NextGen Healthcare Inc (NXGN) 2008 Q1 法說會逐字稿

Good afternoon. My name is Natalia, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter fiscal 2008 Quality Systems financial results. 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. Lou Silverman, you may begin your conference.

Thank you, Natalia. Welcome everyone to our Q1 fiscal 2008 earnings call. Paul Holt, our CFO; Greg Flynn, our Executive Vice President and General Manager of our QSI Division; and Pat Cline, President of the 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 laws, including without limitation, statements related to anticipated industry trends, the Company's plans, products, perspective 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 feelings, 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 have 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 will now provide some summary comments on the quarter. Paul, Greg and Pat will follow with additional details.

For the June quarter, the Company recorded revenue of $42 million. While our revenue now did not set a record this quarter, the $42 million represents the second highest revenue total in our history. On a year-over-year basis, the total Company revenue increased 17%. NextGen's revenue for the quarter was $38 million. NextGen revenue was up 18% over the prior year and as was the case for total Company revenue, NextGen's performance for the quarter represents the second highest revenue quarter in the division's history.

QSI Division revenue at $4 million was up approximately 2% over the prior year. Fully diluted earnings per share for the first quarter of fiscal '08 was $0.29, up $0.28 from the year-ago quarter. As I have mentioned regularly in record and non-record quarters alike, there are no guarantees that financial performance in ensuing quarters will meet or exceed the level of performance attained in prior quarters.

Regarding other items of potential interest, we have no updates on the previously disclosed and discussed SEC matter. Related expenses were somewhat lower in the June quarter than what was incurred in the March quarter, though they remained into six figures during the June quarter. As previously mentioned, the Company's internal investigation, the audit committee's internal investigation was completed during the June quarter.

On the topic of dividends, our board recently approved our second quarterly $0.25 per share dividend to be paid to shareholders of record as of September 14, 2007. This follows the special dividend in the first quarterly dividend payment of $0.25 per share announced and paid to shareholders earlier in this calendar year. Regarding investor conferences, during the quarter, the Company presented at the Deutsche Bank, JMP, Citibank and Jefferies conferences. Investor meetings were also held in Boston and New York.

Regarding acquisitions, we're essentially where we have been, prioritizing organic growth and continuing to review potentially interesting opportunities for acquisitions that come to our attention. At our most recent board meeting, the board indicated nominally expanded interest in considering acquisitions, though it is premature to anticipate that an acquisition of any kind is imminent or likely at this point in time. Our annual shareholder meeting is scheduled for later on this week, specifically August 8, 2007, here in Orange County, California.

Shareholder and director Ahmed Hussein filed a 13D on July 30, concerning, among other things, his position on certain items related to the settlement agreement signed between himself and the Company last August. In response, the Company filed an 8-K on August 1 addressing a number of Mr. Hussein's assertions.

In closing my prepared comments for this call, I want to once again clearly point out there are no guarantees that the Company or either of its divisions will meet or exceed past or expected levels of performance in future periods. It's possible that investors or analysts will set new, short, medium, or long-term expectations for the Company and in response to this possibility please continue to note that we don't give out financial guidance to the investment community and we don't comment on guidance advanced by members of the financial community.

I will now turn things over to Paul Holt.

Thanks, Lou. Hello, everyone. Consolidated Systems sales of $20 million this quarter represents an increase of 11%, compared to $18 million in the prior-year quarter. Sales of add-on licenses included in systems sales grew 37% to $7.1 million this quarter versus $5.2 million a year ago.

Consolidated Maintenance, EDI and other services revenues rose 22% compared to $22 million compared to $18.1 million in the prior-year quarter. Our consolidated gross profit margin came in at 65.4%, down from 68.2% a year ago. The decrease in our gross margin over the year-ago period was due primarily to a shift to a relatively larger amount of recurring revenue as a percentage of total revenue, as well as a relatively higher amount of hardware and third party software costs as a percentage of systems sales.

Total SG&A expense increased by approximately $2.4 million to $12.6 million this quarter. That compares to $10.2 million a year ago. The increase in SG&A expenses compared to the prior year was primarily due to a $1.7 million increase in compensation expenses, due to increased head counts, as well as $0.7 million in higher corporate expansions.

Looking on a sequential basis at SG&A, SG&A expense decreased by approximately $1.9 million. The decrease included approximately $0.9 million in lower commissions expenses, due to the sequential drop in systems sales, $0.4 million in lower compensation expenses related to the Company's incentive plans, approximately $0. 3million in trade show and advertising and finally, a drop of $0.3 million in legal expenses. SG&A expenses as a percentage of revenue this quarter increased to 30.1%. That compares to 28.3% in the prior-year period. That is due to a faster year-over-year growth in SG&A expenses just mentioned.

