NextGen Healthcare Inc (NXGN) 2007 Q4 法說會逐字稿

Good afternoon. My name is Vanessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter and fiscal 2007 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 session. (OPERATOR INSTRUCTIONS) Thank you. Mr. Silverman, you may begin your conference.

Thank you, Vanessa, and welcome, everyone, to our fourth quarter and fiscal 2007 earnings call. Paul Holt, our CFO; Greg Flynn, our Executive Vice President and General Manager of the Quality Systems Division; and Pat Cline, President of the NexGen Healthcare Information Systems Services Division once again join me on this afternoon's call. Please note that the comments made on this call will 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, perspectives and strategies, preliminary and/or projected operating results, capital and equity initiatives, pending litigation and the implementation of or potential impact of legal, regulatory and accounting requirements. Actual events or results may differ materially from our expectations and projections and you should refer to our prior SEC filings including our Forms 8-K, 10-K and 10-Q for discussions of the risk factors, management 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, as I've mentioned on each and every call for the past many quarters, please continue to note that the Company's past performance is not necessarily indicative of future performance.

I'll now provide some summary comments on the quarter and the year. Paul, Greg and Pat will follow with additional details. For the March quarter, the Company recorded record revenue of 45.1 million, up approximately 27% over the prior year. NexGen revenue of 40.7 million represents a record for the division and a 28% increase over the prior year quarter. QSI division revenue at 4.5 million was up nearly 17% over the prior year and represents the highest quarterly total in recent history. Fully diluted earnings per share for the fourth quarter was $0.31 which represents an 11% increase over the $0.28 earned in the same quarter of the prior year. While we were pleased with our revenue for the quarter, there are no guarantees that financial performance in ensuing quarters will meet or exceed the level of performance attained in the most recent quarter.

As detailed in our press release, expenses in the quarter were impacted by a number of factors, including but not limited to, higher FAS 123(R) expense driven by changes in the Company's option plan target and option pool announced in late January of 2007 and the Company's strong revenue performance for the quarter. In the fourth quarter, FAS 123(R) expense was approximately $0.01 per diluted share higher than in prior quarters. Cash incentive compensation was also relatively high in the quarter due to the quarter's strong revenue performance as well as the adjustments to certain bonus plan targets announced in January of this year. The Company's corporate expenses for the quarter were impacted by legal and other professional services, totaling approximately $500,000, which is in excess of $0.01 per diluted share related to the previously announced SEC investigation of trading activity in the Company's equity. The Company's tax rate for the quarter was 39.3%, up from 35.6% in the third quarter of the year. As mentioned during our previous call, the low third quarter tax rate was a result of certain favorable factors including the reinstatement of the R&D tax credit statute.

For the year, Company revenue was 157.2 million, up 32% over the prior year. Fully diluted earnings per share was up 42% over the prior year. NexGen revenue was up 36% over the prior year and NexGen operating income was up 40% over the prior year. The QSI division had revenue growth of 7% for the year and operating income growth of 22% for the year. Detailed information about the fourth quarter and the fiscal year as a whole will be provided by Paul Holt.

Regarding investor conferences, during the quarter the Company presented at the JPMorgan, Needham, UBS and Lehman conferences. Subsequent to the quarter end we presented at that time JMP and Citibank conferences. Investor meetings were held in Kansas City, Chicago, Seattle, Portland, Baltimore, Philadelphia and New York City in addition to those held here in our headquarters. Regarding acquisitions, we continue to prioritize organic growth. We will continue to review potentially interesting opportunities that come to our attention.

Recapping a number of prior announcements. On February 1st the Company announced they would pay out $1 per share dividend to shareholders of record as of February 13, 2007, with an anticipated distribution date of February 28th, 2007, as well as the establishment of a regular quarterly dividend of $0.25 per share per quarter subject to board approval. The first quarterly dividend payment is scheduled for July 5, 2007 for shareholders of record as of June 15, 2007. Also as previously announced, our annual shareholder meeting is scheduled for August 8, 2007.

Before I close I would like to reiterate a portion of our press release comments regarding the previously disclosed SEC investigation of trading activity in the Company's securities. And here's the excerpt from the release. As previously disclosed in our Form 10-Q for the quarter ended December 31, 2006, we received written notification from the Commission stating that the Commission initiated an investigation of trading activity in our securities. While making clear that the investigation did not mean the Commission had concluded there has been a violation of law, the Commission sought documents and records concerning our Chief Financial Officer. To the best of our knowledge, the Commission's investigation is ongoing and is not an investigation of our Company. We intend to fully -- we intend to continue to fully cooperate with the Commission. After we received the Commission's notification, our audit committee, assisted by independent outside legal counsel, conducted an investigation of certain trading activity in our securities with particular focus on trading in advance of our third quarter 2006 earnings release. Based on the information available to the investigators and the results of the investigation, the audit committee has concluded that it does not appear that our Chief Financial Officer engaged in improper insider trading or tipping in connection with that trading activity. The legal and professional services expenses associated with the investigation was in excess of $0.01 per diluted share for the March quarter. The audit committee's investigation was concluded during the quarter that will end June 30, 2007. That was what was in our release.

