| 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, support and maintenance revenue consists of all of our proprietary software sales (either under a perpetual or term license delivery model), subscription-based software sales, transaction-related revenue, the resale of hardware and third-party software and 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 and 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 (“ASC 605”), including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation and accounting for significant financing components. Additionally, ASC 606 provides guidance related to costs of obtaining a contract with a customer that an entity expects to recover. 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 nine months ended September 30, 2018 reflect the adoption of ASC 606. The comparative information for the three and nine months ended September 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. During the nine months ended September 30, 2018, we identified additional cumulative adjustments, which resulted in a decrease to Accumulated deficit of $14.8 million, an increase to Accounts receivable, net of $0.6 million, an increase to Contract assets of $13.9 million, an increase to Deferred taxes, net of $5.2 million and a decrease to Deferred revenue, current of $5.5 million.
As Reported
Adjustments
Adjusted
(In thousands)
December 31, 2017
due to ASC 606
January 1, 2018
Accounts receivable, net
$
567,873
$
(31,948
)
$
535,925
Contract assets
0
90,449
90,449
Prepaid expenses and other current assets
115,463
11,646
127,109
Deferred revenue, current
546,830
(12,901
)
533,929
Deferred revenue, long-term
24,047
0
24,047
Deferred taxes, net
93,643
21,668
115,311
Accumulated deficit
(338,150
)
61,380
(276,770
) 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
September 30, 2018
(In thousands)
As reported under ASC 606
Adjustments due to ASC 606
Pro forma under ASC 605
Accounts receivable, net
$
520,381
$
52,523
$
572,904
Contract assets
71,745
(71,745
)
0
Prepaid expenses and other current assets
131,826
(13,184
)
118,642
Contract assets - long-term
52,555
(52,555
)
0
Deferred revenue, current
506,568
21,522
528,090
Deferred taxes, net
124,294
(27,816
)
96,478
Accumulated deficit
(251,363
)
(78,667
)
(330,030
)
Three Months Ended September 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
$
330,397
$
(4,351
)
$
326,046
Client services
191,882
(5,516
)
186,366
Gross profit
218,371
(9,119
)
209,252
Selling, general and administrative expenses
133,214
247
133,461
Income (loss) from operations
2,410
(9,366
)
(6,956
)
Loss from continuing operations before income taxes
(27,635
)
(9,598
)
(37,233
)
Income tax benefit
3,789
2,522
6,311
Net loss
(23,846
)
(7,076
)
(30,922
)
Net loss attributable to Allscripts Healthcare Solutions, Inc. stockholders
$
(35,991
)
$
(7,076
)
$
(43,067
)
Loss per share - basic attributable to Allscripts Healthcare Solutions, Inc. stockholders
$
(0.20
)
$
(0.04
)
$
(0.24
)
Loss per share - diluted attributable to Allscripts Healthcare Solutions, Inc. stockholders
$
(0.20
)
$
(0.04
)
$
(0.24
)
Nine Months Ended September 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
$
996,569
$
(15,486
)
$
981,083
Client services
565,213
(7,469
)
557,744
Gross profit
652,009
(22,539
)
629,470
Selling, general and administrative expenses
425,365
140
425,505
Loss from operations
(60,707
)
(22,679
)
(83,386
)
Income (loss) from continuing operations before income taxes
15,160
(23,435
)
(8,275
)
Income tax (provision) benefit
3,020
6,148
9,168
Net income
21,911
(17,287
)
4,624
Net loss attributable to Allscripts Healthcare Solutions, Inc. stockholders
$
(11,041
)
$
(17,287
)
$
(28,328
)
Loss per share - basic attributable to Allscripts Healthcare Solutions, Inc. stockholders
$
(0.06
)
$
(0.10
)
$
(0.16
)
Loss per share - diluted attributable to Allscripts Healthcare Solutions, Inc. stockholders
$
(0.06
)
$
(0.10
)
$
(0.16
) 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 are also 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 At September 30, 2018, we had capitalized costs to obtain or fulfill a contract of $26.6 million in Prepaid and other current assets and $34.2 million in Other assets. During the three months ended September 30, 2018, we recognized $7.5 million of amortization expense related to such capitalized costs, of which $7.4 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 nine months ended September 30, 2018, we recognized $23.3 million of amortization expense related to such capitalized costs, of which $22.9 million is included in selling, general and administrative expenses and $0.4 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. 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
Three Months Ended September 30, 2018
Revenue related to deferred revenue balance at beginning of period
$
204,297
$
215,519
$
177,692
Revenue related to new performance obligations satisfied during the period
257,222
244,082
290,145
Revenue recognized under "right-to-invoice" expedient
49,638
62,812
51,587
Reimbursed travel expenses, shipping and other revenue
2,769
3,164
2,855
Total revenue
$
513,926
$
525,577
$
522,279
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 $4.7 billion as of September 30, 2018, of which we expect to recognize approximately 39% over the next 12 months, and the remaining 61% thereafter. Transaction price and allocation Our contracts with customers often include multiple distinct performance obligations such as software licenses, software support and maintenance, hardware, client services, private cloud hosting and Software-as-a-Service. We adjust the transaction price on a contract-by-contract basis for (i) the effect of the time value of money when a contract has a significant financing component and/or (ii) customer discounts and incentives deemed to be variable consideration. We then allocate the contract transaction price to the distinct performance obligations in the contract. Such allocation is based on the stand-alone selling price (“SSP”) of each distinct performance obligation. The transaction price allocated to each distinct performance obligation is adjusted for discounts offered to customers that are outside of the Company’s established sufficiently narrow ranges for distinct performance obligations’ SSPs on a relative SSP basis. For each distinct performance obligation, we use observable stand-alone pricing to determine the SSP. Such observable SSPs