NextGen Healthcare Inc (NXGN) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Quality Systems fourth-quarter and fiscal year 2004 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) I would like to turn the conference over to Lou Silverman, President and CEO of Quality Systems. Please go ahead, sir.

Thank you, Angela, and welcome everyone to Quality Systems fiscal 2004 fourth-quarter and year-end conference call. Joining me on today's call as per usual are Paul Holt, our CFO; Greg Flynn, the Executive VP and general manager of our QSI Division; and Pat Cline, President of our NextGen Healthcare Information Systems division. Please note that comments made on this call may include statements that are forward-looking within the meaning of the securities laws, including without limitation statements related to anticipated industry trends, the Company's plans, products and strategies and projected operating results. Actual results may differ materially from our expectations and projections, and you should refer to our SEC filings, including our forms 10-K and 10-Q for discussions of the risk factors, management's discussion and analysis and other information that could impact our actual performance. We undertake no obligation to update such projections or forward-looking statements in the future. Please also note that the Company's past performance is not necessarily indicative of future performance.

For the quarter the company set new revenue and earnings records; in the March quarter revenues totaled 18.8 million, up 25 percent over the prior year. Fully diluted earnings per share at 47 cents exceeded prior year by 74 percent. The quarter's topline results were driven by record revenue performance at NextGen, the 14.7 million in revenue attained by the division for the quarter, represents a 38 percent year-over-year increase.

QSI Division had quarterly revenues at slightly more than $4 million, which represented an 8 percent year-over-year decline in top line performance for that division. Company profitability was driven by strong performance at both the NextGen Division and the QSI Division. Gross margin percentage for the Company at 62.5 percent for the quarter came in high and outside our historical bend. (ph)

Operating income at NextGen came in at a record 4.8 million, nearly double the prior year's figure. At the QSI Division operating income of 1.2 million was 15 percent higher than the prior year quarter despite the year-over-year decrease in divisional revenue. While not used internally as any kind of management metric, I would point out that quarterly operating margins were strong at both divisions, north of 32 percent for the NextGen Division and a little north of 29 percent for the QSI Division.

EDI revenue for the quarter came in at just under 2.2 million, up 16 percent over prior deer. EDI growth was at 70 percent for the NextGen Division and we had a 6 percent year-over-year decline at the QSI Division. I will once again remind listeners that EDI revenue is reported as part of divisional revenue totaled each quarter. As a convenience Paul Holt will break out divisional EDI totals among other things as part of his prepared remarks later in the call.

Corporate expenses for the quarter came in at $948,000, which was 13 percent ahead of prior year levels. Increases in corporate expenditures particularly in the areas of professional services and insurance coverages and to a lesser extent staffing expenses continue to be the norm. Looking at fiscal 2004 as a whole, total company revenue increased approximately 30 percent to $70.9 million. Fully diluted earnings per share increased 45 percent from $1.10 in fiscal '03 to $1.60 in fiscal '04.

Fiscal 2004 revenue for NextGen increased 46 percent to $54.4 million while the division grew to the point where it accounted for 77 percent of total fiscal year company revenue. In addition to its financial performance, NextGen enjoyed impressive performance in other areas, as well as recent press releases attest. Pat Cline will go into more details on these items in his segment of the call.

For the QSI Division fiscal 2000 (ph) revenue declined by 5 percent from 17.4 million to 16.5 million. However, operating income increased by 5 percent from 4.7 to 4.9 million. The continued expense diligence employed by the QSI team remains impressive. From fiscal 2004 corporate expenses increased from 2.9 million to 4 million. Professional service fees were a significant contributor to this increase. Cash and cash equivalents increased to a record 51.4 million at year end. DSO's dropped to 99 days at year end. Collections activity remains strong during the quarter and the year.

Full-time employee headcount at quarter end was 319, which taken with revenues for the quarter generated annualized revenue for full-time employee of 236,000, not quite a record but certainly at the higher end of our historical band. There were no stock repurchases during the quarter or the fiscal year. Note that the Company stock repurchase authorization expired in September of '03. The date of, actually September 24th of '03, the date of the 2003 annual shareholders meeting. During the course of fiscal '04 and continuing on through today, the topic of executive compensation, including programs involving equity-based compensation has been the subject of study by the Company's compensation committee. The compensation committee continues to work on this important issue.

