NextGen Healthcare Inc (NXGN) 2008 Q2 法說會逐字稿

Good afternoon. My name is Jason and I will be your conference operator today. At this time I would like to welcome everyone to the Quality Systems second-quarter fiscal 2008 call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks to be a question there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you. Mr. Silverman, you may begin your conference.

Welcome to the Quality Systems second-quarter fiscal 2008 earnings call. Paul Holt, our CFO; and Patrick Cline, President of our NextGen Healthcare Information Systems Division, 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, prospectus 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.

I will now provide some summary comments on the quarter. Paul and Pat will follow with additional details. For the June quarter, the Company recorded revenue of $45.1 million, which equals to our prior record high. On a year-over-year basis total Company revenue increased 21%. NextGen's revenue for the quarter was $41.1 million, which represents a record high for it the division. NextGen revenue was up 23% over the prior year.

QSI division revenue at $4 million was up approximately 1% over the prior year. Fully diluted earnings per share for the second quarter of fiscal 2008 was a record $0.35 per share, up from $0.30 in the year-ago quarter.

To update you on non-financial items, in late September, Greg Flynn, Executive Vice President and General Manager of the QSI division, passed away. The Company lost a talented member of its management team, and many amongst our staff, clients and investors lost a good friend. Greg's responsibilities are presently being carried out capably by a number of existing members of our management team. No other changes in the division's operating structure or charter are contemplated at present.

To take care of a couple of housekeeping items relevant to the QSI division, divisional sales staffing is at for FTEs, and the division sales pipeline is at approximately $3.3 million. The QSI division's pipeline is defined as sales situations where QSI is included among the final three purchase choices and where we believe that the sale will occur within 180 days.

As announced yesterday, our Board recently approved another quarterly $0.25 per share dividend to be paid to shareholders of record as of December 14, 2007, payable on January 7, 2008.

Regarding investor conferences, during the quarter the Company presented at the Thomas Weisel, Bear Stearns and Sidoti conferences in Boston, New York and San Francisco, respectively. The Company is currently planning on presenting at the CIBC conference in New York City in early November as well as the Piper conference, also in New York City, later in November. During the September quarter, additional investor meetings were held in Los Angeles, New York City, San Francisco, Chicago, Houston and Dallas, in addition to numerous meetings held here in our offices in Orange County.

Regarding acquisitions, we are where we have been prioritizing organic growth and continuing to review potentially interesting opportunities for acquisitions that come to our attention. The Company was recently named for the Forbes list of 200 Best Small Companies in America. This was the seventh consecutive year that our financial performance earned us recognition by Forbes. This year we were number five on the list, up from number 26 last year.

In closing my prepared comments for this call, I want to again clearly point out that there are no guarantees that the Company or either of its divisions will meet or exceed past, present 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.

I will now turn things over to Paul Holt.

Hello, everyone. Consolidated system sales of $21.7 million this quarter represents an increase of 11% compared to $19.6 million in the prior-year quarter. Consolidated maintenance, EDI and other services revenue rose 31% to $23.5 million compared to $17.9 million in the prior quarter.

Our consolidated gross profit margin this quarter came in at 67.3%, down slightly from 68.4% year ago. The decrease in our gross margin over last year was due primarily to a shift of 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 as a percentage of system sales.

Our total SG&A expense increased by approximately $3.2 million $13.2 million. That compares to $10 million a year ago. The increase in SG&A expenses compared to the prior year was primarily due to $1.2 million higher compensation expenses due to increased headcount, $0.6 million in increased selling-related expenses, $0.7 million in increased other, general and administrative expenses at NextGen, and $0.7 million in higher corporate expenses. Our SG&A expense as a percentage of revenue this quarter increased 29.2% compared to 26.7% in the prior-year quarter primarily due to year-over-year growth and SG&A expenses just mentioned.