are based upon our listed sales prices and consider discounts offered to customers. In instances where SSP is not directly observable because we do not sell the product or service separately, we determine the SSP through the residual approach or cost-plus margin models using information that includes market conditions and other observable inputs. Such instances primarily relate to sales of new products and service offerings and our acute suite of software licenses. Our acute suite of software licenses is sold to a diverse set of customers for a broad range of amounts and, therefore, SSP is not discernible from past transactions due to the high variability of selling prices. Our products and services are generally not sold with a right of return, except for certain hardware sales, which are not material to our consolidated revenue. We may provide credits or incentives on a contract-by-contract basis which are accounted for either as a material right or as variable consideration, respectively, when allocating the transaction price. Such credits and incentives have historically not been significant. 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 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. Some of our contracts contain a significant financing component resulting in a time value of money adjustment when the distinct performance obligation, such as software licenses, is delivered at a point in time, but the customer payments are over an extended future period . The time value of money adjustment is excluded from the transaction price at contract inception and is recognized over the respective future payment term as interest income. The discount rate used is determined at the time of contract inception and is based on investment grade bond rates with duration equal to the expected payment term. Accounting Policy Elections and Practical Expedients We have elected to exclude from the measurement of the transaction price all taxes (e.g., sales, use, value-added) 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. 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 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 granting of access, delivery or shipment. The following table summarizes the pattern of revenue recognition for our most significant performance obligations:
Performance Obligation
Revenue Type
Recurring or Non-recurring Nature
Revenue Recognition Pattern
Measure of progress
Support and maintenance ("SMA")
Software delivery, support and maintenance
Recurring
Over time
Output method (time elapsed) – revenue is recognized ratably over the contract term
Software as a service ("SaaS")
Software delivery, support and maintenance
Recurring
Over time
Output method (time elapsed) – revenue is recognized ratably over the contract term
Private cloud hosting
Client services
Recurring
Over time
Output method (time elapsed) – revenue is recognized ratably over the contract term
Client/Education services
Client services
Non-recurring
Over time
Input method (cost to cost) – revenue is recognized proportionally over the service implementation based on hours
Outsourcing services
Client services
Recurring
Over time
Input method (cost to cost) – revenue is recognized proportionally over the outsourcing period
Payerpath (transaction volume)
Software delivery, support and maintenance
Recurring
Over time
Output method ("right-to-invoice" practical expedient) – value transferred to the customer is reflected on invoicing.
Software licenses
Software delivery, support and maintenance
Non-recurring
Point in time
Upon electronic delivery
Hardware
Software delivery, support and maintenance
Non-recurring
Point in time
Upon shipment Recurring software delivery, support and maintenance revenue consists of recurring subscription-based software sales, support and maintenance revenue, and recurring transaction-related revenue. Non-recurring software delivery, support and maintenance revenue consists of perpetual software licenses sales, resale of hardware and non-recurring transaction-related revenue. Recurring client services revenue consists of revenue from managed services solutions, such as outsourcing, private cloud hosting and revenue cycle management. Non-recurring client services revenue consists of project-based client services revenue. 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
Three Months Ended September 30,
Nine Months Ended September 30,
(In thousands)
2018
2017
2018
2017
Revenue:
Software delivery, support and maintenance
Recurring revenue
$
285,564
$
230,577
$
873,010
$
682,107
Non-recurring revenue
44,833
58,525
123,559
150,216
Total software delivery, support and maintenance
330,397
289,102
996,569
832,323
Client services
Recurring revenue
$
136,015
$
109,285
$
392,874
$
314,567
Non-recurring revenue
55,867
51,055
172,339
142,118
Total client services
191,882
160,340
565,213
456,685
Total revenue
$
522,279
$
449,442
$
1,561,782
$
1,289,008
Three Months Ended September 30, 2018
(In thousands)
Clinical and Financial Solutions
Population Health
Netsmart
Unallocated
Discontinued Operations
Total
Software delivery, support and maintenance
$
225,259
$
51,613
$
56,283
$
(2,758
)
$
0
$
330,397
Client services
156,202
8,065
35,799
(8,184
)
0
191,882
Total revenue
$
381,461
$
59,678
$
92,082
$
(10,942
)
$
0
$
522,279
Three Months Ended September 30, 2017
(In thousands)
Clinical and Financial Solutions
Population Health
Netsmart
Unallocated
Discontinued Operations
Total
Software delivery, support and maintenance
$
192,351
$
40,896
$
52,588
$
3,267
$
0
$
289,102
Client services
127,145
3,627
31,030
(1,462
)
0
160,340
Total revenue
$
319,496
$
44,523
$
83,618
$
1,805
$
0
$
449,442
Nine Months Ended September 30, 2018
(In thousands)
Clinical and Financial Solutions
Population Health
Netsmart
Unallocated
Discontinued Operations
Total
Software delivery, support and maintenance
$
691,084
$
163,708
$
157,479
$
(3,666
)
$
(12,036
)
$
996,569
Client services
453,853
22,743
103,455
(17,029
)
2,191
565,213
Total revenue
$
1,144,937
$
186,451
$
260,934
$
(20,695
)
$
(9,845
)
$
1,561,782
Nine Months Ended September 30, 2017
(In thousands)
Clinical and Financial Solutions
Population Health
Netsmart
Unallocated
Discontinued Operations
Total
Software delivery, support and maintenance
$
553,493
$
119,606
$
148,633
$
10,591
$
0
$
832,323
Client services
366,294
10,854
86,413
(6,876
)
0
456,685
Total revenue
$
919,787
$
130,460
$
235,046
$
3,715
$
0
$
1,289,008 |
