| Revenue from Contracts with Customers | 2. Revenue from Contracts with Customers Our two primary revenue streams are (i) software delivery, support and maintenance and (ii) client services. Software delivery revenue consists of all of our proprietary software sales (either under a perpetual or term license delivery model), transaction-related revenue and the resale of hardware and third-party software. Support and maintenance revenue consists of revenue from post-contract client support and maintenance services, which include telephone support services, maintaining and upgrading software and ongoing enhanced maintenance. Client services revenue consists of revenue from managed services solutions, such as private cloud hosting, outsourcing and revenue cycle management, as well as other client services or project-based revenue from implementation, training and consulting services. For some clients, we host the software applications licensed from us using our own or third-party servers. For other clients, we offer an outsourced service in which we assume partial to total responsibility for a healthcare organization’s IT operations using our employees. Adoption of New Revenue Standard (ASC 606) In May 2014, the FASB issued ASC 606 to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASC 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASC 606 defines a five-step process to achieve this principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under the previous FASB Accounting Standards Codification 605, Revenue Recognition The new revenue recognition guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We adopted the standard effective on January 1, 2018 using the modified retrospective method. We also implemented internal controls, and continue to refine, our updated processes and key systems to allow us to continue to comply with the new requirements. The reported results for the three and six months ended June 30, 2018 reflect the adoption of ASC 606. The comparative information for the three and six months ended June 30, 2017 has not been restated and will continue to be reported under the previous guidance of ASC 605, which was in effect during that period. The table below reflects the cumulative adjustments that were made to balances previously reported in the condensed consolidated balance sheet as of December 31, 2017. The majority of the cumulative adjustments were recorded during the quarter ended March 31, 2018. During the quarter ended June 30, 2018, we identified additional cumulative adjustments, which resulted in an increase to retained earnings of $14.0 million, an increase to contract assets of $15.9 million, an increase to deferred taxes, net of $4.9 million and a decrease to deferred revenue of $3.0 million.
As Reported
Adjustments
Adjusted
(In thousands, except per share amounts)
December 31, 2017
due to ASC 606
January 1, 2018
Accounts receivable, net
$
567,873
$
(32,529
)
$
535,344
Contract assets
0
92,447
92,447
Prepaid expenses and other current assets
115,463
11,646
127,109
Deferred revenue, current
546,830
(10,423
)
536,407
Deferred revenue, long-term
24,047
0
24,047
Deferred taxes, net
93,643
21,392
115,035
Accumulated deficit
(338,150
)
60,595
(277,555
) The adoption of ASC 606 had no impact on cash from or used in operating, financing or investing activities reported in our consolidated statement of cash flows for the year ended December 31, 2017. The following tables compare the reported condensed consolidated balance sheet and statement of operations as of and for the three and six months ended June 30, 2018 to the pro-forma amounts assuming the previous guidance of ASC 605 had been in effect:
June 30, 2018
(In thousands, except per share amounts)
As reported under ASC 606
Adjustments due to ASC 606
Pro forma under ASC 605
Accounts receivable, net
$
522,144
$
110,913
$
633,057
Contract assets
64,419
(64,419
)
0
Prepaid expenses and other current assets
128,325
(2,897
)
125,428
Contract assets - long-term
46,173
(46,173
)
0
Deferred revenue, current
531,189
2,186
533,375
Deferred taxes, net
129,262
(8,542
)
120,720
Accumulated deficit
(228,308
)
3,780
(224,528
)
Three Months Ended June 30, 2018
(In thousands, except per share amounts)
As reported under ASC 606
Adjustments due to ASC 606
Pro forma under ASC 605
Software delivery, support and maintenance
$
336,406
$
(6,107
)
$
330,299
Client services
189,171
(887
)
188,284
Gross profit
212,663
(7,141
)
205,522
Selling, general and administrative expenses
149,081
111
149,192
Loss from operations
(58,797
)
(7,252
)
(66,049
)
Income (loss) from continuing operations before income taxes
78,639
(7,590
)
71,049
Income tax (provision) benefit
(3,683
)
1,997
(1,686
)
Net income (loss)
74,272
(5,593
)
68,679
Net income (loss) attributable to Allscripts Healthcare Solutions, Inc. stockholders
$
64,824