On another Board topic, the Company's Board of Directors has approved the use of 10-B-5-1 (ph) trading plans by appropriate parties as part of the newly improved insider trading guidelines. During the March quarter, the Company participated in the Roth Capital Conference and the B. Riley Conference. Company also met with investment professionals in San Francisco, Los Angeles and Minneapolis during the quarter.

In closing my prepared comments for this morning's call, I would like to point out that the performance of the Company for the March quarter completes the year's performance that is exceeded our internal expectations at times by a significant margin. I want to express my thanks to the individuals joining me on this call and our entire team for their performance during the March quarter and the year as a whole. I also want to again clearly point out to current and/or prospective analysts and investors that while we are extremely pleased with the quarter's performance there are absolutely no guarantees that the Company or either of its divisions will exceed or even sustain the level of performance turned in during this quarter in future periods.

It is possible that the quarter's performance will encourage investors or analysts to set new, short, medium or long-term expectations for the Company. In response to this possibility please continue to note that we do not give out financial guidance to the investment community, and we do not comment on the guidance advanced by members of the financial community. I will now turn the call over to Paul Holt, CFO, for additional financial details on the quarter.

Thank you, Lou. This quarter reflected continued strong performance in both system sales and maintenance and other revenues. Consolidated system sales came in at approximately 10.2 million this quarter. That is an increase of 23 percent over the prior year while maintenance and other revenues came in at 8.6 million. That is an increase of 27 percent compared to the prior year quarter.

Our growth in system sales this quarter was based primarily on sales to both new and existing NextGen users. This quarter we had particular success in selling software licenses to NextGen's existing base of customers. System sales in the NextGen Division grew 29 percent on a year-over-year basis to 9.6 million this quarter. That compares to 7.4 million a year ago.

Our increase in maintenance and other revenue this quarter was driven primarily by the continued growth in the NextGen base of installed users which drove maintenance and EDI revenue in that Division to record levels. Maintenance and other revenue in the NextGen division grew 58 percent year-over-year, to 5.1 million compared to 3.3 million a year ago.

Our gross profit margins this quarter as Lou mentioned, came in above our historical range of 62.5 percent. This quarter had a significantly lower amount of hardware and third party software contents embedded in our system sales. Our SG&A expense as a percentage of revenue was lower this quarter at 27 percent compared to 28.3 percent a year ago. Total SG&A expense increased 5.1 million in the fourth quarter compared to 4.3 million a year ago. The largest contributor to the increase in SG&A expenses was increased selling related expenses in the NextGen Division.

Our R&D expense grew 20 percent compared to the prior year at 1.6 million compared to 1.4 million a year ago. And most of this increase in R&D expense was related to increased investment in the NextGen division product line. The Company's effective income tax rate was significantly higher compared to the prior year quarter at 39.4 percent compared to 35.1 percent a year ago. Our effective tax rate this quarter was comparatively higher primarily due to a proportionally lower amount of R&D tax credits reflected in this quarter's tax provision.

Moving over to divisional performance, based on the strong increase in system sales and maintenance and other revenue discussed earlier the NextGen Division reported its highest ever quarterly revenue of 14,748,000. That represents 38 percent increase over the year ago quarter of 10,681,000. NextGen EDI revenue totaled 905,000 compared to 531,000 a year ago. NextGen operating income of 4,794,000 hit another record wh8ile representing a 97 percent improvement over the year ago quarter of 2,443,000.

The QSI Division reported revenue of 4,039,000 million in operating income of 1,179,000. QSI Division EDI revenue was 1,270,000. That compared to 1,350,000 a year ago. Higher gross profit margins helped the QSI Division to grow operating profits compared to the year ago quarter.

Moving onto the balance sheet, I am going to highlight three areas as I typically do and first off I am very pleased to report our DSOs having moved down by nine days this quarter to 99 days, compared to 108 in the prior quarter. For those of you who are tracking this our DSOs by division are 90 days fir the QSI Division and (indiscernible) for the NextGen Division. Primarily reflecting the growth in the customer base at NextGen, our total deferred revenue grew to 17.3 million as of the end of March. That compared to 16.3 million as of the start of the quarter. Compared to the prior year we've grown our deferred revenue balance by $5.6 million.

Reflecting the strong performance in our cash collection efforts, we have grown our cash to approximately 51.4 million. That equates to $8.13 per share. That compares to 45.3 million or $7.23 as of the end of last quarter.