Interest income for the three months ended September 30, 2007 decreased to $645,000 compared to $819,000 a year ago. Interest income in this quarter had a greater portion of funds invested in tax-favored auction-rate securities, which offer lower interest rates but higher after-tax yields compared to money market or short-term US Treasuries. We also had a comparatively lower amount of funds available for investment during the quarter.

The Company's effective income tax rate declined compared to the year-ago quarter at 36.1% compared to 39.8% a year ago. The reason for the decrease in our effective tax rate compared to the prior year is due to several factors. Primarily we have an increase in the statutory deduction for qualified production activities. We have tax-exempt interest income this year, which we didn't last year. We have deductions related to incentive stock options, and finally the prior year effective tax rate did not include a benefit for R&D tax credits.

The federal research and development credit statutes were not reenacted until December of 2006, and thus the Company did not record a benefit in the year-ago quarter. Our effective income tax rate also declined on a sequential basis, primarily due to a larger benefit from incentive stock option exercises compared to the prior quarter.

Moving onto divisional performance, our system sales in the NextGen division rose 11% to $21 million this quarter compared to $18.9 million a year ago. Continued growth in NextGen's base of installed users drove maintenance, EDI and other revenue in that division 38% higher at $20.1 million, versus $14.6 million last year.

Operating income in the NextGen division was up 12% to $15,698,000 compared to $14,055,000 a year ago. The QSI dental division reported a slight increase in revenue at 4 million 6 compared to $3,972,000 last year. Operating income for the division was $1,290,000.

Moving onto our balance sheet, our cash and marketable securities increased by approximately $2.5 million this quarter to $72.9 million or $2.67 per share, compared to $70.5 million or $2.59 per share at the end of the prior quarter. Note that our cash and marketable securities include $46 million invested in auction-rate securities. Those securities are classified as marketable securities on our balance sheet.

Also note that the Company paid a dividend of approximately $6.8 million or $0.25 per share in July 2007, and again in October of 2007. And the Board of Directors has also declared an additional $0.25 per share dividend to shareholders of record on December 14 that is expected to be paid in early January of 2008.

This quarter our DSOs declined by seven days at 138 days versus 145 days last quarter. Our DSOs in the year-ago quarter was 135 days. Contributing to the reduction in DSOs was a smaller amount of unpaid deferred revenue this quarter versus last. DSOs net of amounts included in both accounts receivable and deferred revenue decline by one day at 90 days compared to 91 days last quarter. Our DSOs by division this quarter were 79 days for the QSI division and 144 days for the NextGen division. Deferred maintenance and services revenue at $39.9 million was down $0.6 million from the prior quarter and up $0.5 million compared to the prior year.

For those of you have you who are tracking this, our non-cash expenses for the quarter breakdown as follows. Total amortization expense, $994,000. That's $32,000 for QSI and $963,000 for NextGen. Total depreciation expense, $586,000 -- $59,000 for QSI and $527,000 for NextGen. Stock option compensation, $959,000. And in our investing activities for the quarter were capitalized software, $1,554,000; that's $43,000 for QSI and $1,511,000 for NextGen. Fixed assets, $587,000. That's $124,000 for QSI and $463,000 for NextGen.

I want to thank you all for being on the call again and in your interest in our Company, and I'll turn things over to Pat Cline, President of our NextGen division.

Thanks, Paul. Hi, everyone. As Lou mentioned, NextGen achieved record revenue as well as record operating profit in our second quarter. Once again, we executed about 70 new customer agreements. Two of the large deals that we spoke about previously that had slipped out of the first quarter were in fact executed in the second quarter, and another one has already ready been executed in the current quarter.

The pipeline currently stands at $76 million, which is near our high. Our sales force grew to 67 people at the end of the quarter. But since that time, the Company lost a couple of sales reps and we terminated a couple of others. We are currently in the process of replacing those people, and we think in most cases we're trading up.