Our audit committee engaged a large nationally recognized law firm to assist in its investigation. The law firm, as well as our audit committee, put a great deal of time and energy into this process. Although our internal process has concluded, the SEC investigation is to our knowledge ongoing, therefore our ability to provide significant additional commentary on this matter may be limited.

In closing my prepared comments for this call I want to clearly point out that there are no guarantee that's the Company, or either of its divisions, will meet or exceed past or expected levels of performance in future periods. It is possible that investors or analysts will 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 guidance advanced by members of the financial community. Once again I'd like to thank the more than 650 members of our team for their many contributions to another year of record results. As well, that the confidence that our clients and investors have placed in us during the past year is greatly appreciated. I'll now turn things over to Paul Holt.

Thanks, Lou, and hello everyone. Our consolidated systems sales of 24.5 million this quarter represents an increase of 19% compared to 20.6 million in the prior year quarter. Sales of add-on licenses included in system sales grew 22% to 6.1 million this quarter versus 5 million a year ago. Our consolidated maintenance, EDI and other services revenue rose 38% to 20.6 million compared to 14.9 million in the prior year quarter. Our consolidated gross profit margin this quarter came in at 67.2%, that was down slightly from 68.9% a year ago. The decrease in our gross margin over last year was due primarily to a relatively higher amount of compensation expenses in our -- as a percentage of revenue as well as a relatively lower amount of hardware -- I'm sorry, as well as a relatively larger amount of hardware and third party software as a percentage of systems sales.

Total SG&A expense increased by approximately 4 million to 14.6 million this quarter, compared to 10.6 million a year ago. The increase in SG&A expenses compared to the prior year was due to several factors including higher related expenses due to increased revenue in headcounts, higher compensation expenses due to the previously announced revisions to performance targets and strong revenue performance impacting certain bonus programs, as well as stock option expenses due to these adoption of FASB 123(R), higher corporate expenses and other increases in SG&A expenses.

I'm going to comment on a sequential basis now in regards to SG&A expense. SG&A expense on a sequential basis increased by approximately 4 million and this increase was composed of several factors, including approximately 1 million in additional corporate expenses, including the Company's response to the SEC investigation already discussed, 1 million in higher compensation and benefit expenses, 0.9 million in additional commissions expenses tied to the strong revenue performance, approximately 0.3 million in trade show and advertising and other SG&A expenses. I also want to note that the increase in compensation in corporate related expenses include a portion of the increase in stock option expenses referenced in our press release, our earnings press release. SG&A expense as a percentage of revenue this quarter increased to 32.2%, compared to 30% in the prior year quarter, primarily due to the significant year-over-year growth in SG&A expenses just mentioned.

Moving on to our tax provision, Company's effective tax rate returned to more customary levels compared to the third quarter at 39.3%, compared to 35.6% last quarter. As Lou has already mentioned, the reason for the sequential increase in our effective tax rate this quarter is due to the fact that our prior quarter included a benefit from the reenactment of federal research and development tax credits which occurred in December of 2006. The effective tax rate on a year-over-year basis was slightly higher, 39.3% versus 38.7% in the prior year.

And before I move to divisional performance, I'm going to mention that our results this quarter include 1,15 million in additional pretax expenses related to stock options due to the adoption of FASB 123(R), the after tax impact of our FASB 123(R) option expenses was 963,000 or $0.03 per diluted share. And note that the prior quarter does not include these expenses due to the fact that we hadn't adopted FASB 123(R) yet. This will be the last quarter that we will have that issue. Next quarter we'll have an apples to apples comparison in terms of stock option expenses.

In terms of divisional performance, system sales in the NexGen division rose 17% to 23.4 million this quarter compared to 20 million a year ago and continued growth in NexGen's base of installed users drove maintenance, EDI and other revenue in that division 46% higher than last year at 17.2 million versus 11.8 million last year. Operating income in the NexGen division was up 12% to 15.444 million compared to 13.785 million a year ago. And the dental division reported a year-over-year increase of revenue of 17% at 4.46 million compared to 3.825 million a year ago. Operating income for the division was 865,000.