I'm going to give out our non-cash expenses, which I typically do each quarter. Total amortization expense, 399,000 and 60,000 for QSI, 339,000 for NextGen. Depreciation expense, 190,000; that is 14,000 for QSI and 146,000 for NextGen. Our investing activities for the quarter were as follows. Capitalized software 684,000; that is 38,000 for QSI and 646,000 for NextGen. Fixed assets 288,000 in total; that is 5,000 for QSI and 283,000 for NextGen.

I would like to thank you all again for your interest in our company and being on this call. I am going to turn things over to Greg Flynn who will provide an update on the QSI Division.

Thank you, Paul. Good day to you all. The QSI Division numbers have already been reviewed, so I won't revisit that analysis. I would point out again, though, that the strong operating income of the Division -- keep that in mind -- the growth year-over-year in our EDI unit particularly the sales and successful implementations of EDI to our NextGen Division clients and our ongoing expense diligence.

I'm proud of the contributions to our overall corporate success made by the QSI Division. I would like to thank each of the division staff for their efforts this year from those that I work with day-to-day, shoulder-to-shoulder to those that work in the background. Thank you again.

And thank you to our dedicated and loyal clients. And thank you, of course, to our shareholders who have made the choice to invest in our business. For the year in review I would like to highlight some of our product achievements of the QSI Division. It was a year of forward movement and technological advancement. As I have said, and again this was true in the quarter just past, we have had continued adoption of our Data Minor Report Writer, our alternate user interface which we call EUI, and our dental EMR, which we call CPS.

Also we added a number of new features and significant enhancements to our products during the year. Items which come to mind are the electronic signature feature with CPS. This works with PC tablets for doctors and also allows patients to sign documents electronically, as well. Our QSI scan products, which scans insurance cards, drivers licenses, explanations of benefits known as EOBs, and other data to be utilized through our QSI practice management system and our very new Word Mail Merge which is used to produce correspondents by our clients through our QSI system for their own patients.

We also have broken a barrier by enabling clients to run more than 1000 concurrent users on a single CPU. Lastly, and I think this is actually pretty cool, we have just finished a patient staff (indiscernible) feature in our dental system. Clients will now be able to track the status of patients in their office whether they be in the waiting room, the exam room, et cetera, through color coding in our appointment scheduling subsystem. I'd like to thank the QSI development team, our implementation team and our support team for their contributions to these products. I believe we continue to bring fresh products to our mature markets.

As always, let me comment on our sales staffing and pipeline. Our sales staffing remains unchanged from last quarter, and our pipeline has grown from $3.7 million last quarter to $3.9 million this quarter due to the addition of new sales prospects. We define our pipeline as sales situations where QSI is in the final three purchase choices of vendors, and we believe that the sale will occur within a 180-day period.

I'd like to thank all of you for joining us on this call, and will now turn the call over to Pat Cline, President of our NextGen Division.

Thanks, Greg. NextGen had another outstanding quarter and another terrific year. During the quarter we executed approximately 54 agreements, of which 37 were with new customers. Sales force now numbers 29 people, including the addition of three new inside salespeople focused on bringing NextGen products to smaller practices. The Company is experimenting with lower-cost sales approach for the small practice market. The market for our systems both large and small remained strong, and though we've closed a lot of business, our sales pipeline is still currently at or a little bit over 35 million.

I would characterize the Spring tradeshow season as a success based both on the number of leads and the quality of those leads. Since our last call NextGen has won a number of additional industry rewards including a first-place finish in EMR and a first-place finish in practice management with Microsoft's healthcare users group or MS HUG Awards at the IMS (ph) conference, and two first-place and one second-place finishes at the recent TEPR conference. And we also just received top overall honors in the AC group's annual review of the EMR applications.

We also just announced a relationship with CapMed, a subsidiary of Bio-Imaging Technologies. Under this relationship NextGen will be able to bring a cobranded version of their personal health record application to the patient base of our customers. The personal health record application or PHR, as we call it, allows customers to maintain their own medical records securely on their home PCs and also on an electronic key chain device or CD and exchange their personal health data with their healthcare providers.

NextGen is preparing for the general release of NextGen 5.0, which is a new version we've been working on for between about 18 months I guess. And this new version is both NextGen EMR and NextGen(epm), the Electronic Medical Records and the practice management system, with an integrated database. As usual in closing I like to thank the employees of NextGen for their outstanding contribution to our success. Operator, I think we are ready for questions.