The Company's effective income take rate declined compared to the year-ago quarter at 37.9% compared to 39.9% in the prior-year quarter. The reason for the decrease in the effective tax rate was primarily due to the fact that an increase, we benefited from an increase in the statutory deduction for qualified production activities. This went into effect this fiscal year. Also the prior-year tax provision didn't include a benefit for research and development tax credits. The federal Research and Development Credit statutes were not re-enacted until December of 2006, and, thus, the Company didn't record any benefit in the June 30, '06 quarter.

In terms of divisional performance, systems sales in the NextGen Division rose 12% to $19.5 million this quarter, compared to $17.4 million a year ago. Continued growth in NextGen's base of installed users drove maintenance, EDI, and other revenue at NextGen 26% higher than last year, at $18.6 million, versus $14.8 million a year ago.

Operating income in the NextGen Division was up 4% at $13.903 million compared to $13.394 million a year ago. The QSI Division reported a year-over-year increase of 2% reporting revenue of the $3.982 million compared to $3.890 million a year ago. Operating income for the QSI Division was $1.056 million.

Moving on to our balance sheet. Our cash increased by approximately $10.5 million this quarter to $70.5 million, or $2.58 per share. That compares to $60 million, or $2.21 at the end of the prior quarter. Note that the Company paid a dividend of approximately $6.8 million, or $0.25 per share in July of 2007. The Board of Directors has also declared an additional $0.25 per share dividend to shareholders of record on September 14, 2007, to be paid in early October 2007.

This quarter our DSO's increased by 16 days at 145 days versus 129 days last quarter. DSO's in the year-ago quarter was 122. The increase in DSO's was primarily due to the sequential drop in revenue, combined with a sequential $1.2 million increase in unpaid deferred revenue, which is included in accounts receivable. The significant customer who represented approximately 12.5% of total gross accounts receivable as of March 31 now represents less than 10% of gross accounts receivable as of June 30.

DSO's net of amounts included in both accounts receivable and deferred revenue grew to 91 days compared to 81 days last quarter. Our DSO's by division this quarter was 83 days for the QSI Division and 152 for the NextGen Division.

Deferred maintenance and services revenue at $40.5 million was up approximately $1.2 million from the prior quarter and up $3.6 million compared to the prior year. The primary drivers of the growth in deferred revenue compared to a year ago is deferred implementation in training in the NextGen Division.

And for those of you who are tracking this, our non-cash expenses for the quarter break down as follows: Total amortization expense, $1.010 million, that's $32,000 for the QSI Division and $978,000 for NextGen. The total depreciation expense, $553,000, that's $62,000 for the QSI Division and $491,000 for NextGen. Total of stock option compensation, $1.076 million, and our investing activities for the quarter were as follows: Capitalized software, $1.473 million, that's $53,000 (sic) for QSI Division and $1.415 (sic) million for the NextGen Division. Investments In Fixed Assets Were $598,000, That Is $41,000 For the Qsi Division and 557,000 For the Nextgen Division.

I would like to, again, thank you all for being on our call and your interest in our Company and I will now turn things over to Greg Flynn, who will update you on the QSI Division.

Thank you, Paul, and thanks to all of you for showing interest on our call. As always, the QSI Division and EDI numbers have been addressed in detail by Lou and Paul. So I will focus on continued product enhancement achievements for the Division and then other historical areas of interest for these calls. We continue to enhance our CPS, Clinical Product Suite, software package, the equivalent of EMR for Dental. In particular, we focused on developments that further improve practitioner efficiency, and thus, further increased the central use of CPS in a practice. I won't bore you with the details of these developments, they're fairly technical in nature.

We also enhanced our integration of the CPS product with the NextGen EPM product, improving the interchange of data between these two products. Now following the line of historical questions, I will comment on our sales staffing and pipeline. Our sales staffing remains unchanged from last quarter, and our pipeline is approximately $3.8 million. Our pipeline is defined as sales situations where QSI is in the final pre-purchase choices and we believe that the sale will occur within 180 days. Now I will turn the call over to Pat Cline, as you know, President of our NextGen Division.

Thanks, Greg. Hi, everyone. During the quarter, NextGen executed over 70 customer new agreements. While this number is in our recent historical range, we had a number of seven-figure deals forecasted for the quarter that we were not able to wrap up. As far as I know, none of these deals have been lost and at least a couple of these should fall into the current quarter.

From a pipeline perspective, I'm pleased to report a substantial increase to over $80 million. Our sales force also grew, sales force now numbers 63 people. We think this number positions us well for the next few months, although we'll be upgrading in a few areas along the way. It remains our goal to be at 70 sales people by the fiscal year end.

The market for our products remains strong and continues to grow, and we're happy with the way we're positioned. In closing, I'd like to once again thank NextGen's employees for their hard work and dedication to customer service. And I'd like to thank our customers for the confidence that they've placed in our Company.

Operator, I think 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 Atif Rahim with JPMorgan.

Hi. Pat, if you just could elaborate on the seven-figure deal you that said you were not able to close? Perhaps give us a specific number (inaudible), and then I have a follow-up question?