(5,593
)
$
59,231
Earnings (loss) per share - basic attributable to Allscripts Healthcare Solutions, Inc. stockholders
$
0.36
(0.03
)
$
0.33
Earnings (loss) per share - diluted attributable to Allscripts Healthcare Solutions, Inc. stockholders
$
0.36
(0.03
)
$
0.33
Six Months Ended June 30, 2018
(In thousands, except per share amounts)
As reported under ASC 606
Adjustments due to ASC 606
Pro forma under ASC 605
Software delivery, support and maintenance
$
666,172
$
(11,135
)
$
655,037
Client services
373,331
(1,953
)
371,378
Gross profit
433,638
(13,420
)
420,218
Selling, general and administrative expenses
292,151
(107
)
292,044
Loss from operations
(63,117
)
(13,313
)
(76,430
)
Income (loss) from continuing operations before income taxes
42,795
(13,837
)
28,958
Income tax (provision) benefit
(769
)
3,626
2,857
Net income (loss)
45,757
(10,211
)
35,546
Net income (loss) attributable to Allscripts Healthcare Solutions, Inc. stockholders
$
24,950
(10,211
)
$
14,739
Earnings (loss) per share - basic attributable to Allscripts Healthcare Solutions, Inc. stockholders
$
0.14
(0.06
)
$
0.08
Earnings (loss) per share - diluted attributable to Allscripts Healthcare Solutions, Inc. stockholders
$
0.14
(0.06
)
$
0.08
The recognition of revenue related to hardware sales, software-as-a-service-based offerings, client services, electronic data interchange services and managed services remained substantially unchanged under ASC 606. The adoption of ASC 606 resulted in an increase in contract assets driven by upfront recognition of revenue, rather than over the subscription period, from certain multi-year software subscription contracts that include both software licenses and software support and maintenance. Costs to Obtain or Fulfill a Contract Under ASC 605, we only capitalized direct sales commissions that were specifically associated with new or renewal contracts. The new revenue recognition guidance under ASC 606 requires the capitalization of all incremental costs of obtaining a contract with a customer that an entity expects to recover. As part of our implementation efforts, we identified certain indirect commissions and other payments that were eligible for capitalization under ASC 606 as they were incremental costs solely associated with new or renewal contracts that we expected to recover. Certain costs related to the fulfillment of contracts will also be capitalized. As a result, we recorded a deferral for such costs of $8.6 million, net of tax, upon adoption of the new guidance on January 1, 2018, which was included in the cumulative effect of initially applying ASC 606. Capitalized costs to obtain or fulfill a contract are amortized over periods ranging from two to nine years which represent the initial contract term or a longer period, if renewals are expected and the renewal commission, if any, is not commensurate with the initial commission. We classify such capitalized costs as current or non-current based on the expected timing of expense recognition. The current and non-current portions are included in prepaid expenses and other current assets, and other assets, respectively, in our consolidated balance sheets. At June 30, 2018, we had $26.5 million and $36.0 million of capitalized costs to obtain or fulfill a contract included in prepaid expenses and other current assets and other assets, respectively, in our consolidated balance sheets. During the three ended June 30, 2018, we recognized $7.6 million of amortization expense related to such capitalized costs, of which $7.5 million is included in selling, general and administrative expenses and $0.1 million is included in cost of revenue in our consolidated statements of operations. During the six months ended June 30, 2018, we recognized $15.8 million of amortization expense related to such capitalized costs, of which $15.5 million is included in selling, general and administrative expenses and $0.3 million is included in cost of revenue in our consolidated statement of operations. Contract Balances The timing of revenue recognition, billings and cash collections results in billed and unbilled accounts receivables, contract assets and customer advances and deposits. Accounts receivable, net includes both billed and unbilled amounts where the right to receive payment is unconditional and only subject to the passage of time. Contract assets include amounts where revenue recognized exceeds the amount billed to the customer and the right to payment is not solely subject to the passage of time. Deferred revenue includes advanced payments and billings in excess of revenue recognized. Our contract assets and deferred revenue are reported in a net position on an individual contract basis at the end of each reporting period. Contract assets are classified as current or long-term based on the timing of when we expect to complete the