Moving on to our Balance Sheet. Our cash decreased by approximately 20.4 million this quarter to 60 million or $2.21 per share compared to 80.4 million or $2.98 at the end of the prior quarter. Note that the March quarter included a dividend payment equal to approximately $27.1 million. This quarter our DSOs declined by 11 days at 129 days versus 140 days last quarter. DSOs continue to remain however above prior year levels due to a significant customer which represented approximately 12.5% of total gross accounts receivable as of March 31, 2007. I also note the DS0s net of amounts included in accounts receivable and deferred revenue remained unchanged at 81 days as of this quarter and last quarter. DSOs by division were 91 days for the QSI division and 134 for the NexGen division. Deferred maintenance and services revenue was 39.4 million, that's down 1.1 million from the prior quarter and up 3.5 million compared to the end of the prior year.

Primarily drivers of the growth in deferred revenue compared to a year ago is deferred implementation and training as well as maintenance services in the NexGen division An increase in training and implementation services rendered in the fourth quarter assisted the Company in bringing down our backlog of implementation services on a sequential basis. And again for those of you who are tracking this, our non-cash expenses for the quarter break down as follows. Total amortization expense of 931,000, that's 34,000 for QSI and 897,000 for NexGen. Total depreciation expense, 564,000, that's 67,000 for QSI and 497,000 for NexGen. Stock option compensation, 1.25 million. Our investing activities for the quarter were as follows. Capitalized software, 1.555 million, that's 36,000 for QSI and 1.519 million for NexGen. And fixed assets, 770,000, that's 67,000 for QSI and 703,000 for NexGen. I want to thank you all for being on this call and your interest in our Company. I'll now turn things over to Greg Flynn who will provide an update on the QSI division.

Thank you. And thanks to those of you on the call for joining us. We of course appreciate your interest in our Company. As always, the QSI division numbers have been addressed in detail by Lou and Paul. So I'll focus on continued product enhancement achievements for the division and then other historical areas of interest for these calls. I'm very pleased with the division's development and implementation efforts for the CPS, Clinical Product Suite, software package. We not only introduced new clinical graphics, improved security enhancements, improved integration between CPS and digital x-ray softwares, and most importantly to me, further integrated the CPS package with our practice management systems.

Now, following the line of historical questions, I'll comment on our sales staffing and pipeline. Our sales staffing remains unchanged from last quarter and our pipeline is improved to approximately $3.8 million. Our pipeline is defined as sales situations where QSI is in the final three purchase choices and we believe that the sale will occur within 180 days.

This being our year-end call, I would like to make one other comment. I would like to thank the staff at the QSI division for their efforts this past year. I am both proud and fortunate to work with such talented and dedicated individuals. Thank you. With that I'll turn the call over to Pat Cline, as you know, President of our NexGen division.

Thanks, Greg. Hi, everyone. During the quarter NexGen once again executed about 80 new customer agreements. I'm very happy with the number of new customers and with our record revenue. Also, last quarter NexGen reached another high in customer service response time, returning over -- returning 100% of our customer service calls in under two hours. That has been a goal that we've established for the Company quite some time ago and we're clicking on all cylinders in customer service. We're also making good progress on resolution time and in overall customer satisfaction. Our sales force numbered 58 at the end of the quarter which is unchanged from the prior quarter. But all 58 people aren't the same people. I think we traded up in a few positions.

Our goal is to continue to grow the sales force and to be at 70 people by the end of the fiscal year but we're making sure of course that we've got the right people in place and not just focusing on the number. Our pipeline grew modestly. It stands at over $70 million today. For those that need a refresher on what NexGen calls our pipeline it's just the total value of the potential value of the deals that we think we have a 50% or better chance of closing within 120 days. We closed a lot of business in our pipeline last quarter, but with the HEMS leads maturing and the Tepper Conference leads coming into the pipeline, the pipeline's been built back up nicely. The market for electronic health records systems and integrated practice management systems remains robust and NexGen continues to win key sales in the marketplace. In closing, I'd like to thank our employees and once again thank our customers. Vanessa, we're ready for questions.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Charles Ray from CIBC World Market.

Yes, hi, thanks for taking the question here. You know, I just had a couple questions. First, more generally, on your R&D spend I think it was under 6% as a percentage of revenues. Can you talk about sort of your targets on research and development as we go forward, maybe you can give us some suggestions on where you think there's needs for improvements either in the QSI or the NexGen side? And do you think this is the right level of R&D spend as we think about the business and the opportunity in the HR in particular.