Over all, I'm very happy with our position, the current pipeline, the market itself. We continue to compete very effectively in the mid-range of the market, the high-end of the market, and we continue to expand our efforts at the low-end and experiment to try to bring our solutions to the low end of the market on a profitable basis.

Jason, we're ready for questions.

(OPERATOR INSTRUCTIONS). George Hill, Leerink Swann.

First, the HMA deal that was announced -- did that close in the quarter, and is that included in the revenue that's reported on the NextGen license side?

That was one of the deals that Pat referenced that did close in the quarter, yes.

I know that you guys don't normally -- I don't know the degree to which you'll give this granular information. But we know that this is supposed to be a staged deployment. Can you speak to what volume licenses have been recognized in the quarter and how much you guys expect to -- I guess, can say what percentage of the deal you guys have recognized this quarter? I won't ask you to talk about anything in the future.

No, we're not going to give out any granular details on specific contracts at this time.

Are you guys is seeing any change in the pricing environment? I'm actually at MGMA right now, floating around, and you hear some people talk about that you guys have been discounting a little bit and that has especially been in response to competition at the low end of the market. Are you guys feeling any pricing pressure?

I think I would agree with the characterization that we're discounting a little bit, but I think that has always been kind of our mode of operation. As I've mentioned on prior calls, we do see our competitors discounting more heavily. While we haven't dropped our retail pricing, we do discount from time to time on a case-by-case basis if we think that a particular deal is strategically important or it's highly competitive, we will reduce our price. We typically won't reduce our price to the extent that our competitors do, and we wind up winning a heck of a lot of business after modest discounting at a number higher than the number proposed by our competitors.

I can tell you that feedback on the ground here, where people are shopping for your product, is pretty positive. But would you say it's fair to say, then, that especially at the low end of the market, the level of discounting in general has needed to become more aggressive?

I'm not sure I would limit it to the low end of the market, and I'm not sure I would say more aggressive, though I haven't done the calculation to look at our average discounting last quarter over, for example, the prior quarter. My gut feel is that we didn't discount anymore on a percentage basis across the board, as we have at any other time.

Our best target or our best customer tends to be the customer that looks at return on investment and looks at value a lot harder than they look at the pricetag. As long as we continue to work with those kinds of targets, I think we can protect our margins. Another key point I'll make is, as long as we continue to stay on top of customer service and work to achieve the gold standard in customer satisfaction, we can also help to protect our slightly higher prices.

You and a lot of your competitors in the market are working on ASP and hosted solutions for the small end and the midsize of the market. Are you guys working to develop something similar, or maybe what have you guys done to that end?

We've offered ASP and hosted solutions for quite some time. It's not typically something that we have lead with. You know about our traditional license and maintenance model. But we have somewhere in the neighborhood of 7500 or maybe 8000 providers that are currently hosted, a very small number by NextGen and a very large number by third parties that we refer that business to. So there is a good portion of our customer base that uses hosted solutions.

We offer subscription pricing, but most customers opt to flip over to a leasing model, if they like to spread the payments over a period of time. Typically, on the subscription-based pricing, a product might be $300 or $400 a month plus the hosting component, whereas, if they purchase a license for $10,000 and do a lease purchase over five years, it comes up to be more like $200 per month, and the payment ends in five years. So a lot of people prefer that alternative. If they want to do subscription pricing, again, it's something that NextGen has offered for a long time.

Sean Wieland, Piper Jaffray.

A lot of folks at the MGMA show were talking about the importance of the CCHIT certification, and obviously you guys have your 2007 certification. Can you talk a little bit about the importance of the 2007 certification, thoughts on going forward on the 2008 certification? Is it helping you win deals?

I think it helps to some extent. Many customers are aware that the Stark relaxation, the CMS rules and interpretations essentially state that in order to be qualified for some of the Stark exemption, the health organization, in order to subsidize the purchase price, has to go with a system that is CCHIT-certified. And it actually goes further and says that that certification has to be within the last 12 months.