related performance obligations and bill the customer. Deferred revenue is classified as current or long-term based on the timing of when we expect to recognize revenue. In general, with the exception of fixed fee project-based client service offerings (such as implementation services), we sell our software solutions on date-based milestone events where control transfers and use of the software occurs on the delivery date but the associated payments for the software license occur on future milestone dates. In such instances, unbilled amounts are included in contract assets since our right to receive payment is conditional upon the continued functionality of the software and the provision of ongoing support and maintenance. Our fixed fee project-based client service offerings typically require us to provide the services with either a significant portion or all amounts due prior to service completion. Since our right to payment is not unconditional, amounts associated with work prior to the completion date are also deemed to be contract assets. Performance Obligations A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account in ASC 606. A performance obligation is considered distinct when both (i) a customer can benefit from the product or service either on its own or together with other resources that are readily available to the customer and (ii) the promised product or service is separately identifiable from other promises in the contract. Activities related to the fulfillment of a contract that do not transfer products or services to a customer, such as contract preparation or legal review of contract terms, are not deemed to be performance obligations. Based on the similarities in the definitions of a “deliverable” under ASC 605 and “performance obligation” under ASC 606, our identification of performance obligations under ASC 606 did not result in a significant divergence from our existing identification approach. We generally sell our solutions through multi-element arrangements where we provide the customer with (1) software license, (2) support and maintenance, (3) embedded content such as third-party software and (4) client services. Incremental solutions, such as hardware and managed services are also provided based upon a customer’s preferences and requirements. We deem that a customer is typically able to benefit from a product or service on its own or together with readily available resources when we sell such product or service on a standalone basis. We have historically sold the majority of our performance obligations, with the exception of software licenses, on a standalone basis. Incremental solutions, such as hardware, client services and managed services, are often negotiated and fulfilled on an independent sales order basis as customer needs and requirements change over the course of a relationship period. In addition, support and maintenance and embedded content are provided on a stand-alone basis through the renewal process. One of the product offerings under our CareInMotion TM Additionally, our support and maintenance obligations include multiple discrete performance obligations, with the two largest being unspecified product upgrades or enhancements, and technical support, which can be offered at various points during a contract period. We believe that the multiple discrete performance obligations within our overall support and maintenance obligations can be viewed as a single performance obligation since both the unspecified product upgrades and technical support are activities to fulfill the maintenance performance obligation and are rendered concurrently. Generally, we do not provide additional warranties to clients above and beyond warranties that the solutions purchased will perform in accordance with the agreed-upon specifications. On rare occasions, when additional warranties are granted, we evaluate on a case-by-case basis whether the additional warranty granted represents a separate performance obligation. The breakdown of revenue recognized related based on the origination of performance obligations and elected accounting expedients is presented in the table below:
(In thousands)
Three Months Ended March 31, 2018
Three Months Ended June 30, 2018
Revenue related to deferred revenue balance at beginning of period
$
204,297
$
215,519
Revenue related to new performance obligations satisfied during the period
257,222
244,082
Revenue recognized under "right-to-invoice" expedient
49,638
62,812
Reimbursed travel expenses, shipping and other revenue
2,769
3,164
Total revenue
$
513,926
$
525,577