I think there were four or five of those, that sized deal in the pipeline at the end of the quarter that we were not able to wrap up by that time.

Okay, and what do you think the revenue impact of those might have been during the quarter?

I would rather not get into that exactly, but again four or five seven-figure transactions, the revenue impact, and profit impact would have been significant.

Okay. On the gross margin side, specific for the NextGen Division, you guys went through the numbers pretty fast. I think revenues are up about 17% and operating income was up about 4%? Where does the difference arise from? In terms of the operating margin overall, not just the gross margin. Where are the costs rising?

Well, this is Pat. I will answer that and, Paul, may be you can follow on. From my perspective costs, the biggest cost is in payroll expense. As the Company has grown, we have hired people both in sales and marketing and implementation and training and a good number of customer service people, as well. As I've mentioned on prior calls, it's important to us to, in order to protect our premium pricing to render top-quality customer service, so we do make investments in those areas and we stand by those investments.

Okay. All right, thank you.

Thank you.

Your next question is from George Hill with Leerink Swann & Company.

Hey, how's it going? I guess, Pat, I understand you're saying it sounds like a couple of deals slipped out of the quarter. I guess I want to circle back and say that I guess you don't feel like you're seeing any type of slow down in the macroenvironment, or has anything changed in the macroenvironment which would force customers or make them choose to delay contract signings?

No, I don't see any slow down, George, in the macroenvironment. I think the market is continuing to grow. The market is strong. I think we're very well positioned to take advantage of that. I personally don't believe that what you see there with these couple of contracts not being able to be closed by the end of the quarter represents anything majorly (sic) out of whack.

So there is nothing out there that is lengthening the sales cycle?

No, with one possible exception, George, and that is, as we have talked about on prior calls, the relaxation of the Stark rules, the antikickback rules have caused, we think, an uptick in the interest on the part of the larger system sales and hospitals, and as I have also mentioned on these calls, some of those sales tend to be a bit more protractive. But outside of the things that we have discussed in the past to get to the root of your question, there is no big change in the last couple of months at the macro level.

Okay, one question for Paul. Paul, you alluded to in your prepared comments on an increasing level of recurring revenue in the quarter. Can you give us a little more color on what caused that and maybe the degree to which it occurred (inaudible)?

Well, what caused that is that the recurring revenue stream grew at a faster rate than the system sales revenue growth. And recurring revenues tend to have lower margins than we get on our system sales, so when you've got a bigger chunk of your revenue coming from your recurring-type revenues, you're inevitably going to have an impact on your gross margins, first of all.

Was it recurring revenue because you're selling more maintenance, or back selling more maintenance, or because you're selling more licenses on an ASP basis?

No, maintenance is coming from our license sales, and then we also have EDI revenue which we're selling into our base, and we had a nice pick up there, as well, but those, especially EDI, they have lower gross margins.

Okay, thanks.

Your next question is from Alexander Draper with Raymond James & Associates.

Thank you, actually, my primary question has been answered, or asked and answered. But maybe just a follow-up for, I guess, maybe Paul. You gave the total number for the QSI revenue, can you just repeat the system sales versus maintenance for QSI?

You know, I historically don't give that number out on the call. Why don't you stay tuned. We'll get our Q filed here shortly. You will see all of that there.

Okay. Great. Thanks.

Your next question is from Richard Close of Jefferies & Company.

Yes, really quick. You guys mentioned with the system sales up 11%, I guess, in the quarter, you mentioned something that I don't think you touched on before and that is add-on sales. Or maybe I'm mistaken there, but did you say that was up 37% year-over-year?

Yes.

And I guess question there is is that, maybe if you could look back on recent history, is that an acceleration with existing customers coming back to purchase more or is that, I guess, you're throwing that out there because of the new sales were somewhat delayed in the quarter?

You know, add-on license sales does tend to fluctuate from quarter-to-quarter, and that is just a function of existing customers who are coming back to us. To buy additional licenses, which we certainly appreciate. Pat, maybe ought to add a little color to that.

Sure, 37% is a nice gain, but it's one quarter over one other quarter. We do like to see add-on licenses grow and accelerate. I think it's evidence that our systems are working for our existing customers, and that is a good thing and the add-on orders are a good thing. The -- we sell a lot of systems to large organizations, some national in scope that might start with a 100 or 200-provider licenses and as they get them deployed and as the systems work, they will hopefully come back and order many more licenses from us. So, we hope to see a continuation of the growth and add-ons as we move forward.

Okay, as the follow-up to that, I would think that if you're selling more add-on sales that that, that would be higher, possibly higher margin business? Am I wrong in thinking that? That much of the implementation and the services side has already been taken care of?

You are correct. Add-on licenses are a very high margin.

Although a lot of the add-on licenses can carry additional implementation services, as well.

