NextGen Healthcare Inc (NXGN) 2005 Q4 法說會逐字稿

At this time I would like to welcome everyone to the fiscal year 2005 fourth quarter and fiscal year end conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. [Operator Instructions]. Thank you. Mr. Lou Silverman, you may begin your conference.

Thank you, operator. And welcome to Quality Systems's fiscal 2005 fourth quarter and fiscal year-end conference call. Paul Holt, our Chief Financial Officer; Greg Flynn, Executive Vice President and General Manager of our QSI division; and Pat Cline, President of our NextGen Healthcare Information Systems Division, once again join me on this afternoon's call.

Please note that the comments made on this call may include statements that are forward-looking within the meaning of the securities law, including without limitation statements related to anticipated industry trends; the Company's plans, products and strategies; projected operating results; capital initiatives; and the implementation and potential impact of legal, regulatory and accounting requirements. Actual events and 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 any projections or forward-looking statements in the future. Also please continue to note that the Company's past performance is not necessarily indicative of future performance. I'll now provide some summary financial data. Paul Holt will follow with additional detail.

For the quarter, the Company set new revenue and earnings per share records. In the March quarter revenue totalled $25.5 million, up approximately 36% over the prior year. Fully diluted earnings per share at $0.36 exceeded prior year earnings per share by 50%. The quarter's top line results were driven by a record revenue performance at NextGen. The 21.8 million in revenue attained by the division for the quarter represents a 48% year-over-year increase. The QSI Division's 3.7 million in quarterly revenue represents represents a 12% year-over-year decline.

Company profitability for the quarter was impacted by strong performance at the NextGen division, which had operating income of 7.9 million, approximately a 65% increase over prior year. We had a 30% year-over-year drop in operating income at the QSI division. We experienced a significant increase in corporate expenditures for the quarter, which more than doubled on a year-over-year basis to approximately $2 million. It should come as no surprise that expenses related to the Sarbanes 404 process was the principle driver of the year-over-year increase. And we also had a reduction in the Company's effective tax rate for the quarter driven by some of our R&D tax credit initiatives.

EDI revenue for the quarter came in at just under 2.9 million, up 32% over prior year. EDI grew 86% year-over-year at the NextGen division, and declined 8% on a year-over-year basis as the QSI division. I'll once again remind listeners that EDI revenue is reported as part of divisional revenue totalled each quarter.

Looking at fiscal 2005 as a whole, total Company revenue increased approximately 25% to 89 million, fully diluted earnings per share increased approximately 53% from $0.80 per share in fiscal 2004 to $1.22 a share in fiscal 2005. Fiscal 2005 revenue for NextGen increased 35%, to 73.6 million, and the division grew to the point where it accounted for 83% of total company revenue for the fiscal year. For the QSI Division, fiscal 2005 revenue declined by 7%, from 16.5 million, to 15.4 million. Operating income for the year declined by approximately 15%.

For fiscal 2005 corporate expenses increased from about $4 million to about 5.5 million. And, as I mentioned, the higher professional service fees were the most significant contributors to this increase, with Sarbanes 404 expenses accounting for much of the year-over-year increase. Cash and cash equivalents were at 51.2 million at year end, incorporating a nearly $20 million one-time dividend paid to shareholders during the month of March. DSOs increased to 119 days at fiscal year end from 115 days at the December quarter end, and 99 days at the conclusion of the prior fiscal year. Our staff will be working over the ensuing quarters toward turning this trend around.

Full-time employee head count at fiscal year end was 390. Taken with revenues for revenues for the quarter, this generated annualized revenue per full-time employee of $262,000; which is at the higher end of our historical range.

There were no stock repurchases during the quarter or the fiscal year. Note that the Company's stock repurchase authorization expired in September of 2003.

The status of our ongoing acquisition evaluation process continues unchanged. We will actively pursue opportunities of strategic significance that also represent a goof financial fit for us. Absent those characteristics we'll remain patient and continue to focus on our organic growth. As I've mentioned on prior calls, we're not interested in just doing a deal for the sake of just doing a deal.