The aggregate amount of contract transaction price related to remaining unsatisfied performance obligations (commonly referred to as “backlog”) represents contracted revenue that has not yet been recognized and includes both deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Total backlog equaled $4.8 billion as of June 30, 2018, of which we expect to recognize approximately 38% over the next 12 months, and the remaining 62% thereafter. Accounting Policy Elections and Practical Expedients The majority of our contracts contain provisions that require customer payment no later than one year from the transfer of control of the related performance obligation. Perpetual software license contracts in which payments range from 2 to 10 years contain a financing component. Interest income is recognized in these circumstances and totaled $0.3 million and $0.5 million during the three and six months ended June 30, 2018. We have elected to exclude from the measurement of the transaction price all taxes (e.g. sales, use, value-added, etc.) assessed by government authorities and collected from a customer. Therefore, revenue is recognized net of such taxes. Within the normal course of business, we contract with customers to deliver and ship tangible products such as computer hardware or licensed software disks. In these situations, the control of the products transfers to the customer when the product reaches the shipper based on free on board (FOB) shipping clauses. We have elected to use the practical expedient allowed under ASC 606 to account for shipping and handling activities that occur after the customer has obtained control of a promised good as fulfillment costs rather than as an additional promised service and, therefore, we do not allocate a portion of the transaction price to a shipping service obligation. Instead, we record as revenue any amounts billed to customers for shipping and handling costs and record as cost of revenue the actual shipping costs incurred. Additionally, our standard contract terms allow for the reimbursement by a customer for certain travel expenses necessary to provide on-site services to the customer, such as implementation and training. Such reimbursed travel expenses are reported on a gross basis. Since such reimbursed travel expenses do not represent a distinct good or service nor represent incremental value provided to a customer, a performance obligation is deemed not to exist. In certain situations, however, when the allowable reimbursable expenses amount is capped, we believe that such cap represents the most likely amount of variable consideration and the capped amount is included in the total contract transaction price. In accordance with ASC 606, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, the entity may recognize revenue in the amount to which the entity has a right to invoice (“right-to-invoice” practical expedient). We have elected to utilize this expedient as it relates to transaction-based services (such as revenue cycle management) and electronic data interchange transactions. Revenue Recognition We recognize revenue only when we satisfy an identified performance obligation (or bundle of obligations) by transferring control of a promised product or service to a customer. We consider a product or service to be transferred when a customer obtains control because a customer has sole possession of the right to use (or the right to direct the use of) the product or service for the remainder of its economic life or to consume the product or service in its own operations. We evaluate the transfer of control primarily from the customer’s perspective as this reduces the risk that revenue is recognized for activities that do not transfer control to the customer. The majority of our revenue is recognized over time because a customer continuously and simultaneously receives and consumes the benefits of our performance. The exceptions to this pattern are our sales of perpetual and term software licenses, and hardware, where we determined that a customer obtains control of the asset upon delivery, shipment or granting of access. The following table summarizes the pattern of revenue recognition for our most significant performance obligations:
Performance Obligation
Revenue Recognition Pattern
Measure of progress
Support and maintenance ("SMA")
Over time
Output method (time elapsed) – revenue is recognized ratably over the contract term
Software as a service ("SaaS")
Over time
Output method (time elapsed) – revenue is recognized ratably over the contract term
Private cloud hosting
Over time
Output method (time elapsed) – revenue is recognized ratably over the contract term
Client/Education services
Over time
Input method (cost to cost) – revenue is recognized proportionally over the service implementation based on hours
Outsourcing services
Over time
Input method (cost to cost) – revenue is recognized proportionally over the outsourcing period
Payerpath (transaction volume)
Over time
Output method ("right-to-invoice" practical expedient) – value transferred to the customer is reflected on invoicing.