(OPERATOR INSTRUCTIONS) Mike Crawford with B. Riley.

Pat, I was looking through the AC group study, and you can never bank on people's promises in this space, but some of your upstart competitors like SynaMed, eClinicalWorks, have told AC Group that they're going to have functionality that is more closely matching what NextGen has by the end of the year, prompting AC group to give them a five star rating like you have. And a couple of these companies have lower price per seat, so do you think that they're going to have functionally closer to what you have and do you think that there might be any pricing changes going forward?

It's hard for me to comment as to whether or not I think they will catch up, but the companies that you've mentioned and by and large what you called upstart competition, has a lot of catching up to do. And while it may be that a year from now they will have a lot of the functionality that we may have, we have 60 or 70 people in our development area, which is larger typically than most of those competitors that you mentioned and our people are not sitting on their hands. So I would say it's possible that a year from now they will have what we have today, and it's probable that a year from now we'll have far more.

Relative to the pricing part of your question, that's tough to say. We are, as I mentioned experimenting with new lower-cost sales approaches. Some of that may get passed on to the customer, and also as we've talked about briefly I think the market is about 80 percent small practices. And while we have and many other companies in our market have focused to this point on the larger practices and will continue to focus on larger practices we are also starting to expand our focus to the smaller practices and pricing models may change more at the low end.

Also, Pat, of the 54 agreements and 37 with new, what is the breakout between EMR and EPM?

As has been the case, over half of the new sales included both products. I think 21 were combination deals. Of the remaining, similar to last quarter EPM edged out EMR. I don't have an exact number, but something like 10 to 6 or 9 to 7, something like that.

Okay. Thanks, and then Paul, regarding some of the financials your DSOs dipped down, are you doing anything differently now, or why do you think that changed, and what do you expect going forward?

We didn't do anything differently. That's just execution, just good strong execution in our cash collections area. But nothing is changed other than that.

Okay, and then with less R&D tax credits is that something you expect to extend into the next year, or was that an anomaly?

I think I might have mentioned one or two calls ago that if the R&D tax credits are somewhat fixed, so if you grow your earnings or you grow your pretax income, you are going to have over time you may have a proportionately smaller impact from taking those credits. And so we have some of that happening this quarter.

Maybe, Lou, is the Board, when is the next meeting, and do you think they are going to do anything about the good problem you have of this rising cash balance?

I can tell you with confidence that the board's next meeting is scheduled for the next face-to-face meeting is scheduled for July 27th. I wouldn't put myself in a place where I would predict the agenda or the outcome of any agenda item.

Okay, thank you.

Sean Wieland with WR Hambrecht.

My first question is on the gross margin line, which is way better than I expected, which is great news. Why is hardware expense as a percent of total revenue coming down or third party software expense coming down and is that a trend you think should continue?

Sean, this is Lou and if anybody else on the call wants to pick up, they are more than welcome to. I think it is difficult to characterize the hardware component in any given quarter as a trend. It is what it is based on the mix of sales in a given quarter. And we basically tally it up when the quarter is done and see where it came out. It is not anything that is particularly controllable by us, and we don't really seek to control it. If there happens to be in a forward quarter a significant increase in hardware, that would reflect the numbers, as well. So there is no grand corporate strategy, so to speak, that is impacting the hardware number. It is just simply an outcome of the mix of deals and the components of those deals in a given quarter.

Is there a trend by customers to purchase their own hardware not through NextGen?

I think over a long period of time we've seen that trend; certainly nothing quarter to quarter. You may see, as Lou mentioned, large fluctuations in hardware contents on a quarterly and even perhaps on an annual basis. But over a longer period of time I think as customers become a little bit more sophisticated relative to IT, and as hardware prices come down and as hardware suppliers provide more value add it becomes a little easier for customers to buy their own. To add a little bit more texture, we incentivize our salespeople to sell software, and essentially we try to align our salespeople's compensation programs with the Company's best interests. And as you know, the margins on software are far better, so that's where they tend to lean.

This quarter was also the first quarter where we put a concerted effort forth to sell additional licenses or add-ons to our existing customer base. So that had I think a little bit to do with it. It's a program that will continue on into the future.

Lass quarter you mentioned something about moving to computerized computer-based training to increase margins. Did that have any impact on the quarter's gross margins?