So a lot of people interpret that as requiring the 2007 certification. Some of our competitors don't talk about that very much, the ones that are only 2006 certified. But we're proud to be one of the very few companies relative to the 2006 numbers that are 2007 certified, and we're committed to certifying again in 2008.

Do you have any thoughts on market share, of gaining or losing market share? Some of the other vendors at MGMA were talking about a sequential revenue growth, Q2 to calendar Q3, that was a bit faster than what you guys did. I wanted to just get your understanding or your sense of competitiveness and do you think you're growing at or better than the market rate?

I think we're probably growing a little bit better than the market, and I think it's important to differentiate what we do as far as actual results with what our competitors might talk about that they might do. I also don't think you can look at one component and say, gee, that component only went up by 11%, and therefore growth is slowing because the same sales reps needed to sell the maintenance contracts the went along with those, and the EDI requires sales.

These are also sales to new customers, and those numbers went up at a healthy clip. If you go back and look at through our very fast growth history, we had a number of quarters where that system sales revenue would go up 12% or 13%. But overall, year over year, the company grew far faster than that.

Also keep in mind that that system sales number includes system sales to existing customers as well as to new customers and it's not something that we will typically give a lot of detail on. But if we do a particular promotion to existing customers, we could drive that number up a little higher and boost the growth rate. So there's a lot that goes on in those numbers. But again, overall, I'm happy with our growth.

Richard Close, Jefferies and Company.

I was wondering if we get talk hypothetically. If you have a large entity that's adopting your practice management and then also on the electronic health record, how should we think about that in terms of rollouts? If like a quarter of the doctors are going to adopt the technology, how do you recognize the revenue?

As you might be able to appreciate, we often get questions asking us hypothetical questions with only some of the detail filled in. I just think it's not a good policy or plan for us to make up as we go along what a hypothetical transaction might look like and then discuss the details of revenue recognition.

So we've gotten this question a number of times, both on calls and after calls, and we've responded the same way each time. I don't think it helps anybody to make up a few or hypothesize a few facts when you need a whole bunch more facts to really figure out how to appropriately account for something.

Is it plausible in large situations like that, where there would be multiple contracts?

There are sometimes and, in fact, quite often, a number of contracts where since you reference a large organization -- a large organization might purchase for a hospital or a hospital's affiliated physicians and then, six months later or a year later, purchase for additional physicians and downstream purchase for more and more. They may purchase for a set number of physicians. And then, as practices in their area one to come onboard or want to take advantage of what we offer, they will provide supplemental orders as we go.

Typically, license revenue is recognized when the license is delivered. Typically service revenue, as I'm sure you know, is recognized as the services are rendered. That would be training services, implementation services, consulting services, those kinds of things.

With respect to DSOs, I know there's been questions in and around your level of day sales outstanding. Maybe if you could walk us through that number -- and I guess you don't give guidance -- well, I know you don't give guidance. But do you feel comfortable where that number is? Maybe is it somewhat inflated? Is there some one-time issues with it or one-time situations that would make it lower?

If you recall, we do have amounts included in both accounts receivable and deferred revenue. So if you break it down to -- if you strip that out, you get to -- we were at 90 days this quarter as opposed to 91 days last quarter. Of course, we would like to work at moving that number down.

There's a number of factors that go in there. It's hard to isolate any single one exactly. But I'm happy to see it drop down this quarter like it did, and we'll keep doing all the basic blocking and tackling here.

That's another question that I get asked fairly frequently, and my perspective on that is that we are or I am comfortable to the extent that I don't see our DSO levels at a place where I feel like we have red flags about our business. I also fully recognize and understand that there's a lot of heat and light in terms of the investment community. We get a lot of questions on that, but we don't want to be insensitive to people's hot buttons, if you will.

But operationally and from my seat, I spend a lot more time looking at how we are doing relative to any write-offs that we have or the bad debt end of things. I feel like our performance has been very, very strong in that area. So we are aware of the interest and sensitivity that the investment community has on that. We don't want to be ignorant of that and insensitive to that. But at the same time, from an operational perspective, we feel good about our business.