During the course of fiscal 2004 and '5 and continuing on through to date, the topic of executive compensation, including programs involving equity-based compensation has been and continues to be the subject of study by the Company's compensation committee. The committee and the Board of Directors continues to work on this important issue. Since our last conference call, the Company participated in the UBS conference, the Roth Capital conference, the B. Riley conference, the Sidoti conference; and most recently, the Friedman Billings Ramsey conference. We plan to participate in the Thomas Weisel conference in San Francisco conference later on this week. Additionally, since the last conference call. the Company's met with investment professionals in Los Angeles, San Diego, New York City, Toronto and Montreal.

Summarizing some of our more recent announcements, we talked about the dividend. We did our two-for-one stock split effective mid-March; we announced our partnership with Siemens; and we also announced the addition of Pat Cline and myself to the Company's Board of Directors, which-- that was done at the May 25th Board meeting.

In closing my prepared comments for this morning-- for this afternoon's call, I have the pleasure of once again pointing out that the performance of Company has exceeded our internal expectations. And it's, again, with great pleasure that I thank the individuals joining me on this call and our entire team for their leadership and performance during the year. The shared successes of our clients and shareholders are the result of your skill and dedication.

I also want to clearly point out again to current and/or prospective analysts and investors, that while we are pleased with the Company's performance during the quarter and the year, there are absolutely no guarantees that the Company or either of its divisions will exceed or even sustain their level of the performance in future periods. It's possible that our 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'll now turn the call over to Paul Holt, CFO, for additional financial details on the quarter.

Thank you, Lou. Our March 2005 quarter reflected continued growth in system sales, maintenance and EDI. Consolidated system sales rose to 14.2 million, an increase of 39% compared to 10.2 million a year ago. Maintenance, EDI and other revenues grew 31% to 11.3 million compared to 8.6 million a year ago. A relatively low level of hardware and third-party software included in system sales resulted in our consolidated gross profit margin this quarter coming in close to a record 64.3% of revenue.

Total SG&A expense increased by 2.9 million during the March quarter-- at 8.0 million compared to 5.1 million a year ago. As Lou mentioned, the largest contributor to the increase in SG&A expenses was a $1.1 million increase in corporate expenses, primarily to related to Sarbanes-Oxley compliance. Other factors contributing to the increase in SG&A expenses were: selling-related compensation expenses to our expanded NextGen sales force as well as other SG&A-type expenses in the NextGen division. SG&A expense as a percentage of revenue this quarter increased to 31.3% compared to 27% a year ago.

The Company's effective income tax rate was significantly lower compared to the prior year, at 31.3%, compared to 39.4% a year ago. During the quarter ended March 31, the state of California concluded an audit of the Company's tax returns with no material change in the amount of R&D tax credits. Based on the results of that audit, the provision for income taxes during this quarter was reduced by approximately 0.4 million, related to credits which had not been recognized previously due to uncertainty over the ultimate amount of tax to be credited.

Our NextGen division-- I'm going to move over to divisional performance. And our NextGen division recorded record software license and implementation revenues, which grew 44% on a year-over-year basis. System sales in the NextGen division rose to 13.8 million compared 9.6 million a year ago. Again, continued growth in NextGen's base of installed users drove maintenance, EDI and other revenue in that division 59% higher; at 8.1 million versus $5.1 million a year ago. NextGen maintenance revenue was up 43% from last year at 5.0 million versus 3.5 million a year ago. And NextGen EDI revenue stood at 1.7 million for the quarter, compared to 0.9 million a year ago. Operating income in the NextGen division was up 65% to 7,917,000 compared to 4,794,000 a year ago.

The QSI Demo division reported a year-over-year decline in revenue at 3,689,000. That compared to 4,039,000 last year. Operating income for the division was 737,000.

Moving on to our balance sheet. Our cash declined this quarter by approximately 15.2 million, coming-- finishing up at 51.2 million, or $3.90 per share, compared to $66.4 million at the start of the quarter. This quarter we paid a one-time cash dividend, which reduced cash by approximately 19.7 million; however, we generated cash from operations as well as received proceeds from stock option exercises, so our ending cash only declined by 15.2 million.