Hi, Charles. This is Lou. We don't run our business by setting percentage targets for things such as R&D. Those who have been around the Company for awhile would attest to the fact that our R&D spend has continued to increase fairly steadily over time. We have a number of talented individuals and I would dare say a growing number of talented individuals in our development staff and we continue to keep them busy. But in terms of a specific target of a percentage of revenue tied to R&D, that's just not how we've tried to run our business. We continue to try to reinvest in the business in a number of areas, including development but not limited to that. And hopefully, performance willing, we'll be able to continue to do that.

Okay. Great. Just more generally, I think the IRS recently passed a rule that allowed for nonprofit entities to be able to subsidize costs for EHR and it seemed like that was the last piece that was missing when the relaxation of Stark rules happened last fall. Have you seen any type of pick-up of activity from hospitals interested in sort of subsidizing the cost of the HR?

Yes, we have seen an uptick. This is Pat. The relaxation of the Stark rules has started to become a little more of a driver for us. We're seeing a reasonable amount of activity from hospitals and health systems, both local health systems and national health systems. Although as I mentioned I think on the prior call, a lot of these hospital and large health system deals do take some time to close. Some of them might -- some of the increased activity now might not translate to increased revenue in the current quarter or even next quarter but may come online downstream. That's just the way the market works. And I do believe that a couple of the deals that we closed in the quarter that we're discussing may have been impacted positively by the relaxation of Stark and I agree with you that the IRS ruling was a last piece and was favorable for our Company and those in our business.

And if I could just add on to that, when you're talking about the opportunity from hospital customers in particular, should we think that really a lot of these hospitals are Siemens customers or are you able to more broadly go out and reach out to other hospitals that may not be using the Siemens platform?

We do more sales to non-Siemens hospitals as we do to Siemens hospitals. Of course we welcome the Siemens hospital business and we're happy with that relationship and have a lot of prospective deals in our pipeline that might be related to Siemens. To answer your question, we do a heck of a lot of business with hospitals that are non-Siemens customers.

Okay. Great. Thanks a lot, guys.

Thank you.

Your next question comes from the line of Sean Wieland with Piper Jaffray.

Hi. Thanks, guys. Couple of questions. The system sales number in NexGen, accorded to my math, is the strongest sequential growth outside of when you layered on the Siemens transaction, the strongest sequential growth you've ever had in that division which may be overshadowed by your higher SG&A cost. So first, can we talk about what were the driving factors behind such a strong 31% sequential growth in system sales? Was it Stark? Was it macro related? Was it just your sales reps were becoming productive? Were there any significant transactions in the quarter that would represent kind of a one-time transaction?

Sean, that's a good question. This is Pat. Unfortunately, I don't have a good answer for you in that it would be tough to decide for example with a hospital that purchased last quarter, whether that sales rep was a little more productive, was more experienced, learned a little bit more or whether the hospital was impacted by the relaxation of Stark or some of those things. I can tell you that we're happy to see the uptick in system sales. I think it was last call or maybe the one before that somebody commented that system sales were flat and I think I answered by saying that wasn't necessarily a trend. And as I've said, one quarter is -- it's tough to look at one quarter, whether it's a good quarter like the system sales pop that we've seen or whether it was the quarter where system sales were flat. But overall, we're very pleased with the trend. If you look over the longer period of time, we think we've got some room to run on, on system sales.

Have you seen any changes in win rates or anything in the competitive landscape which could have contributed to the higher growth?

No, nothing in particular. I don't think there has been much of a change to the competitive landscape. We continue to be happy with our win rates. As I mentioned, we're -- we win a lot of key accounts, especially the ones that we feel are strategically important. That's not to say we win all of them, but fortunately there's a share of business out there for a lot of organizations in our business. 80 system sales is at the high -- 80 new customer contracts, that is at the high end of our range which has run from the 50 mark to about the 80 mark. But no, I don't see a big change. I think I -- let me add a little more texture to that, Sean. I do think I see, and I think we touched on this partially in the last call, a couple of our competitors getting a little more aggressive. I'm trying not to use the word desperate. But getting a little more aggressive with pricing and some of the tactics that are being used and those kinds of things. I'm not sure I would characterize that as a change in the competitive landscape but it's interesting to me, nonetheless.

Okay. Thank you. And as related to the SG&A expenses, about a $1 million was due to additional corporate expense. Just related to your audit committee. Just so I can be clear on this, the audit committee has looked at this with some outside counsel. They've closed the books. So we could expect that that portion of the million dollars essentially goes away next quarter?