As Paul indicates there are always opportunities to do better, and we pursue those with, I'd say, a constant amount of rigor but with varying results. That certainly continues to be an ongoing area of interest and commitment for us. But in terms of forecasting or committing to a specific number or even a specific direction, I think it's fair to say that the number has bounced around a bit over the past four or five quarters, and that proves a little bit of the difficulty of forecasting and/or delivering a particular number or trendline for that metric.

I remember that you have mentioned the bad debt previously and your focus in on that. So in your comments saying you are very strong on that front, you are pleased with it, there has been no necessarily changes from the last quarter or anything like that on the bad debt?

I think, in that context, from the data that I get and that which we report, I think that we continue to be well-positioned there.

With respect to Stark, we've heard, in talking with people throughout the industry, some consultants say that people, physicians, may be sitting waiting to gauge what the hospitals in their area are going to do, while other hospitals have been extremely proactive. I was just curious if you could give us, Pat, your sense in terms of how you see demand in the marketplace for electronic health records. Do you see any freezing out related to Stark and maybe contrast the demand today versus a year ago.

For the first time last quarter, we did have a number of small and mid-sized deals delayed we think, because of the relaxation in the Stark rules. I don't know whether you want to call that a freezing, but a number of customers, targets that had selected NextGen decided to hold off because they had heard that the hospital was going to be completing a funding program or something like that. And in most of these cases NextGen was or is competing for the hospitals' business or endorsement.

So, while at the high end the market has heated up, I think, because of the Stark relaxation, at the low-end and mid-range, it may have slowed down a little bit. The good news is in the longer term, as these hospitals do come out with these programs to subsidize the purchase of systems, that if there is a freezing or a slowdown in the mid and low end, it will go away.

But if you're dealing with hospitals, they are notoriously, I guess, maybe slow in making their decisions; it's a longer, protracted -- it's a longer process. So maybe comment on how you see the processes so far in terms of hospitals deciding on the vendor.

Yes. I've said in the past that a lot of the large deals, the hospitals do have more protracted sales cycle, and that hasn't changed. I'm not sure whether we're in that window where hospitals are taking their time at the high end and that the low end is freezing out. But I think there's a little bit of that effect.

We do see more coming into the pipeline, with large deals. We're very happy with the pipeline that we have and the quality of the pipeline that we have. And we are pretty optimistic about what we're doing with our hospital customers.

NextGen does very, very well at the high end of the market. You're obviously aware of the HMA situation, but we have executed agreements with other national organizations, certainly a lot of large regional organizations but also many national organizations that have hospitals in many, many markets of the country. And we're actively pursuing rollouts so that we can continue the downstream sales to those organizations that have embarked on their Stark plans.

Finally, based on maybe the slowdown or what not in the decision-making, overall, would you say demand is greater today, interest level in electronic health records, versus a year ago?

I would say demand is greater today than it was a year ago. I think, as we've just discussed, some of the decisions are taking a little while. But overall interest, I think, is increasing. There are a lot of drivers.

We've obviously talked about the Stark, but pay for performance and government grants and the awareness of the systems and the results that some people are starting to see with their systems, including improved quality and improved efficiency. There are a lot of quality reporting initiatives and those kinds of things and four or five other drivers that I could mention that I think are causing the interest to be higher than it was a year ago. Again, as the market shifts a little bit from some of the lower end and mid-range to the large hospitals making purchases or subsidizing purchases for many small practices, decisions may be extended.

Atif Rahim, JP Morgan.

I want to dig deeper into the revenue growth. Given you had said that a couple or three deals slipped from Q1 into Q2, you signed those in Q2, two of them, would it be fair to expect a higher revenue number this quarter, just given the way your revenue recognition works? Particularly in light of what you're seeing about the general bullishness of the industry, what has happened to the topline growth? It's just, you come in two quarters in a row, just below 20% for the overall Company. So any light on what's going on there?