Our turnover of accounts receivable measured in DSO's increased 4 days to 119 days, compared to 115 last quarter. Breaking that down by division, we have 86 DSO days for the QSI Division and 124 for the NextGen Division. Moving on to deferred maintenance and services revenue, that-- that now stands at $25.5 million. It's an increase of 1.8 million compared to the last quarter and 8.3 million compared to a year ago. The primary driver of the growth in deferred revenue is, again, a continued growth in implementation and training services in the NextGen division.

For those of you who are tracking this, our non-cash expenses for the quarter break down as follows: Total amortization expense, 527,000, that's 55,000 for the QSI division and 472,000 for NextGen. Total depreciation expense, 302,000; breaks down to 42,000 for the QSI division and 260,000 for NextGen. Investing activities in capitalized software was 901,000, total; 28,000 for QSI Division and 873,000 for NextGen. Investments in fixed assets totalled 593,000, 23,000 for QSI and 570,000 for NextGen. We also have a non-cash expense related to deferred stock option compensation and that was $107,000 for the quarter. And I will thank you all for being on this call and your interest. And I'm going to turn things over to Mr. Greg Flynn for an update on the QSI division.

Thank you, Paul. And thanks to everyone on the call for their interest in our Company. The numbers for the QSI Division have already been well covered by Lou and Paul, so I won't belabor those again. Of note, though, I would again point out was the growth in our EDI business which we facilitate at the QSI division for both our QSI and NextGen divisions.

On the product development front, we saw many enhancements during the quarter to our clinical charting product, CPS as we term it, for dental clients. In layman's terms, we improved the use of the product for patient flow throughout our high-volume offices. Now noting patient appointment volume by time in the actual charting software, and even tracking the status of patients throughout their movement within the office; from waiting room to exam chair, et cetera.

During the quarter past, we also enhanced and expanded several of our third-party vendor relationships associated with the CPS product. On the dental practice management software side, we expanded our insurance fee schedule capabilities even further. As insurance plans become ever and ever more complicated, so too must our software flexibility increase; in particular in the high-volume offices that we work with.

Also the quarter saw one of our large dental consolidator clients begin to rollout a thin-client version of our application. They realized cost benefits along with increased security and ease of hardware maintenance.

As always, let me comment on our sales staffing and pipeline. Our sales staffing remains unchanged from last quarter and our pipeline is at approximately $3.9 million. We defined our pipeline as sales situations where QSI is in the final three purchase choices and we believe that the sale will occur within 180 days.

And now turning the the call over to Pat Cline, our President of the NextGen division, I would like to again congratulate Pat and his crew on a great quarter and, in fact, a great year. Pat?

Thanks, Greg. Hi, everyone. In the fourth quarter NextGen executed nearly 80 new agreements, about 70 of these were with new customers. NextGen continues to win new sales with our EPM and EMR version 5 platform, and our customers are continuing to migrate over to these new versions of the products as well.

Our sales force increased slightly from the last call. It stands now at 36 people, that includes four inside salespeople. And our pipeline has increased now to $48 million.

The market for NextGen systems continues to be robust and we see a number of new opportunities coming down the road. We've been investing heavily in product development to take advantage of some of the opportunities and to make sure that we stay ahead of our competition. We're also beginning to explore new opportunities related to outsourced practice management.

We're very proud of our fiscal year 2005 performance and we think we're in good shape going forward. Nothing is certain, but we're not worried about our products, we're not worried about our market. Are we worried about our competition? I would say yes. I think it's important always to keep an eye on competition. But we're not anymore worried now than we were on the-- on the last call. We think we're-- we're pretty far out ahead relative to product and to our-- relative to our customer service. It's also prudent to continue to pay attention to customer service and to execution but, again, overall I think we're in reasonable shape. Thanks again to NextGen's outstanding team of people and thanks to our customers for the confidence they've expressed. Operator, I think we're ready for questions.

[Operator Instructions]. Sean Wieland, Piper Jaffray.

First question is on the tax rate. Is this-- is this largely -- is this going to be a one-time thing and we're going to go back to a more normal tax rate in the future?

Yes, Sean. We-- as I mentioned, we recognized approximately 0.4 million in credits this quarter that we hadn't recognized previously. That is not a recurring event. We do have R&D tax credits, which affect will-- which affect our tax rate. But the amount I quoted you was -- was related to the conclusion of that audit we received.

Okay. Are there other tax credits, perhaps, on the balance sheet that are yet to be recognized?