And would that be because you're maybe going to a large client, another clinic or another facility, so to speak, or --?

Yes, we have, for example, one customer that has facilities in 50 different markets across the country. And they may purchase for a couple of markets and as things go well, start rolling out additional markets where they would contract back with us for training and project management services.

Okay. And then I guess on a different note, you mentioned several large, I guess, seven-figure deals and then also talking about the Stark and maybe that lengthening, some sales cycle a little bit. Would you say versus the March quarter, your fourth quarter, that the level of large deals has increased over all that you're seeing in the market?

I think the number of large deal opportunities has increased somewhat over the last three or four or five months.

Okay, thank you very much.

You're welcome.

We have a question from Robert [Kunely] with [E.K. Reilly Investments.]

Hi. Good afternoon.

Good afternoon.

I'm kind of new to your story here, just trying to learn a little bit more about this. I just have one question and that is can you talk about what you view as the key forward indicators for the health of your business, and how you think those are looking right now, or how they looked in the first quarter?

Give me a little help with what, try to help me characterize your question in a response relative to forward indicators. Are you look at financial indicators? More fundamental market macro indicators?

Yes, I would say both. I would say macro and fundamental market indicators, as well as your own internal, just a -- what you see as the health of your own business?

Okay.

And your customers.

Obviously, revenue growth over a period of time is a key, key indicator, revenue growth relative to both new customer business and existing customer add-ons, as we have discussed. The number of new licenses. Again, not so much on a quarter-over-quarter basis, but over a period of time might be also used as an indicator.

Relative to the market, I think there are a lot of things going on. We discussed briefly the relaxation of the Safe Harbor regulations. There is also the certification of systems that has been a little bit of a driver. There is a movement toward pay-for-performance, that is paying physicians and health organizations more for rendering and reporting better quality.

I think the results that are being achieved by our customers and by customers of others in the marketplace continues to be a driver and something that we want to continue to achieve and continue to watch. Does that help?

It does. Was just -- what caused the question was the comments you made about some of your costs going up in the quarter relating to payroll, training and those sorts of things. Is that an indicator or reflection that you are confident in your -- confident enough in your business to continue to spend at relatively higher levels to grow the business?

Well, certainly we're confident in the business, the Company, its people, our products, and we're also confident in the market. The market is, as I mentioned, strong and growing. We're going to try to spend where spending is prudent and make sure that we have a reasonable foundation to be able to scale revenue and be able to scale profits in the future.

Certainly, if we wanted to report a better quarterly profit number or year-over-year increase in profits and those types of things, we could scale back expenses, not hire quite as many service people, trainers, implementation people, and that would be -- we would see a short-term gain and it would be a very short-sighted move. As I mentioned, we stand by the investments we're making and we think we're positioning the Company for sustained growth of top and bottom-line.

Okay, great. And just a follow-up to that. Did you see any significant changes in the competitive landscape in your view in the quarter?

No, not at all.

Okay, thank you.

Thank you.

Your next question is from Jeff [Mitz] with Sidoti and Company.

Hi, guys, I was hoping you could clarify the pipeline and just the mix in there. What size practices are you typically seeing there? Has anything shifted there?

No major shift. A few, as I mentioned, a few more larger deals in the pipeline. A few more of the seven-figure-type deals in the pipelines than were in the pipeline three or four months ago.

The pipeline continues to represent those deals that we feel are, where we're likely, 50% or more likely to close the deal within 120 days. We're happy with the uptick in the pipeline. I don't think it was any, any one thing. We had some leads coming from the spring trade show season that I think are maturing at this point. I think, as I mentioned, our market is getting stronger and I also think that we have improved our internal lead management processes a little bit over the last few months. We're happy with the increase in the pipeline.

Okay, and just -- aside from the larger deals that did slip to the next quarter, are there any smaller deals? Did you see in increase in the number of smaller deals that may have slipped in the quarter?

No, no real change that we can see on the smaller side, and to clarify one thing that you just said, it's certainly our hope that these deals slip to the current quarter. But there is no guarantee. I feel confident that a couple of them at least will close in the current quarter, but I want to stop short of saying that they'll all close.

Okay, thanks.

Thank you.

The next question comes from the line of Gene Mannheimer with Caris & Company. Gene, your line is open.

Next question.

Your next question comes from the line of Andrew Shapiro with Lawndale Capital. Andrew, your line is open. Andrew, your line is open.

No, it's not.

I can hear you now, Andy.

Okay, great. Thanks.

Forgive me if I was late to the call and if Lou had touched on this, but I noted that your second largest shareholder and director Hussein, and your largest shareholder, Razin, I guess, are at it again. I wanted to understand what the nature of the current dispute is, that you guys formed a special committee to deal with litigation and voting matters at this week's annual meeting. Hussein amended his 13D filing -- I guess alleging or threatening some type of dispute. Can you summarize this for me?