No, I hope that I mentioned last quarter that that is a long-term initiative. That's something that hasn't really kicked in yet. We are investing quite a lot in the development of those programs and other ways to deliver these systems more efficiently, asking ourselves for example, how we move from delivering 54 systems in a quarter to 154 systems in a quarter without it taking on a proportional amount of additional expense. Computer-based training as well as other internal programs are things, are areas where we are making long-term investments.

Okay. And Pat, another question on the trend of number of deals signed and then I compare that with the revenue in NextGen where you've had fantastic growth in the past couple of quarters and the number of deals signed. The revenue in NextGen is -- I know there is not a one-to-one correlation because maintenance is kind of a doesn't grow as fast, but I guess what I'm getting at is the average deal -- talk about what's going on with the average deal size.

The average deal size as has been predicted was slightly down. The number is going to move around quarter-to-quarter, and that is just based on the nature of the leads and the amount of sales rep time and effort that it takes to sell the deals. But over time we still think that the average deal size will come down as the number of deals increases.

Okay, and the pipeline, what is your expectation -- pipeline would you say 35 million?

It's about 35.

So that is fairly flat. Are you expecting that should move upwards with the addition of, I think it was five new reps, in the quarter?

Yes, we did add that number of sales reps, including the three inside reps that I mentioned. And we are hopeful that that pipeline will come up. As I mentioned, we had a successful Spring trade show season with both HIMSS and TEPR and as the leads that we received at those conferences move from the initial qualification stage to the demonstration/presentation/proposal and things we hope that a number of them will ultimately make the pipeline. As you know the pipeline, a deal won't make the pipeline until it is pretty far down the road. Our pipeline is comprised of deals that we think will close within the next 120 days, and we think we are 50 percent or more likely to win that business.

Okay. And one last question, Lou, can you give any more detail on the equity compensation issue from the last Board meeting? Was there any progress made?

I can tell you that the Board continues to work on the topic. It is a topic of importance for the Board, and management and the Company, and really many people in the company. I can tell you that the Board continues to work on the topic, but that's about all I can tell you.

Great. Thank you very much.

Brandon Osten with Sprott Securities.

Can I just get, Paul, some numbers you mentioned -- the capitalized software versus the amortization of capitalized software -- what were those two numbers again?

$684,000 in capitalized software and 399,000 in amortization.

On the gross margin I just wanted to delve into this issue a bit. So we are talking about a lower component of hardware. What is really, what really caused that in the quarter? Was it more -- we're selling to more doctors that are working off the same server, or we are increasing the amount of doctors in our customer base and that goes off the same server, or is it customers that are simply buying their own hardware?

Yes. It is a combination of all of those things, as well as the effort that we put forth to sell additional licenses to our existing customer base.

So we did 59 deals and 37 with new customers. I don't know if my computer in front of me. How does that compare with last quarter?

It's actually 54 deals, and I don't recall the exact number last quarter. But I do know that this is up.

I'm just trying to figure this out because obviously gross margins are higher because of the greater software leverage. But it sounds like you're doing better. If all else were equal you might have had another 2 million in revenues, and of course the same net earnings. So it seems that from a revenue traction line the NextGen business while I know the growth rate was high 30s, if you were basing it on what it I was before you are kind of based on that model that you guys are running at from a gross margin perspective earlier in the year, your kind of still in that 40 to 50 percent year-over-year growth range. Is that a fair statement?

I think based on the history that is a fair statement. Paul or Lou you may have something to add to that but I think that's a fair statement.

Its a fair hypotheses I guess I would say, you're asking us to project what our growth would have been if we had (indiscernible) an amount of hardware in the quarter that was closer to what our historical average would be. I have not run those numbers, but what you're saying, Brandon, it seems plausible. And I haven't run the numbers.

I guess I am just trying to think about it in terms of the other analysts on the call, how we model going forward. And while I know past is not indicative of a future necessarily, it would seem that either our revenue estimates should be coming up a bit, or what happened if it's going to go back to the normal trend or if this quarter is normal than our gross margins should come up a bit. One way or another there seems to be a trade-off. But in terms of the NextGen new business traction, is there still, we are still reading about insurance companies subsidizing EMR or Bush putting the pressure on EMR and offering, I guess help to doctors which naturally is going to help you guys. So are we seeing any of that yet because historically you guys have said you are not seeing that yet.