No.

Okay. Second thing, Pat, you mentioned, quickly, outsourced practice management.

Yes.

Can you just give us a little bit more detail on that?

I'll give a little bit more detail. I don't want to tip too much of the hand. But, essentially, our customers routinely take advantage of outsourced services for things like collections and payment posting and some high-level management reporting and those kinds of things. And we've been looking at adding some of those types of things and related services to our-- our offerings, to sell both to existing customers and to new customers.

As a-- as a MSO-type service like you get paid a percentage of collections? Or would it be under the confines of a software licensing agreement?

I hate to do this to you, but I'm going to stop there.

Okay. And just a quick update on the 5.0 rollout?

5.0 rollout is-- is going well. It's going a little bit more slowly than we anticipated. I think I heard this morning that we had between 30 and 40 new customers that have migrated into production. And we've got 120 customers in the queue who have migrated in their test environments and will be moved over to production. These are existing customers that I'm talking about. And all new customer shipments for about the last six months have gone out on that platform.

Chris Fallon, a private investor.

I have a question. When does the integration of Siemens take place, if it hasn't already?

Well, are-- are you -- can you-- can you be a little bit more specific with your question for me?

Sure. In-- in -- in the-- relation to the Siemens product line, I believe you folks are integrating your services with them. And I'm just curious as to when you expect that to be complete if it isn't already?

Okay. Our agreement with Siemens is essentially a joint marketing type of an agreement as-- as we announced. So we're jointly calling on some of the same customers with both NextGen products and Siemens products. We are interfacing the products together. Some of the interfaces are completed and some of them are-- are being worked on. Some of them will be worked on in the future. I would say the Siemens relationship is going along very well. Though it's too early to tell from a-- a revenue standpoint or opportunity standpoint. And, of course, we won't disclose actual numbers, or numbers of sales, or set any expectations.

John Biel, a private investor.

The last call I asked about emerging standards and if you all felt comfortable with your product offering that, whether it was the government or the industry sector or the end users, whatever standards were introduced or contributed to them that you felt comfortable that your system could handle import, and exchange; and I believe you said you did. There was an article in the USA today June 7th that spoke of the government putting forth standards and I wonder if anything has changed in your thinking? Or whether you feel quite comfortable, that no matter what standards come down the road, QSII will be right in the middle of it?

We feel very comfortable, nothing has changed from the last call. The government is, fortunately, pushing on standards and certification and is really getting behind the electronic medical record. And I think that's been a big help to us. We try to keep our-- our finger on the government's pulse and-- and also private industry relative to standards. And we think we're way out in front.

Just one other quick question more out of curiosity on my own. I know in my doctor's office, they have the wall of the tab colored -- colored tab folders, and is-- is it part of your strategy or is it a third-party or outsourcing that Pat referred to earlier; does the industry expect the doctors to convert all the retrospective data? Or is this strictly prospective data conversion? And-- or is that an opportunity for Quality? And I know you wouldn't tell me in public if it was. But I was curious if that's part of what you offer or whether there's an opportunity for other companies to come in as third parties and help in data conversion?

Converting a practice's wall of charts, that you mentioned, is not currently a service that we provide. That is rolling in a high-speed scanner and personnel so that the practice can outsource that conversion. Some practices will back scan a lot of their records, or all of their records and many others will start sort of fresh from today and wait a year or two or three to-- to get rid of the-- start getting rid of the paper. I would say there is an opportunity there. We have talked about it. We haven't yet explored it.

William Linehan, a private investor.

-- I've talked to you before on the past calls. One of the things I wondered is there-- is there any greater penetration into the medical replacing-- by QSII? Is there any difference than our last call, for example?

I'm, sorry. I'm not understanding the question.

Well, I was just wondering if briefly if there is any greater penetration into the medical field than in the past? QSII in general made a bigger impression on the physicians with relative to-- to what you have to offer?

The-- the physicians in the NextGen division is-- is what we're pretty well solely focused on.

Right. And is that-- is your penetration, do you have more percentage-wise than you did at the last conference call, for example?

No, I think-- I think we were doing well then relative to market share and new system sales. And I think we're doing just as well, if not maybe slightly better, but that's a tough thing to measure quarter-to-quarter.