Pat, you can go first. I'll go second.

In the NextGen division I think we reported 23% growth year over year. Again, in the system sales area, there's a lot of components to that. That includes sales to existing customers as well as new customers. I can tell you, for example, in the year-ago quarter, the comparative quarter, we ran a big special for existing customer sales and existing customer sales in that year-ago quarter were higher. We did not run the same kind of special for existing customers last quarter; we didn't think we needed to.

So, without knowing how all of that breaks down, I understand it's a little bit difficult to get a really good picture or a real accurate picture. But the revenue growth that we're seeing is not something I'm concerned with.

When you commented, you said that the last quarter you had seen some of the small or mid-sized deals getting postponed. Would you mean Q2 or Q1?

In Q2.

And then, Lou, I think (multiple speakers) --

I'll make one other comment that if we really wanted to -- if we wanted to go from 23% to 26% or 27% and I told my guys to go out and move a bunch of hardware at cost or something like that, we could have added another $1 million of hardware cost, see the system sale number come up, see the bottom line number unchanged, and maybe everybody would have been happier with the year-over-year growth. But it's not what we do.

Alex Draper, Raymond James.

I apologize; I am going to follow up on that same line. Pat, I certainly recognize that one quarter doesn't make a trend. But I just did some quick math, looking at rolling four quarters growth, just on the NextGen system sales line. That number has sort of slowed down. So it sounds like you would probably attribute that more to law of large numbers than any dynamic you're seeing in the marketplace.

If you look over the last four quarters it was 29%, 22%, 20% and 19% on a rolling four-quarters basis. That takes out some of the quarter-to-quarter volatility. I was just curious on any additional commentary. I know you talked about this a lot. So I apologize.

Yes; I think I have talked about it the a lot. I don't see a huge change in the market. I don't see the market as slowing down. But again, I don't see a big slowdown in our growth. You'd have to look at the components and do a trending over a long period of time, including sales to existing customers, in order to get the picture that I have.

But I think we are growing very well. I'm happy with record revenue. I'm happy with record profits. I'm happy with 23% year-over-year growth. Again, if I wanted to goose that, I could have goosed it. But I think we have more important things to focus on and pay more attention to the bottom line and move some of the lower-margin stuff.

It could have been, in the year-ago quarter. I know a couple of quarters ago we had rock-solid hardware sales, let me say, more hardware than in typical quarters. We didn't in the second quarter. But I won't make any excuses. It is what it is, but there's a lot of good news here as well.

So sales to existing customers -- is that the revenue that actually drops down to the other revenue line in the maintenance and not up in system sales? I'm not sure if that's a question for Paul or Pat.

That's in the system sales line. I think what Pat is trying to say is there's a nuance there in terms of sales to existing customers versus new customers that I don't think you're quite capturing there in those percentages.

If we have a bigger number a year ago from a promotion in the system sales, that's included in system sales, that may --

If we did a promotion to existing customers in the year-ago quarter comparative quarter and that's included in the system sales, that may have an effect.

But there is something that shows up in the other revenue line. Is that just add-on modules? I'm trying to remember; there is an other revenue line that has a software component, if I'm not mistaken?

Well, the other revenue line that we have other services, add-on services that are not related to a new system sale. Then we also have some third-party software products. Those are annual licenses. That type of revenue is more of a recurring nature; it's not a one-time license revenue type of the event.

Michael Cherney, Deutsche Bank.

Can you just talk a little bit about yesterday's HHS announcement and what you guys think it means in terms of stimulating the low end of the market for adoption?

My understanding of the HHS announcement was that they were going to to a pilot with something like 100 doctors to help them purchase a system more help them install systems. While it's nice that HHS is doing these types of pilots, and they do other pay-for-performance pilots, and they all help, I don't think it's going to revolutionize the market and spur adoption across the country.