Yes, Andrew, this is Lou. I would -- there's a couple of clarifications I would make to your question. It's factual that Mr. Hussein filed a 13D. You mentioned he had amended it. I'm only aware of one that he filed. If there is an amendment to that, I haven't seen it.

No. That technically is an amendment of his prior 13D.

Thank you for the clarification. To suggest that it's -- Mr. Hussein going at it with Mr. Razin, that is your characterization and one that -- .

Or the Company. He's got some dispute against.

Yes, and I think that he filed his 13D, we filed an 8-K response a couple of days later. I don't make it a habit to speak for Mr. Hussein, nor he me for that matter, but his issues seem to revolve around the settlement agreement and certain elements of the settlement agreement that was executed between himself and the Company about a year ago. Principally seeming to revolve around the retention of board counsel, which was clearly laid out, the issue was clearly laid out in the settlement agreement that was publicly filed at the time of its signing.

And that is as good a summary as I can give you. He put out his 13D, we put out an 8-K that tried to clarify a couple of items and provide the Company's response to his 13D, and we have our annual shareholder meeting later on this week, on Wednesday.

Wednesday, right, is it your expectation, or has notice been given that cumulative voting rights are going to be exercised by Mr. Hussein, and that he's nominated alternative candidates?

I am not aware of any announcement to that effect and so, therefore, in terms of any expectations I have one way or another, I am not aware of anything at this point in time and I am going to be at the meeting.

Okay.

Just as Mr. Hussein will be and the other board members will be and we'll take it from there. But I am not aware of any disclosure that Mr. Hussein has made in terms of any intentions he has for this meeting.

All right.

I would also call it, the settlement agreement is many pages long, it's not 50 pages long, but it's six or eight pages long, and I would encourage those that are interested to review that if you have particular questions about anything to do with that agreement. I think it speaks fairly clearly on a number of topics.

Okay, well, thank you. It will be nice if everyone would be on the same page one of these days.

Thank you, Andy.

Your next question is from [Doug Danut with Kenmar.]

Good afternoon. I just noticed that the accounts receivable account and the deferred revenue account have kind of continued to diverge on an absolute basis, and I was wondering whether you expect that to sort of come back together and maybe be a little bit more of a source of cash or how that's going to work?

When you say diverge, you mean -- I'm not trying -- .

I mean deferred revenue is not going up nearly as fast as AR is.

Well, part of the AR growth is that we've experienced over the last several periods has been just the course of the growth we have had in revenue, but I am not sure I can, there is much more to say about that other than what we have reported in our numbers.

And we, we're as you may know or may not know, we don't give out forward guidance in terms of top or bottom-line performance, or really any other element of our income statement or balance sheet. So, it's hard for us to project for you what the numbers are going to look like.

Right, I'm aware you don't give guidance and -- that's fine. I'm just curious as to the general nature of the trajectories of those accounts and how they may work with each other? Is there -- is it maybe a bigger deal that requires a different booking or a different cash component up front or --?

Well, just in general, on a system sale, we will typically include, have implementation services, for example, that are deferred and so you will have amounts that are included in both those categories, accounts receivable and deferred revenue, and in this past quarter, you saw an increase in both accounts receivable and deferred revenue.

Okay. Thanks.

We have a question from Gene Mannheimer with Caris & Company.

Thanks. Can you hear me now?

Yes, Gene.

Great, thank you. With respect to the revenue number, I noticed this is the first sequential decline in revenues since your December '05 quarter in which you had deferred some revenue out of the quarter related to Siemens contracts. Was this more the same type of pattern this quarter? Thank you.

No. I would say that that was, that quarter that you referenced in the past is much more of a unique situation. And one that in general terms didn't repeat itself in this particular quarter.

Okay. So sounds like it was more a function of what Pat had talked about earlier about some large deals getting deferred?

Not deferred. I wouldn't suggest the word deferred. I think he said they were forecast to close and didn't.

Okay. Very good. And in terms of the pipeline, you mentioned it's grown now to over $80 million within the NextGen Division. Can you remind us what it was last quarter, thanks?

I think it was a little bit over $70 million in the prior quarter.

And are you able to divulge what percent of the pipeline is physician practices under 10 doctors?

I don't have that information in front of me, and I probably would not disclose it if I had it.

Thank you.

Thank you.

You have a question from Joseph Craigen with Needham.

Thanks for taking my questions. First off, on the seven-figure deals, so we don't get hung up on semantics, whether it gets over the seven-figure mark or not, let's call them large deals. How many large deals closed this quarter versus last quarter?

Well, I don't want to get into that another, but we certainly would have liked to see a couple more of those deals, large ones close. I don't want to get into reporting the number of large deals, or medium-sized deals, or small deals in any particular quarter. And, frankly, it's not a function where we're sort of laying off blame for a decline sequentially in revenue onto these deals. We had some deals that we thought we would be able to close.