We are seeing a strong market and a lot of interest. We see the government drivers. We see the insurance company drivers. There are a number of employer drivers; employers in some cases are starting to pay physicians for the use of these systems. Insurance companies are starting to operate a little bit more, although not yet broad-based, on what is referred to as pay for performance methodology. The government, you may have heard President Bush mention electronic health record in his recent state of the union address. He and other folks in the government are trying to work on the adoption Electronic Medical Record adoption issues on a number of fronts. There are standards of adoption and promotion efforts going on.

You may have also heard about the new subcabinet level position that was created and the appointment of Dr. David Brailer who is referred to now by people as the national healthcare IT czar. And he is developing a plan related to the adoption and promotion of these systems and there is quite a lot more, I am just scratching the surface and it's all good.

Are we starting to see a little bit of the subsidization of buying software from parties outside the actual direct sales, say that you're making?

From time to time, but what we're seeing more than a third party paying for the system, is a third party paying doctors a little bit more on either a per patient per month or per patient per year basis. We are starting to see and hear about payors paying a little bit more to providers that are using certain technologies. There is something going on with the prescribing and that it looks like will be expanded. A lot of people are looking at what the government will do with systems and for example with Medicare and Medicare payments relative to Docs using these systems and the hope is that translates to the private payors, as well.

You said a bit about prescriptions. I guess the customers of yours that I talk to historically said interesting. We know the government is looking at it, it is not something our doctors are comfortable using yet. How are you guys viewing that computer physician automated entry the CPOE product? Is it something that is starting to get some pickup?

Yes, it is, and what I see with our customer base is more and more of them are doing electronic ordering and electronic prescribing. And I would say by and large the users of our EMR are in fact doing the prescribing within their facilities now.

And you talked about going after the smaller doctors office, the deal sizes being down as we get into the sort of onesie, twosie, or fivesie, tensies, are you guys looking at sort of an ASP model for that business, or is it still going to be the license sale?

We offer an ASP model today, and we have for quite some time. Our primary business model is the license sale, and thus far that's the model that the market seems to prefer. I also just want to be careful to make sure that I characterize things as expanding our market into the smaller system market, not any type of change of focus.

Okay and last question competition, I guess you guys just talk a lot about Epic not seeing them as much anymore. If you were to say one two three in your target markets, and what you view your level of success against them and if they do beat you and when they do and why, if you go through that a bit, that would be helpful. Thanks a lot, guys.

Thank you. Outside of Epic, the ones that I have mentioned on prior calls I think remain in the hunt that being GE, Allscripts, A4, and four or five others. You wanted me to mention a few so I'll stop with those three. There are many, many others, however. And rather than going competitor by competitor I will just tell you that typically when we lose a deal to competition a lot of it has to do with the price of the systems or prior established relationships. Very infrequently does it have to do with functionality of product.

Bill Lennahan, (ph) private investor.

Thank you for taking the call. I have just a general question and that is if there is a percentage of medical practices to dental practices that use your methodology. Anyone could answer.

I can take it from the medical side. We believe that fewer than 15 percent of medical practices are using an Electronic Medical Record system today. The numbers that the industry throws around are anywhere between 5 or 10 percent, up to 20 or 30 or sometimes 40 percent depending on which analyst you talk to. A lot of that has to do with the various definitions of what an Electronic Medical Record system is; with a very broad definition the numbers get a little bit higher, but a true Electronic Medical Record system, that is a system that physicians are using to document patient care primarily as opposed to a paper-based system, I think is 15 percent or less.

On the practice management side, that is a far more mature market, it is probably between 90 and 95 percent of all medical practices in the country having those types of systems, systems for administrative purposes, billing, scheduling, management, reporting and Greg, you can take it from the dental side.

On the Dental side it is an inexact science; I have never seen what I would call precise numbers. Some of it -- what comes into play are the dentists retired? Are they part of the Armed Forces, et cetera. But let me give you some round numbers. Our target market is dental groups of five or more, typically what we really look at is dental groups of six or more. Within six or more there are probably approximately 5,000 dentists of which greater than 60 percent are currently using the QSI system.

I think it is also likely to be the case that the general usage in dentistry parallels the figures that Pat gave in terms of practice management systems are well penetrated in the dental sector and clinical systems or electronic patient record systems are far less penetrated in dental than practice management. There would be some parallels between the two sectors from that perspective.