Do you plan on any greater concentration? It seems to me that there-- there is a group, they may not be a high volume-- quite as high volume; but a smaller group of physicians from -- [ Inaudible ] who can't come up with the money to, you know, import their practice with electronics. And I wondered if that was a field that would appeal to NextGen?

It-- it is an area that-- that appeals to NextGen. We have, over the last six or nine months or year, been executing a strategy to penetrate the small practices; which make up, depending on how you describe a small practice, somewhere between 60 and 80% of the market. So it is an important piece of the market for us. We've expanded our focus as opposed to changed our focus.

But, yes, I think-- to answer the question, we are -- we see that as an important market.

Gene Mannheimer, Caris Company.

Just elaborating on the small practice strategy. Could-- could you just distinguish for us, perhaps, the-- the sales effort of targeting the small practice versus the-- your traditional large-- mid-size to large practice?

Sure. We have a separate sales force that works out of our office in Horsham, Pennsylvania that calls on, typically, the smaller practices. And they use slightly different tools, such as web-based demonstrations instead of onsite demonstrations. Because doing a web-based demonstration is far less expensive. And they don't go out and physically visit the practice, though they may have one of our outside reps go by and do so. And they do a lot with the telephone and e-mail and those kinds of things, whereas our -- the bulk of our sales force gets into the office and spends a lot of time with the practices and-- and those kinds of things. If the practice wants that, you know, again there's no rule that an inside salesperson can't team up with an outside salesperson to make sure that the customer feels comfortable and puts a face with the name. But they -- I would say the big differentiator is the tool set that's available to them.

Okay. And is-- is the end product for the small practice different from the large practice, ie a scaled-down version, perhaps, with fewer bells and whistles?

Yes. We do have such an offering for the smaller practice and they can move from that offering to the full NextGen EMR system. I presume you're talking about the-- the EMR side. We have not done a scaled-down version of our EPM, or Enterprise Practice Management, system; though we've-- we've tossed it around internally.

Okay. And could you-- could you give me the number -- or the hardware and third-party software number for the quarter? Is that available?

Paul?

Yes, Gene, that's going to be on our K, which-- which is going to be filed shortly. So if you could just hold off for -- until that gets filed, you're going to see it real soon.

Okay. Sounds like it's also higher than last quarter, but still relatively low historically. Is that a fair statement?

Yes, I think qualitatively, I think that's true.

Lewis Banfield, RWB Capital Management.

I'm wondering if you have any statistics on market share. I know this is a dynamic marketplace with different products, meeting a variety of needs. But I'm wondering if you have any-- any thoughts on that?

We don't have any statistics that we can cite. We have seen some statistics out there. We've had consultants look at, for example, our market share compared to our competition's market share. But I don't think the-- the-- data that's available to us is tight enough for me to start tossing those numbers around.

George Heel, Leerink Swann.

Lou, I was wondering if you could just provide a little more color on the demand you're seeing in the-- we'll call it the small practice market, Maybe under 10 doctors versus the traditional mid-size to large-practice market?

Pat, you want to handle that one?

Yes. We're seeing increased demands from the small -- even the solo physicians. I-- I think that market is starting to heat up, with all IT including IT that penetrated practices 25 years ago on the practice management side. Very often it's the larger practices that see the return on investment, or can realize return on investment a little faster. And-- and can afford to make purchases like this, and the smaller practice market comes along. But, I would say they're coming along pretty quickly.

Okay. And, Lou, you had spoke to keeping your thumb to the pulse of Washington. Is the Company active in Washington with what goes on?

Yes, we are.

Brandon Osten, a private investor.

Can we just talk a bit on the DSO side? How much of the DSO is related to prepaid maintenance contracts so to speak? Or maintenance that's been-- that's been booked into deferred revenues but hasn't yet been-- been paid for?

Brandon, this is Paul. Yes, a big chunk of it. It's-- you're going to see that -- that's also going to be put out in our K which is going to be filed shortly. You'll be able to-- to see how much of our AR is composed of deferred revenue.

Okay. And were there any customers that were more than 10% of the revenues in the quarter?

We generally don't get into that level of detail. I can tell you we don't for-- for-- in our annual statements, we don't have any material customers like that.