We had a fair number of them and we're in the unfortunate situation where one $2 million deal can swing earnings by $0.04 or $0.05. In this quarter, it's unfortunate and other quarters it may be fortunate. To give a little more texture, there was not any particular reason that all of these deals moved. It was not all Stark related, it was not all longer decision-making processes or those types of things.

One customer required funding related to a grant, approval for funding related to a grant. Another one's contract negotiation was just more protracted than we had hoped for. We think that agreement will be in the door over the next couple of days, although, again, there is no guarantee of that. It -- it's an agreement that we have been -- where we have been awarded vendor of choice. We're trying to reel it in.

I think another one off the top of my head ran into some internal political headwind that we were not able to overcome with that customer. So it's not one situation like the Siemens revenue a year ago, roughly as year ago, getting moved from one quarter to another. It's just a lot of these kinds of things and we would have liked to have seen more of these large deals come in and we'll have to get up to bat again this quarter and take our swings.

You said that one you expect to come in in the next few days, that would be the first of the four or five deals that slipped that would come in this quarter?

I believe so.

Okay. And lastly, just to give us some ballpark here, what typically are we talking about? Five large deals a quarter, 10, 15? What roughly is the normal number of large deals that you close each quarter? Understanding that --

Two to four.

I'm sorry?

Two to four.

Two to four. Thank you.

Thank you.

Your next question is from George Hill with Leerink Swann & Company.

Hey, guys, back again. Pat, just a clarification. If add-on sales were up 37% in the quarter, does that mean sales to new customers in the quarter were actually down?

Paul, do you have that information in front of you?

Yes, the -- repeat the question, please?

These add-on sales to existing customers were up 37% in the quarter.

Yes.

Does that mean sales to new customers or de novo customers were actually down year-over-year? I guess if the answer to that question is, yes, the follow-up question would be is there something -- I mean, we saw this issue before. Is there something in the sales compensation package that is [incentivising] people to go back and get the low hanging fruit in the installed customer base?

We're about, even. There's some moving parts there but I, I would characterize it as being pretty close to even on the new front versus the, the new systems sales front versus add-on licenses. As to how people are compensated, Pat, can elaborate a bit more on that.

Yes, as to that part of the question. No, there was not any change in the compensation program over the last few months that would cause our sales people to only go after low hanging fruit.

Okay, and one more question. Of the four to five large deals that continue to be referred to, can you talk about how many of them are Stark related? I guess how many of them are large, were -- would you character these as deals that are more specific to large stand alone physician practices, or are they, are you seeing larger deals that are more related to Stark-related purchasing and hospitals having influence over the purchasing decision?

I wish I could answer that question, but it's tough for me to crawl inside the heads of the prospect being a few levels of people removed from any of these to know that one customer was purchasing because of the Stark relaxation, and another was purchasing for another reason.

Paying attention to the overall, the macro issues or the market. Again, we see an uptick in the interest. We think there is more coming into the pipeline because of the relaxation of Stark. There has been a pickup in the interest coming from the seven-figure size deals or prospects. But of the four or five, it would be impossible for me to tell you how many were Stark related.

Okay, so then the assumption Stark is driving it is really just an assumption then? Given that you don't --

I think so.

Okay. Thank you.

We have a question from Charles Rhyee with CIBC World Markets.

Yes, thanks, just had a quick clarification regarding the pipeline for NextGen. You talked about it being $80 million in the quarter, I think it was about $71 million last quarter. Is it fair to say that the difference here is largely the deals that we're talking about that kind of slipped?

Again, without getting into a lot of detail and trying to characterize it into small, medium and large, we see a couple more large deals in the pipeline, but a fair number of small and medium-sized, as well.

Okay, and then just maybe to follow-up, just to understand the mechanics of how you view your pipeline. Is it fair to say that as soon as you close, let's say, some of the deals that you had hoped to close sooner, that comes out of the pipeline and possibly you could see a sequential downtick in the pipeline?

While that is theoretically possible, it has not happened yet. We close deals every quarter and we haven't seen a big decline in pipeline in any given quarter in recent history. Theoretically possible, but we think with what we're doing with our marketing campaigns and the way the market is going, and as I mentioned, continuing to grow, that I personally would not expect a big downturn in the pipeline number.

Okay. So that -- then is it fair to say that just in general your pipeline, as you look at it, there has been no real changes to the mix of your pipeline. Other than say that maybe there has been a little bit more interest on the large side but, it just happened that we're seeing these four to five deals slip for whatever circumstances, but it is not like we had a bigger number of deals this particular quarter than previous quarters?

I think that's fair to say.

Okay, thank you.

Thank you.

We have a follow-up from Richard Close with Jefferies & Company.

Yes, you had mentioned adding sales people, but you also talked a little bit about adding people on the implementation staff. I was curious if you could give us a head count for the end-of-the-quarter, and maybe talk a little bit about the state of your implementation teams? And then a follow-up to that would be if you can sort of talk about the pricing environment, whether customers are getting extra, I guess, difficult to deal with on price, demanding lower prices and just how competitive the market is on price?