Are you saying, then, that the company is probably has a breakdown of 85 percent or 90 percent dental practices versus perhaps 10 percent or 15 of medical? Approximately?

I do not think we said that, we maybe answering a different question than what you are asking or vice versa. But that would not be an accurate conclusion.

Thank you very much.

(OPERATOR INSTRUCTIONS) Gene Mannheimer with Roth Capital Partners.

Congratulations on a good quarter. My question, a couple of them. One, Pat, I think you indicated that you are placing what seems to be a new focus on the low-end practice, i.e. the small practice. And this seems to be an area you haven't played in in the past. What would be the rationale for that? Do you see perhaps better growth at the smaller practice than the medium to large?

I wouldn't say it is a new focus but I would say it is an increased focus. We have sold to the smaller practice market for some time and have many, many solo and two and three doctor groups already on board. The rationale is that the small practice market tends to, with technology, follow the large practice market by a couple of years. And the other part of the rationale is 80 percent of the physicians or roughly 80 percent of the physicians practice either solo or in very small groups. So being a company that doesn't want to ignore 80 percent of the eventual market, we thought it was about time to increase our focus.

Do you envision the offering being scaled down somewhat to and perhaps enable these small practices to afford the solution?

Yes, we do.

Second question a little bit more on the market penetration. How many doctors would you say you have of the 500,000 or so office-based physicians?

That's a number I don't have in front of me, and it's a number that we don't track very closely internally. That's largely because of our licensing models. In many cases we will do an enterprise or a site license for a particular network of doctors or hospital organization, and we will license them for as many providers as they have or can bring on for a fixed fee. And that fee tends to be in the seven figure range. And we do those from time to time. And when we do a deal like that, we don't -- we are not very concerned about the number of Docs that they bring on board, and are using the system.

We have one customer in New York that I think licensed for all of their physicians, maybe 1000 or 1500 physicians. I think they have about 600 live on the product at this point. And that is a typical situation for the very high-end customers.

Thanks, Pat. And one final question. You also mentioned that there was a considerable amount of add-on business to existing customers. Can you just characterize that? What sort of sales were they -- a feature function?

It was a combination of feature function. We've come out with some new features and functions, additional modules, if you will. And it was also an effort to take advantage of the growth of some of our customers as they add providers. We put some special opportunities on the table for them. And some of them took advantage of it.

Thanks again, guys.

Neil Bradsher with Broadwood Capital.

First of all I would add my congratulations on your very strong results. Most of my questions have been asked so I'll just ask a couple of oddball questions that people haven't asked. One is has there been any consideration about changing the name of the company recently? Since the QSI Division is now such a small part of the company and getting smaller as a percentage, has there been any consideration to naming the company NextGen or some third name that wouldn't be associated with either division?

Neil, this is Lou. I would say no formal theory of consideration recently. I am sure that there may be some watercooler conversation around that from time to time in different places, but it is certainly not a discussion that our Board has taken up anytime in the recent past.

Does it make any sense from a business perspective to do that? Obviously there are always other than business reasons people think about doing these things, but does it make sense from a business perspective to do that, or is it sort of irrelevant?

I would say my answer is somewhere in the middle and goes like this. It may make some sense, it may make some sense at some time down the road. I personally don't view that as an urgent business issue at this point in time.

Okay. Then my other question relates to your initiative to go down to smaller practices. You also recently put out a press release to go even more micro than that, which is directly the patient with a personal health record through a partnership with another company, which if I'm reading looks like they are a neighbor of yours Pat in Pennsylvania. And I'm just wondering what your thoughts are on that. This has been an area where people have talked about some sort of national program for everybody in the country or something, and obviously you guys are doing it on your own. What kind of a revenue model is there, and does this have the potential to be a real business over time, and if so does it scale to millions of people, or is this sort of a minor little add-on here?

I think it may ultimately scale to millions of people. There are a lot of people who feel that the keeper of the patient's health record ought to be the patient. And we're excited about the relationship, the product as it relates to the integration of the personal health record with the office based Electronic Medical Records system, and think that a lot of the power of these systems lies in the exchange of data between them. It is far too early to tell what revenues may come out of this relationship.

And I would say that is true on if you asked either company about it, we are experimenting with some things. We are learning about business models relative to the personal health record, and we are talking to existing customers about it, have some pilots kicking off and those types of things. So I think that is a question I may be able to better answer six months from now. Right now I would be careful to caution the folks on this call against forecasting short-term revenue.