Sean, just to clarify what we said was that corporate was up about 1 million and as part of that, roughly half of that, approximately, was tied to legal and other professional services related to the SEC investigation. So you're using the million. I know we tried to point out that it was about a 0.5 million that was tied to that. That was through 3/31.

Okay. 0.5 million should go away in the next quarter?

As we also mentioned, the internal work of our audit committee and the independent outside counsel was concluded in June. So we had April and May and had some of June in there and so we will have expenses in the June quarter related to this. So I think it would be inappropriate to say that all of the expenses are going away. I think it's a little tough, given that it's now June 7th to be able to project with 100% certainty what the exact expenses are going to end up for the quarter. We think it would be fair to at least think that the expenses might be a bit less than we incurred in the quarter but they're going to be greater than zero.

Okay. And then one other question related to the additional -- the higher compensation related to certain bonus programs. This is related to when you took the option, you kind of loaded up on options from 70 to 160,000 for those executive members, is that correct?

Loaded up would be your term. There are a couple of things going on in those categories, Sean. That's one of them. There was a referenced change in one of the performance targets, the revenue target that was in place, and the third factor and it shouldn't be discounted in any way, shape or form, is that we did have a very strong revenue quarter. So the three of those things operating together contributed to what you're talking about, not one or the other or not any one individually.

Okay. And is that going to be an ongoing expense in SG&A or do you think -- I'm trying to get SG&A expense guidance out of you.

I appreciate you being direct about that. And no other tactic has worked, right?

[ LAUGHTER ]

So the issue is that we do have these performance plans and our ability to predict the expense related to those plans is really tied to our willingness and ability to predict or predict accurately what the revenue and profit's going to be. So it's a little hard to do. But --

Okay.

Okay?

Okay. Thanks very much.

Thanks, Sean.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Richard Close from Jefferies and Company.

Yes, I guess first question, if we look at the NexGen revenue on I guess specifically on the system sales, is there any way you could give us the breakdown between the software, hardware and implementation and training?

We typically don't break that down, but the software tends to be the lion's share of things. We did book more hardware in the quarter as was mentioned previously than we have historically booked, I think to the tune of maybe a couple million dollars over the prior quarter, maybe a little bit more than that. Again, I don't have that in front of me. As far as other breakdowns or concerns, typically it's asked so I'll go ahead and answer in advance. Roughly two-thirds of our customers purchased both our practiced management system and the electronic health record which is right in our historical range.

And Richard, this is Lou. Although I don't have an exact date and time that we're going to file our K, the usual and customary breakdowns will be in the K, so hopefully in a couple of days or not too long from now you'll have that information to work with as well.

Okay. I guess just a point of clarification on that last question. When you say a couple million, maybe higher than the prior quarter, just to be clear, are you -- the prior quarter year-over-year or sequential?

Sequential. I was referring to sequential.

Okay. I just wanted to be clear on that.

Hardware portion.

Correct. Okay. And then I know you guys have been detailing how much revenue comes through I guess VARs over the last couple quarters. Can you -- is there any way you guys can maybe give us details on that front?

That's another area that we don't break out what comes through VARs and what comes through our direct sales force. I'll tell you that by far most of our system sales come through our direct sales force. We're happy to have the value added reseller channel with resellers like Siemens and many others that we think bring a lot of value to us and have been good partners for us in many respects but our sales force, again, numbering the 58 people outsells the VAR channels by a lot.

And I appreciate that. And one final question. With respect to the gross margin, maybe additional clarity on that front. You mentioned two reasons for the decrease. I guess year-over-year, obviously the higher hardware sales and then additional comp I guess, higher comp expense in the quarter and I was wondering if you could give us a little perspective on which one, maybe the percentage contribution of that 170 basis point decline?

Well, you'll see, this is Paul. You'll see that all in the K when we come out with that level of detail.

We brought the skinny binders in here with us as opposed to the real thick ones for the call, Richard.

Okay. So we shouldn't look at that decrease in gross margin as maybe discounted pricing occuring in the quarter or anything like that?

Well, I don't think you should. I don't see any decrease in the quarter. We did about the same number of agreements with new customers and obviously revenue from system sales was way up. So that would kind of lead you in the other direction.

Okay. Great. Thank you.

Richard, just one point of clarification. Pat was doing the best he could with none of the hard numbers in front of him. I think that you'll see that the hardware delta on a sequential basis was a bit less than the 2 million that was discussed. I'm thinking that it's more like a little over 1 million, somewhere in there. But directionally, Pat was correct but the order of magnitude -- or the size of the delta may be a little -- may have been a little high.

Okay.

I stand corrected. Thank you, Lou.

Thank you very much.

Your next question comes from the line of Dave Scially with Kingsford Capital.