Software licenses
Point in time
Upon shipment or electronically delivered, as applicable
Hardware
Point in time
Upon shipment When evaluating our SMA, SaaS and private cloud hosting performance obligations, we noted that these obligations are fulfilled as stand-ready obligations to perform and, therefore, we deem the obligations to be satisfied evenly over time. Client services, such as those relating to implementation, consulting, training or education, are generally not fulfilled evenly over the contract period but rather over a shorter timeline where work effort can rise or decline based upon stages of the project work effort. These client services are typically quoted to a customer as a fixed fee amount that covers the implementation effort. Delivery progress for these services is measured by establishing an approved cost budget with labor hour inputs utilized to gauge percentage of completion of the work effort. Therefore, revenue for our client, education and outsourcing services is recognized proportionally with the progress of the implementation work effort. Payerpath transaction volume and other transaction-based service obligations, such as revenue cycle management services, are fulfilled over time but are not provided evenly over the contract period and reliable inputs are not available to track progress of completion. We determined that value is provided to the customer throughout the contract period and the pricing charged to the customer varies on a monthly basis, based upon the volume of the customer’s transactions processed in that respective period. The invoiced amount to the customer represents this value and, accordingly, the practical expedient to recognize revenue based upon invoicing is most appropriate. We considered the specific implementation guidance for accounting for licenses of intellectual property (“IP”) to determine if point in time or over time recognition was more appropriate. The first step in the licensing framework is to determine whether the license is distinct or combined with other goods and services. For most of our software licensing products, the licenses are distinct, with the exception of one of our product offerings under our CareInMotion TM Disaggregation of Revenue We disaggregate our revenue from contracts with customers based on the type of revenue and nature of revenue stream, as we believe those categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The below tables summarize revenue by type and nature of revenue stream as well as by our reportable segments:
Three Months Ended June 30,
Six Months Ended June 30,
(In thousands)
2018
2017
2018
2017
Revenue:
Software delivery, support and maintenance
Recurring revenue
$
292,991
$
224,078
$
587,446
$
451,528
Non-recurring revenue
43,415
50,955
78,726
91,693
Total software delivery, support and maintenance
336,406
275,033
666,172
543,221
Client services
Recurring revenue
$
134,385
$
99,136
$
256,859
$
200,915
Non-recurring revenue
54,786
51,922
116,472
95,430
Total client services
189,171
151,058
373,331
296,345
Total revenue
$
525,577
$
426,091
$
1,039,503
$
839,566
Three Months Ended June 30, 2018
(In thousands)
Clinical and Financial Solutions
Population Health
Netsmart
Unallocated
Discontinued Operations
Total
Software delivery, support and maintenance
$
235,268
$
50,896
$
51,951
$
(2,073
)
$
364
$
336,406
Client services
154,229
6,172
34,415
(5,732
)
87
189,171
Total revenue
$
389,497
$
57,068
$
86,366
$
(7,805
)
$
451
$
525,577
Three Months Ended June 30, 2017
(In thousands)
Clinical and Financial Solutions
Population Health
Netsmart
Unallocated
Discontinued Operations
Total
Software delivery, support and maintenance
$
182,811
$
39,021
$
49,548
$
3,653
$
0
$
275,033
Client services
121,300
3,487
28,873
(2,602
)
0
151,058
Total revenue
$
304,111
$
42,508
$
78,421
$
1,051
$
0
$
426,091
Six Months Ended June 30, 2018
(In thousands)
Clinical and Financial Solutions
Population Health
Netsmart
Unallocated
Discontinued Operations
Total
Software delivery, support and maintenance
$
465,825
$
112,095
$
101,197
$
(908
)
$
(12,037
)
$
666,172
Client services
297,651
14,678
67,655
(8,845
)
2,192
373,331
Total revenue
$
763,476
$
126,773
$
168,852
$
(9,753
)
$
(9,845
)
$
1,039,503
Six Months Ended June 30, 2017
(In thousands)
Clinical and Financial Solutions
Population Health
Netsmart
Unallocated
Discontinued Operations
Total
Software delivery, support and maintenance
$
361,142
$
78,710
$
96,044
$
7,325
$
0
$
543,221
Client services
239,149
7,227
55,384
(5,415
)
0
296,345
Total revenue
$
600,291
$
85,937
$
151,428
$
1,910
$
0
$
839,566 |