What is the revenue model, and what do you guys do and what does CapMed do?

Our involvement will come in the promotion of this personal health record to the patients through our customers' offices. One of our customers may provide the personal health record software and content for their entire patient base. Typically when that happens it tends to be on CD based on the cost of (technical difficulty) Our customer base may also offer the electronic keychain device to their patients, and both of those with CD ROM or the electronic keychain would come with the software application, as well as the patient's health record. Whether it is the practice or the NextGen customer, if you will footing the bill or whether it is ultimately the patient footing the bill or some other third party footing the bill, remains to be seen.

So does CapMed basically make this and you are going to make sure it can easily work with your system and inform all of your customers about it?

I would say at this point that's pretty close. We've done some integration work, some interface work. We've done some cobranding, copromotion kicking off at the recent TEPR conference. We are also working with them on a couple of other initiatives relative to content and promotion and relative to cobranding and some additional features that our customers may want to see in that product.

Is there revenue directly from the patient or from the patient's insurer, or does the revenue have to come from the practice?

That is something that we are going to figure out through the pilots that I mentioned.

Okay, and would there be any benefit to a patient just directly getting one of these, or would it only be relevant if you are a patient of a practice that has the compatible management EMR system?

I think there is benefit to the patient directly getting one of these provided that the patient is willing to enter their health record data. Again, I think the real bang for the buck comes from the electronic exchange of the data and the automatic population of the patient's health record through their physicians' office and the NextGen system.

Okay, again I apologize for these oddball questions but particularly the potential of getting directly to patient, I think in the long run could be very interesting for you. So thanks.

I would reiterate that past comment that we're still very, very early in this particular game and it would be, we are learning a lot. We are not prepared to -- we have not drawn any conclusions yet; we think it would be premature for others to draw conclusions on this as well.

That's what I would expect.

Matthew Richey with Centaur Capital.

Question for Lou. Could you give us an update on your acquisition pipeline?

It is a short update. And it is basically unchanged, and unchanged update from prior quarters. I continue to spend time -- although it is only a portion of my time on this search. But there is really nothing to report, nothing significant to report at this point in time. So it is a work in process albeit a slow one and a methodical one without any promises on my part or the Company's part for any particular outcome at any particular time. So we're just keeping our ears open, working along, but not feeling a huge amount of pressure to bring a deal to the table unless there is a great deal to be brought.

Lou, I know you don't have final say on the use of cash, but given that the acquisition pipeline is looking less and less likely to offer candidates, do you think in your opinion this adds emphasis to considering alternative uses for the cash like a dividend or a share buyback?

My own personal opinion has been and continues to be that the Board should be looking continuously at those types of ideas. But you are right, I am not on the Board, and I'm giving you my opinion, but it is not an opinion that is officially registered as a Board member at the Board table.

I appreciate that. Thanks.

Corey Tobin with William Blair & Company.

Good afternoon. Just following up on the comments regarding expanding your target market into smaller practices, this is an area where a number of vendors have struggled to earn, certainly the types of margins that you have earned over the years. Most usually due to cost of service in small accounts and lower ASPs. Can you just give us a feeling for your expectations regarding profitability in this segment of the market and any commentary regarding your current margins?

We expect that segment of the market, like the other segment of the market, to be very profitable. And we are making sure that, as we have in the past, we are keeping a close eye on that, looking at new selling approaches, new delivery approaches, that will allow us to bring the cost of the system down without sacrificing a large amount of profit.

And are these things that you're currently implementing, or are these things that we would expect to see closer to fiscal year '06, or is this something that we should expect in the next couple of quarters or so?

Its actually something that we have been implementing, I would say about over the last year, the change that just happened was the addition of three new salespeople who will be by and large focused on that segment of the market, rather than having our outside sales force expand or change their focus. That's not to say that we won't have an outside rep calling on a small practice. We will if that's appropriate, and requested by the small practice. But it is really something that we have been doing for quite some time. We have sold since the company was created to small practices, its just again an expansion of the focus.

So we would not necessarily expect to see any decrease in margins simply due to going into that area of the market?

I got my fingers crossed.

Okay, great. Thank you.

At this time there are no further questions. Mr. Silverman, are there any closing remarks?

I would just like to thank everyone for their participation on today's call. And we'll wrap it up.

Thank you. This concludes today's Quality Systems conference call. You may now disconnect.