Thanks. I wanted to follow on there. So Lou, you're saying that it was roughly a delta of 1 million dollars over the last quarter number that was reported in there for hardware for NexGen.

I'm having a note passed to me from our finance staff that says it was 1.2.

1.2. Terrific. That's fine. That's a very good number, use approximately. And then back to Richard's question. So going forward, I guess the gross margin is the area that we're trying to figure out here and do you feel comfortable for modeling purposes at the current levels or do you see initiatives that might go back to the previously achieved margins that you had earlier this year?

As I said on many calls and in many meetings over many years, for us at least gross margin percentage is an outcome as opposed to a goal or a target and we are happy to take hardware orders from those customers who would like to buy hardware through us and if customers decide to make other plans, we certainly respect that decision as well. So it's really hard for us to forecast that hardware sales are going to go up or down. I can tell you that we wouldn't turn down any hardware sales or opportunities that came to us that we thought we could make a little profit on or reasonable profit on. But it's -- that's really hard to forecast and therefore it's a little hard to address your question. The short answer is we don't have any initiative per se to stop selling hardware so that the gross margin percentage can go up. I'm not sure that's exactly what you were suggesting. But that's really what it would amount to. We're very -- we're happy to take the orders if and when they come in and if they don't we'll move along and try to find some business in other places.

Yes. Well, but I guess what I'm more trying to get at is that in the previous quarter, the December quarter, the hardware sales for NexGen were roughly 0.5 million and in the September quarter they were 0.5 million but yet we saw a sequential decline in gross margins if I remember. So that isn't related directly to hardware. There's some other component going on. So I'm trying to ask if we can see those other components of costs.

Well, actually gross margin on a sequential basis went up slightly. But we were talking about the year-over-year change in gross margin. So sequentially --

I'm sorry, yes, so it did go up but down from where it had been earlier in the year. That's what I was getting at. So okay. Anyway, moving forward. Would you folks consider also you would, I don't know if it was Pat or not, you were talking about the decline, it might have been you Lou, that was talking about the decline in receivables from the one customer to 12.5% down from other levels. Would you folks consider giving out the revenue from those in the K when it's filed?

No, we -- what we have done -- that 12.5% number comes from a disclosure of significant customer concentration. That happens to be a receivables concentration, a net receivables concentra -- gross receivable concentration and then on a parallel basis, we have not had any revenue concentrations and therefore haven't disclosed any revenue concentration.

But wouldn't it make sense, though, if the level of receivable from this customer is in the -- and if it's 12.5%, it's roughly $8 million, and it's been higher than that in the past. Wouldn't that make sense that they were a significant customer?

Well, what you're missing is what's in deferred revenue.

Okay. Okay. So they could be in deferred. I got it. Okay. Okay. Thank you.

Thank you.

Your next question comes from the line of George Hill with Leerink Swann.

Hey, guys. Good afternoon. I'm going to follow up on a couple more of the SG&A items. I just want to make sure that I wrote these numbers down. Selling expense as part of the increase contributed 0.3 million, headcount expenses contributed about 1 million, bonuses were 0.9, options were 1.25 pretax and corporate was 1, half of which was legal?

Whoa, whoa, whoa, let's go over that again.

Of the $4 million sequential increase.

Yes, 4 million sequential increase, you have 1 million in corporate. You have a million --

A million in corporate, half of which Lou said was the legal. I'm calling that the legal, the stuff associated were the investigation.

Yes. Then have you 1 million in compensation and benefits. And you have 0.9 million in commissions.

Right.

And 0.3 million in trade show and advertising.

Right.

And then you have other.

Right.

That makes up your 4 million.

That's my number. And I guess as we think about that going forward, the -- we could say that the selling expenses could be contributed to HEMS, it would be safe to assume that the headcount expenses will probably continue. As far as the bonuses, or the commissions are concerned, is that something -- is that something that you're expensing for I guess for the year-end and have accrued for the year-end or is that something that is reflective of what was done this quarter?

Reflective of what happened this quarter. It's what's in there is the strong revenue performance that we achieved.

Okay.

This quarter.

And okay. All right. I'm clear on that. Alluding to something that you spoke to earlier, the number of new contract signings, 80, close to the top end of where you guys have been but the revenue number's higher. Does that mean that you guys are selling to larger practices as opposed to smaller practices and which direction would you say that the sales are trending?

Well, as I've said I'm not sure that one quarter is a trend but last quarter we did have a fair number of large organizations. Our software is highly scalable and our customer base is comprised of many, many large organizations included in our bookings for last quarter were two or three in fact national organizations that made purchases, a couple of which will hopefully continue to roll out and continue to make purchases in the future as they move the product nationally.