Okay. Just, Greg, what was that you were saying on the-- on the-- on the QSI? You mentioned something at the end there, I think it was a deal and I just-- I cut out for some reason.

No I mentioned our pipeline was at $3.9 million.

Okay. That's it. And lastly, if you guys could just make -- Pat, if you can make a quick comment. Right now there are some issues going through with CMS, and CMS wants to cut doctor pay, and Congress is trying to fight that for Medicare patients, and doctors are sort of threatening that if their-- if their pay gets cut on Medicare, IT is going to be one of the areas that gets hit. Are you seeing anything like that, sort of push back-wise? Is anyone sort of waiting to see how this Medicare reimbursement issue settles out, or is it all systems go for electronic medical records?

We haven't seen that. It's been all systems go. I think people will wait until it settles out. But I think the-- what drives a lot of the business is a positive return on the investment. And if the doctor's making a little bit less, in my opinion, it's a better reason to go out and buy a type of system like NextGen.

Now while CMS has made comments along those lines, ultimately they're looking for a lot of different ways to reduce the country's financial burden related to healthcare. And they're also pushing hard on pay-for-performance pilots. And pushing hard on healthcare IT and certification of electronic health record systems and-- and those kinds of things. So I think, overall, the government has-- has been a positive factor for us.

Sheila Cunningham, Hillward Research.

Pat, I have a standards question for you. I'm looking at these big health care systems. And, in February, GE announced a deal with Intermountain in Salt Lake City and they're doing a platform and standards. And I'm wondering, how you guys sort of interface. I mean is it possible the big healthcare systems will impose standards that-- or will the-- will the ultimate standards come from the doctor practices? How is this all going to kind of shake out?

Well, I think a lot of the standards get shaken out by healthcare IT vendors working together when customer opportunities present themselves. Very, very few standards are really driven by a large healthcare system, though some standards have been advanced by large healthcare systems. I think the standards that are used to exchange health information are pretty well established. There is a new standard that has been worked on in-- in recent history, that is over the last 12 or more months, called the continuity of care record, or CCR. NextGen is a supporter of that initiative as well as another initiative and another standard called HL7. The two standards compete in some ways and are harmonious in others. But NextGen's position is to be supportive of HL7, be supportive of CCR and other ANSI standards, and that type of thing; and remain what the industry calls an open system and keep open minds.

Okay. Are you on any forums? Or are you being consulted by the government?

We-- we have people that speak to government officials and, with great regularity, we have people who are assigned that task for our Company. There are a number of people in our Company that over the last 60 days have had a lot of interaction with government officials. And we also have people in the Company responsible for attending other association meetings and forums and conferences relative to government initiatives, standards, and the kinds of things that we've been talking about.

Okay. Then just a quickie on Siemens. Siemens, I guess one of the advantages -- well, first of all, does your involvement with Siemens preclude you from doing anything with, say, GE Healthcare?

I'm going to say that it doesn't preclude us from working with or partnering with a GE Healthcare necessarily. But GE Healthcare has a product that's competitive to NextGen's products. The odds that GE would want to partner with NextGen when they have competed so intensely against us for so long, would be pretty slim.

And then finally the international exposure. I guess Siemens helps you with that. What international exposure have you, as of now?

We have very little international exposure. We get international exposure at a number of conferences that we attend here in this country, but we have very little outside of that.

And what's the plan there?

To expand into markets faster than we otherwise would have with-- by leveraging the Siemens relationship.

Josh Stewart, Sidoti & Co.

I was wondering if you would break out the types of deals that you signed, which ones were EPM/EMR and which were just EMR and just EPM?

In looking at it, I almost-- almost on every call, I disclose that about two-thirds were the combo products and the balance was evenly split. And as I looked at these contracts, it turned out to be right in that ballpark. So I didn't want to just keep repeating myself on that point, so I didn't put it into my opening remarks. But as it turns out, we're-- we're still in that world.

Okay. And when you're signing-- I'm assuming when you're signing deals with -- existing customers, they're just buying the EMR product. Is that always the case?

No, it's not always the case. In many cases we've interfaced NextGen EMR to a foreign practice management system. And we've done a good job on the EMR side and the practice comes along and buys Practice Management; and we're able to de-install a competitive practice management system.

