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Turnaround Letter
Out-of-Favor Stocks with Real Value

May 8, 2020

Allscripts Healthcare Solutions (MDRX) – While we have remained patient with the fading turnaround prospects at Allscripts, our patience has ended. We are moving the company to a Sell.

In the quarter, every one of Allscripts’ metrics (including revenues, profits, margins, cash flow, bookings, receivables, balance sheet) except backlog continued their slow but steady deterioration. Even the increase in backlog was illusory as the company has been slow in delivering services to their clients.

We view the management as ineffective and unable to make meaningful improvements. The firm recently hired turnaround advisor Alix Partners, but having an outside firm find cost-cutting opportunities should be an embarrassment. And we wonder how a poorly-run firm can really benefit from the $75 million in cost-cuts that they apparently have found – we’ve seen too many companies with deep-rooted problems make some optically-pleasing cuts that leave the company in worse shape than before. Perhaps this is just a short-term adrenaline shot for a lame horse?

We believe Allscripts needs a complete operational and strategic overhaul led by an entirely new leadership team. Making matters worse, the president is also the CFO, not only straining his time and focus but also removing a check-and-balance role.

We wonder if the Alix move was motivated by the need to find investors to fund a replacement for the $345 million bond coming due in July. And, any new funding will almost certainly have a higher cost than the 1.5% coupon on the maturing bond.

We note that apparently Alix has also been hired to help competitor Cerner (CERN) with its operations. While there is a chance that these relationships could result in an acquisition of Allscripts by Cerner (Cerner has the size and balance sheet to readily complete a deal), Cerner may simply find it simpler and cheaper to continue grinding away at the Allscripts franchise.

Allscripts’ shares jumped about 8% in mid-day trading on these hopes. But these are thin reeds on which to base an investment thesis for an otherwise fading company.

We move MDRX shares to a Sell.