Okay. And the one last question I'll ask is was there any sales concentration particularly in the quarter? Was there any one deal over $3 or $4 million?

No, there was not.

Okay. Thanks a lot.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Rama Rao from R and R Capital Management.

Hi, guys. Thank you for taking the call. We have become your shareholder very recently. I have one comment and one question. When we analyze the data it was truly amazing to see that you guys are consistently grown sales and EPS year-over-year for the last 10 years. I think it's a remarkable achievement and yet few companies can complete this. Job well done.

Thank you very much.

Now my question. It's a bigger picture question. It would be nice if you guys can share your view with shareholder about what are the growth drivers for the next two to three years in terms of product, market and geographical region. Thank you for taking the call.

Thank you. Well, the drivers relative to product are numerous. There are federal and state government initiatives and legislation, both enacted and being talked about. One of them we mentioned a little bit earlier on the call was the relaxation of the Stark rules. In addition to the federal and state government initiatives, there are a number of pay for performance programs where physicians essentially, and health organizations, are essentially paid more for better outcomes and meeting certain metrics and providing certain quality indicators, quality data and that type of thing and those pay for performance programs are both on the private side and on the government side. There's a trend toward interoperability and exchange of health record because of the benefit that that'll provide both to the health organizations, providers and their productivity and efficiency and also the benefit that that will provide to the patients. There are trends toward consumerism and personal health records that we think are drivers for the type of systems that we develop and sell.

There are a lot of quality initiatives. There are trends toward different subscription based an other financing programs or licensing mechanism and hardware technology improving and hardware costs coming down that I think open up the market to a broader range of providers. There are some demographic trends and drivers. For example, the number of physicians in the country is expected to grow by 20% I think by the year 2014 as the baby boomers require more and more healthcare. So hopefully that'll address the driver question.

I'm not sure -- you had had mentioned relative to product and geography. I don't want to get into a place where I'm disclosing on this call our product plans. I'd like to try to fly under our competitors radar in that regard so I'm going to just talk about those kinds of drivers and tell you that we are committed to keeping the lead that we feel we have product-wise on our competition and I think the final part of your question related to geography. We have an initiative within the Company to broaden our focus over a period of time to the certain global markets or international markets. This is not a change of focus but again, a broadening of focus and as we move on that initiative and will do so relatively slowly, it's highly likely that we'll move on that initiative through partners, perhaps for example with Siemens who I believe is in over 140 countries and those types of things.

It's a pleasure to be your shareholder and keep up the good job. Thank you.

Thank you very much. Pleasure to have you.

Thank you.

Your next question comes from the line of Gene Mannheimer with Caris and Company.

Thank you. Most of my questions have been answered. Great quarter. I guess I would be looking for a little more granularity with respect to -- if you bifurcate the market into small, medium and large, are you able to talk about where you see the growth rates of each of those segments and how you're faring, particularly at the low end, which seems to have the higher growth prospects, given its under-penetration? Thank you.

The low end I think does have higher growth prospects, but I think that growth will come over a number of years. I think the accelerated growth right now tends to be toward the high end as we see, as I mentioned, more activity or reasonable uptick in activity, partially due to Stark and partially due to the other drivers. Our system plays very well at the mid range, very well at the high end and as I've mentioned previously, we're again broadening our focus as opposed to changing our focus so that we can do a great job for the smaller practice in bringing the product to them at an affordable price, yet keeping things -- keeping those sales profitable for the Company and for our shareholders.

Thanks, Pat.

Thank you.

Your next question comes from the line of Dr. Peter Shim, private investor.

Yes, my question is concerning the SEC investigation. Did you state that the SEC concluded that the CFO did not engage in insider trading?

Sir, we did say that the audit committee of the Company, the audit committee engaged independent legal counsel. That group did a significant amount of work on an internal investigation and I'll read you from our release. It says that the audit committee has concluded that it does not appear that our Chief Financial Officer engaged in improper insider trading or tipping in connection with the trading activity. We also mentioned that to the best of our knowledge, the SEC investigation is ongoing.

Has there been any SEC investigation in the last six months regarding any accounting irregularities at QSI?

No.

No. That's good news. Thank you.

Thank you.

Your next question comes from the line of Jeff Schmidt from Sidoti and Company.

Hi, guys. Most of my questions have really been answered. Just out of curiosity, are you seeing any -- as far as the Stark rule effects, are you seeing that on any particular side of the market, at the larger or smaller ends?

The high end.

It's mostly the high end?