Okay. And one-- one other question. I know that in the-- in past calls, you were saying that the practice size that you're selling into has been broadening on both ends; you're going into smaller and also larger groups. And I know that a lot of times Allscrips talks about how they're kind of more of a large physician practice provider and you're-- and they compete with you in medium-size practices. I was wondering, are you seeing more traction in larger groups and is there any reason why Allscrips product would be better for larger groups?

We're seeing Allscrips in competitions at the higher end and in the mid-range, and I understand that they have an initiative, or have announced an initiative perhaps, that broadens their focus to the smaller markets.

To get to the second part of your question, no, there's nothing that I can think of that would make that product any better for a large opportunity, and I think we're doing very, very well at the-- the very high end of the scale.

Okay. And so you are-- do you feel like you are getting more traction at larger practices right now?

I believe so.

[Operator Instructions]. Sean Wieland, Piper Jaffray.

Hey, just want to jump in one more time, Pat. Average deal size in the quarter and then the big uptick sequentially in the number of agreements? Can you kind of talk about the-- the mechanics going on there?

I don't have -- I haven't calculated the average deal size. So I may lean on Paul to give you that. But I don't think there's a-- a huge swing.

Okay. How about the -- I think you did 55 agreements last quarter, and did you say, 80 this quarter?

80 total. About 70 of those were new.

And so that looks like a bigger sequential growth than normally. And then according to my math, it looks like a smaller average system sale. Is -- could the delta be the relationship with Siemens? Did you-- how many of those deals were the result of the Siemens partnership?

I don't want to get into disclosing how many deals that we've done with Siemens or-- or deals that we've expected to do. But, what we're seeing as we're successful in some of the-- the smaller practices, as well as the larger practices, is -- well, I think as I mentioned two or three calls ago, we'll see the average deal size come down slightly and the number of deals go up. That prediction has been-- been coming true.

Okay.

I don't think, though, quarter-to-quarter it's, as I mentioned, a huge swing.

Okay. Were the deals done with Siemens in the quarter?

Sean, again, we're not going to be keeping score on one source or another here on deals.

John [inaudible] Witter Capital.

Could you just give some detail on on what the-- the non-cash charge was in the quarter?

Non-- non-- you want me to restate the non-cash expenses that I stated earlier?

No, the 107,000. What was that related to?

Oh. That relates to some stock options that were granted back a ways back that were -- we've been amortizing that amount of expense each quarter for the last year and a half approximately.

Okay. Were those granted at market value?

Well, as-- as we've-- we disclosed in our financials, those were granted, yes, they were granted at the market value; however, they were-- the strike price was somewhat less than the market price, hence the reason why we're having-- we're amortizing some amount of expense.

Okay. Would you anticipate more charges like that going forward?

Not that I'm aware of.

Just to clarify, the grant that Paul is referring to was a fall of '03 grant, if my memory is correct. And I think we've done a reasonable job of talking about this in our K's and Q's. There will be an ongoing charge to the financials for a-- some period of time into the future. So if-- if that was your question, the answer is yes, we will expect to see that on a go-forward basis. If the question is do we anticipate any future grants being done with -- at a below market price, my personal opinion is I doubt-- I doubt it.

But-- but would that be your decision or a Board decision?

Clearly that is a Board decision.

[Operator Instructions]. Eyton Friedman, Emerald Investment.

My question is-- trying to get an understanding of the pipeline of sales. I understand this quarter it's at 3.9 million. I was curious what the pipeline of sales if you recall the last quarter?

Just to clarify, Pat Cline, who is the President of our NextGen division, and Greg Flynn, who is the Executive VP and General Manager of our QSI division, have each given out pipeline number with-- for-- with their division discussions along with the definition of what our pipeline is all about. So the 3.9 million that you reference is attributable to the QSI decision and Pat Cline had mentioned a pipeline of 48 million. And the NextGen pipeline definition is those deals that our sales reps forecast as having a 50% or greater likelihood of closure within 120 days. So the-- in general terms, the QSI pipeline has been relatively stable, and the NextGen division pipeline has been moving north at a-- at a reasonable steady pace.

At this time, there are no further questions.

I'd like to thank everyone for their interest and their participation on the call. Thanks again.

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.