I think it was a five-year pilot. I don't have it in front of me. I did read it, but I think it was a 5-year pilot with 100 docs or maybe 100 practices; I don't quite remember.

I believe it's 100 docs each in a few markets. But I certainly concur with your bottom (multiple speakers)

If it's a five-year pilot and they are going to study for five years, I think in my opinion most of the game will be played in five years, and most practices will have these types of systems by the time they learn the results of their pilot.

Chris Sassouni, Eagle Asset Management.

Could you just give me, because I don't have it in front of me, the backlog for this quarter you said was $76 million?

That was the pipeline, (multiple speakers) and you can appreciate, has been discussed on many calls. There's a difference between backlog and pipeline in, at least, our lexicon of terms.

So pipeline in Q2, just past Q2, was what?

I believe it was around $80 million, for NextGen.

Then the second question is just the status of the SEC investigation.

No further announcements from us since the last time we chatted.

But it is not closed?

We really have no way to know, one way or the other.

Could you just talk a little bit about the announcement that you made regarding Microsoft's [Health Fall] and also the relationship with the American Board of Internal Medicine, what you think those two relationships can do for you?

Before I answer the specific question about the Board of Internal Medicine and HealthVault let me just follow onto the previous answer, to make everybody aware that the Company is not under investigation by the SEC.

Now moving to the question that you asked, Microsoft announced their consumer platform or personal health record platform called HealthVault and we were one of a number of companies that announced some support for that platform specifically, our feature that we call ChartMail which allows providers to send personal health information to patients securely. That feature will be enhanced to allow the patient to import that record or those records into Microsoft's platform, should the patient choose to do so.

I don't believe that feature, in and of itself, is going to do one thing or another for NextGen system sales. But I'd characterize it as a nice-to-have.

With respect to the Board of Internal Medicine, they have an ongoing certification, board certification process, that we built some things on our end to support so that providers that have the NextGen system can electronically report data to the American Board of Internal Medicine and make it far more convenient for the doc and for the Board, for the docs to participate in that ongoing achievement.

I think I characterize that one the same way. It's a nice-to-have. We're happy and proud to be the first to do it. We hope to do it with other certification bodies, but it is not something that a customer is going to run out and buy NextGen solely because of that feature. I think they will purchase NextGen for all kinds of other reasons, and began that's a nice-to-have.

You mentioned that your sales force -- is it currently at 67 inclusive of the people that left and involuntary turnover?

No; it was at 67 at the end of the quarter that we're discussing. I'm not sure exactly what it is today because, again, we did lose a couple of people. We terminated a couple of others and we are, as I mentioned, in the process of filling those positions and others.

All things being equal, though, is 67 about the number that you would like to have, or is your intent to grow that number over the course of the year?

Our intent is to continue to grow that number with an eye on quality, better quality and making sure that we have the right people in the right positions. In other words, I don't want to just pull a number out and say we want to be at 80. That's a number we have been in our mind, and higher all the way to 80 and hope for the best.

But we're continuing to actively recruit for the best people in the business. If it takes us two years to get to 80, provided we reach that first goal of finding the best, then I'll be happy with that. If we can find them sooner, all the better.

Frank Sparacino, First Analysis.

Can you just remind me, when you look at the system sales, roughly what percentages, Quality Systems IP versus hardware versus third-party software?

All of that is detailed out in the Q in pretty good amount of detail, each and every quarter. I can't tell you exactly when the Q is going to be filed, but it's coming soon. So if you can just hold your question for a short period of time, you will be swimming in data, and you'll be able to do all kinds of analysis there.

Maybe lastly, going back to the question earlier around the hospitals funding or subsidizing the MR, just to be clear, the decisions you have been involved with that you're saying are delayed -- are those situations where you believe you are the vendor of choice and it's simply a funding issue that's happening? Or, when the hospital does get involved, that is, driving a new vendor evaluation process?