Yes. We see an uptick in interest from the hospital customer base and those types of organizations that will come to a company like ours for their medical practice, for the ambulatory side, and make a purchase and help the turnaround and provide the software to their associated physician base, taking advantage of the Stark exemption. They can fund I believe it's up to 85% of the purchase price in electronic health record system at this point. So they help to a great extent these practices that may not otherwise choose to afford an electronic medical record system to acquire one.

Okay. Thank you.

Your next question comes from the line of Frank Sparacino from First Analysis.

Hi, this is Christopher Pat. Pat, in terms of some of the drivers were you outlining, I don't want to put words in your mouth, but I interpret from your comments that there is interest in different deployment options, whether it be on-premise or some type of on-demand model, but if you could just comment on that.

Well, I think we can't ignore that as a trend. There is a trend, or an uptick, in interest over a broad period of time in on-demand or subscription-based or ASP-based offerings. As I've mentioned in the past, we have such offerings, hosted offerings and subscription models, but it's not our primary model. Our primary model is selling licenses and executing an ongoing maintenance agreement with our customer. Again, I've said that we've seen an uptick over a broad period of time, this is one of those things that isn't going to have any material change in my opinion on a quarter to quarter basis but over a long period of years. And the gentleman that asked the question was looking for drivers relative to multiple years in the future.

If I could ask one follow-up there, Pat. If I'm a sales rep selling NexGen, is my commission at all predicated on how I sell the software, whether it's on premise or whether it's hosted, am I going to be commissioned differently?

It is more attractive for the sales rep to sell the licenses and a maintenance agreement than it is to do an ASP or subscription-based model.

Thank you very much.

(OPERATOR INSTRUCTIONS) Your next question is a follow-up question from Richard Close of Jefferies.

With respect to the expansion of the sales force, getting I guess from 58 to 70 by year-end, would you expect that more activity on that ramp in the first half or evenly spread out or tilted toward the second half of fiscal '08?

I think it's going to be more tilted toward -- not completely tilted toward the second half of the fiscal year. At this point what we're trying very hard to do is make sure that all of our -- that our sales force is firing on all cylinders, so to speak. We're investing a lot in training and we're doing, as I mentioned, some what we think is some trading up in a couple of areas to make sure we've got a solid foundation and we haven't stopped recruiting or stopped hiring. This is just the way it worked out quarter-over-quarter but I think with the concrete drying on that foundation over the next couple of months, we'll try to ramp the hiring if things go according to plan toward the end of the year. The number 70 is also not a number that I take too seriously or I think that you should take too seriously and because again, we're -- our focus is on and is going to remain on getting the right people, not just hitting the number for that sake. So I would say that's pretty loose guidance, that 70 number by the end of the year.

Okay. And then maybe -- you've been growing at a nice clip on the NexGen side over the last several years. Would it be your characterization of the market that it's robust enough to achieve similar type of growth rates I guess on the top line, considering you're adding people more so in the second half of the year?

Well, I'm going to stop short of giving you guidance but I'm going to compliment you on the way you crafted your question because you crafted it more toward the market. You talked about our growth but then sort of shifted to the market. So staying with the market theme, I believe that the market will continue to grow at or above the pace that we've seen over the last couple of years.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of George Hill from Leerink Swann.

Hey, thanks. Just two quick follow-ups. Number one is, are the sales reps incented from a revenue perspective and from a profitability perspective or are their goals or are their targets just around revenue?

Both.

Okay, And the second one is just a last question on Stark. I don't know if you've had any of these conversations with customers, but the tax issues seem to have been addressed between the IRS and the hospitals. Is anybody at all discussing the tax impacts to the receiving physicians and are they at all worried about whether or not they're going to get a 1099 form if they've gotten any MR that's been subsidized by the hospital?

I wouldn't call myself an expert in that area but I have not heard any medical practice pushing back in that regard.

Okay. All right. Thank you.

Your next question comes from the line of Lynn Padulsky with Piper Jaffray.

Hi guys, thanks for taking the follow-up. You executed a sales force realignment I guess towards the back half of last year. Are you comfortable with where the reps are located and how the accounts are stratified and kind of how the geography is generally laid out?

Yes, I'm reasonably comfortable, though I think there are some areas for improvement and we're constantly talking about ways of structuring things and ways of tweaking things to reach our ultimate goal, which is to make sure that we're applying the right resource to the right opportunity.

Okay. Thanks.

At this time, there are no further questions. Mr. Silverman, I would turn the call back to you.

Yes, I would like to thank everyone for their interest in the Company and participation on this call and we'll look forward to joining you in a short while. Thank you.

This concludes today's conference call. You may now disconnect.