Richard, this is Lou. I will start here. In terms of the overall head count, I'm just looking it up here to see if I have it. At the end of the quarter for the Company as a whole, the head count was 670.

We have not broken that out on a department-by-department basis, although as Pat alluded to, we have the Company tried and, I think, by and large has succeeded in trying to make strategic investments in key departments, of which sales and implementation and really many other departments are part of that mix. But we have not to date broken out number of people by department, and I think we're going to continue with that practice on a forward basis. Pat, why don't you pick up the rest of that if you would like.

Yes, I will just repeat that we do continue to grow our implementation and training staff to keep up with present and what we hope will be future demands. On the last part of your question and that is do we see increased pricing pressure or pressure to lower our prices, we, as I have mentioned on a couple of prior calls, have seen our competitors get more aggressive with pricing. Thus far, we have not had to react to that pressure in any big way.

We try not to react, but rather to make sure that our sales people are trained to sell value and trained to talk about return on investment and those types of things and, fortunately for us, there is a good subset of the market that it's sophisticated enough to know that they should be looking at return on investment and not just cost and looking at the value of the system and not just the price of the system.

We will lower the price of the system from time to time when we feel that it's strategically important to do so, or a highly competitive situation and a customer that makes good sense for us, but on an overall basis, no, we haven't seen a lot of need to drop our prices.

Okay, thank you.

Thank you.

We have a question from Sandy Draper with Raymond James & Associates.

Thank you very much, just a quick follow-up to a couple of questions ago and I apologize for beating this horse to death, but Pat, I just want to be clear. In the pipeline going from 70 to 80, these larger deals, I would not anticipate would be deals that come into the pipeline and close in three months, and so I'm trying to make sure I understand correctly that you had a big step-up in pipeline but it doesn't necessarily mean that these deals jumped into the pipeline because, again, the sales cycle I would imagine would be typically longer, not within a quarter. I want to make sure the overall pipeline is building and not that these deals just jumped in?

Two things. One, the overall pipeline is building as, again, the market heats up.

We had leads from the spring trade show season maturing and a couple of things that I have mentioned, but one other clarification, that is it's very possible for a couple million-dollar deal to pop onto the pipeline and close within a month or two or three. And that would be a deal to an existing, another sale or an add-on license to an existing customer that, again, might want to roll that in other markets, or has finished a pilot of 100 providers and now wants to move to something more substantial. So those can close relatively quickly.

Okay, and then just Paul, can you give me the bad debt number and also, I don't think I got the unbilled, or undelivered maintenance and services revenue? Thanks.

Okay, we, I think I reported on the growth not necessarily the absolute number for -- on deferred revenue that is in accounts receivable, but I have that number available. It's 20, it's going to be in the Q, as well, $24.961 million is in undelivered software implementation maintenance and what not. And the bad debt figure is $187,000 is an add-back in our statement of cash flows. You will see that in the Q, as well.

Thank you.

Thanks, Sandy.

Our next question is from Constantine Davides, SIG.

Thanks. Lou, it sounded like you talked about maybe a slightly more favorable interest in acquisitions. Can you maybe just add a little bit of color on your thinking behind that, specifically, are you looking at tuck-ins or any reasonably-priced deal of any size?

Yes. Thank you for asking for the clarification there. I did reference a nominally expanded interest expressed by our board at its most recent meeting. And I, the reason that I put that into my comments is that I, in most, if not every quarter, give people a little bit of a calibration on where we are because it's a topic that people have been interested in quarter in, quarter out.

I think it's important to not have this become a bigger-than-it is type of a comment. We have been in a place where, from our discussions with the board, the management team has been focusing almost exclusively on organic growth. We certainly had listened courteously and with interest to any deals that had been brought to us by investment bankers. We haven't moved off of that all that much other other than for the first time in awhile, there had been a little more of a positive discussion at the board level concerning the potential interest of the board and its members, the non-management members of the board, in exploring potential acquisition opportunities.

In terms of what specifically that is going to mean in terms of our acquisition pipeline and activities, I think it's a little early to be able to characterize that and, again, I think we're moving from a very low level to a relatively low level of focus on that particular area. But it was the slight recalibration was worth noting and I did that.

As I have mentioned over many discussions with many investors, the types of acquisitions that could potentially be of interest to our Company vary widely. They could be tuck-in acquisitions, they could be product extensions, market share acquisitions, there is a discreet list of types of things that would make sense for us. Again, I think the headline here is that it's a bit premature to anticipate that any acquisition is imminent in the near-term future.

Okay. Great. And then, Pat, just in terms of some of the new contracts you closed in the quarter, anything notable in terms of mix, combination deals, practice management, EMR, or anything of the like?

No notable change.

Thanks for the color, guys.

Thanks.

Thank you.

You have a follow-up from George Hill with Leerink Swann.

Hey, guys, maybe third time's the charm here. With the addition of deployment capacity, Lou, tell me if I remember this right? Often the Company's cash collections are tied to deployments in [go lives]?

Well, yes. Our payment terms often will have a milestone event, as well as a date. So if the milestone event occurs before the date, then we will have those moneys come due sooner. If not, we have the date.

Okay. Would it be reasonable for investors to assume that the increase in deployment capacity could lead to a reduction in DSOs?

There are many moving parts. This is Lou, George. Many moving parts to the DSO calculation, George. It will be sensitive to revenue levels, it will be sensitive to any deferred revenue totals.

I think it's fair to say that there are enough moving parts of that calculation so that it will be a little bit disingenuous for us to say there is one factor that is likely to drive the derived DSO calculation in one particular direction or another. Again, it's a lot of moving parts to that calculation. It's not a complex calculation, it just has a lot of different inputs to it.

Okay, and last question would be regarding the Company's, I'll say M&A discussions at the board level. Is there any chance that these discussions would ever involve the sale of the Company?

We, we don't comment on that exactly, George. I think the honest answer would have to be is there any chance? I suppose there is some chance, but we haven't, and won't respond to any rumors or any of that stuff, but the board is always trying to do a responsible job in carrying out its fiduciary responsibilities.

Okay. Thank you.

We have a follow-up from Atif Rahim with JPMorgan.

Hi. I wonder if you guys could provide us anymore detail on the relationship between your quarterly deal sign and the profitability? So, for example, if you have a million dollar deal, what percentage of that revenue would be recognized in the quarter, just generally speaking, and what is the earnings impact from that, if possible? If you can elaborate on that?

Yes. That can vary somewhat. It really depends on what is included in that deal. How much of that deal will constitute services, or perhaps free maintenance periods, or what is in the mix. That can affect how much of a deal may be characterized as revenue. There is a lot of issues and factors and things to consider when you're looking at revenue recognition for a software arrangement. So, I guess the bottom line is it can vary quite a bit, depending upon the nature of the transaction.

Could you provide, perhaps, an average of maybe the larger deals that you've signed over the last few quarters, what that looks like?

Well, I would have to give you a very large range, if pushed. It could be anywhere from low-end 30%, 40% of a deal, to maybe 75%. I mean that's going to vary quite a bit.

Okay. And the cost associated with this revenue that you recognized in the quarter, is it just commissions, or would there be other costs?

Well, there is hardware. If the deal includes hardware, we'll have those costs and, of course, there's commission related expenses that go into that, as well. Those are your big moving parts in terms of an initial arrangement. Of course, there is implementation services. Those costs get recognized along with the revenue as the services get rendered.

Okay. Thank you. Appreciate the color.

Thanks.

(OPERATOR INSTRUCTIONS) You have a follow-up from Richard Close with Jefferies & Company.

Yes, just as a follow-up with respect to the large deal discussion, Pat, I think you threw out the example of a $2 million deal. Is that fair to say that one of those is $2 million plus that are hanging out there?

I don't think I'm going to go into that detail on this call.

Okay.

We will, though, typically have in our pipeline deals that are $2 million plus.

Okay, and then with respect to legal costs, just to go over the expense of that in the June quarter, did you give that exact number, or I think you said 0.3 or something like that increase? Was that in the sequential or maybe -- what were the legal costs in the fourth quarter, March quarter and in the June quarter?

We don't, we're not -- we don't go of out the actual tally of our legal expense bill. We don't go into that level of detail. What I did mention was on a sequential basis that part of the drop of SG&A was $0.3 million in legal expenses.

Okay, part of the sequential drop?

Yes.

Okay. And should we expect additional legal costs incurred, and I know you don't give guidance, but should we expect a continuation of legal costs into the second quarter related to the SEC situation, and then with, I guess, the board situation that has taken place?

In terms of the overall legal expense number, Richard, you painted the picture, I think, accurately and it's very hard to forecast at any given point in time what issues may or may not come up and to what level they may or may not come up. I think it's fair to say that the, we talked a lot on the last call about the fact that the Company had incurred some expense related to our response to the SEC piece, as well as the Company's internal investigation of that matter.

We talked about the fact that the Company's internal investigation was completed, I believe, in June or sometime in the June quarter, at least. But I think it was June. In terms of any going forward legal expenses, I think the conservative thing would be to say that we may have some, but in terms of -- and certainly big picture, we always have legal expenses, and, again, it depends on what issue comes up or what issues come up that we're working on. So, on any one particular item, the expenses can go up or down, obviously. But in aggregate, it's just very hard to forecast with any certainty at all in terms of exactly whether the one quarter's legal expense is going to be higher or lower than another.

Okay. Appreciate the help there.

Thanks.

There are no further questions at this time.

All right, thank you, operator, and thank you to all of those joining us on today's call. Good afternoon.

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