Typically, the former. We did the deals that I mentioned where we had some target customers that decided to hold off until the hospitals solidified their Stark-related, Stark-relaxation-related funding programs. These were entities that had made the decision to purchase NextGen. We were the vendor of choice, and they have, through the process they became aware that the hospital was putting together this type of program but hadn't rolled out. So these practices decide, hey, why not let the hospitals pay for half of this or more than half of the system as opposed to putting money out of our pocket?

Unfortunately, the interpretation of the rules is that the hospital can't reimburse for a system that has already been purchased. So there is some delay, again, typically at the lower end and mid-range. But the ones that I referenced had made a decision that NextGen is the vendor of choice.

[Fred Benti, Flexicord Capital].

I apologize if you already mentioned this, Paul, but could you give operating cash flow and CapEx for the quarter?

I don't have operating cash flow handy. That will be in the Q that's going to be filed shortly. But which item, CapEx? Do you want total or broken down?

Just total.

$1,564,000 in capitalized software and $587,000 in fixed assets.

Sales force -- has there been any change in terms of how you're compensating the guys in terms of what they get for new system sales versus follow-up with current customers or larger deals, smaller deals? Anything at the margin that you've changed on how you compensate your sales force?

Not recently. There was a change in our commission program that goes back quite a while, a year or so, related to something that we talked about on prior calls, which is aligning the right resource, sales resource, to the right opportunity so that we don't have the more junior or more new people calling on very large national, multi-million dollar enterprises, and that we don't have people that are capable of calling on, successfully calling on, those organizations working with a two-doctor practice. So we did so restructuring in the sales force, and that included some changes to the compensation plan, but nothing recently.

There has been no change in how often the guys get a payout -- or gals -- whether it's quarterly, monthly, annually, no change to that recently?

No change in that.

All steady as you go.

[Brett Slattery], Symmetry.

What did you guys guide to for quarterly revenue for next quarter?

We don't provide guidance.

Just a little bit more in terms of the 138-day DSO. That seems awfully high. Could you clarify that a bit?

On our balance sheet we have -- you could call it a gross-up, if you will. We have amounts -- because of the way we recognize our contracts, we have some amounts included in accounts receivable and deferred revenue. Now, we disclose what that amount is. So if you were to net those two out, you will get to a 90-day figure for this quarter.

And in a follow-up question. A previous caller asked about that investigation going on. Has it at all ever looked at the DSOs or the accounts receivable with the Company?

No. And you can go back through various transcripts, and you can get a pretty good sense of what the topic areas were. But it's not been the Company that's under investigation; it had to do with trading activity in the company stock (multiple speakers) or Company's equities; yes.

Nadim Rizk, Montrusco.

Four quick questions. The first one I guess you mentioned at the beginning of the call but I missed it. Could you explain to me how can SG&A be ramping up so quick when new sales are growing at a much slower pace? I don't know if I'm missing something here.

There are obviously many components to SG&A increases, many of them controllable in the medium to longer-term. We've had headcount increases, we've had increases in various corporate expenses, for example. Most of the expenses, most of them over most quarters, have been kind of in the ordinary course of investing in and reinvesting in the business. We've had a few, quote, surprise expenses, more on the corporate level than anything else.

I guess, how can it happen? The decisions that the management team, myself included, have made over time reflect an interest in trying to build a sustained success for the Company, which includes continuing to invest in product development, in infrastructure from a customer support and perspective, additional sales staff, et cetera, et cetera.

Also, as we grow, we have additional commitments on the corporate side, be they legal expenses or accounting expenses or any number of other types of expenses. So I think my answer to that question would be that the decisions that we've made -- continue to be toward making appropriate investments toward a longer-term and sustained success from the Company.

So these decisions were made, I guess, not necessarily in this quarter specifically, but they might have been made before and that's why they don't necessarily track the revenue for the (multiple speakers)

Correct. I think that most of the decisions that we make in a given quarter show up, at best, partially in the quarter in which they are made and tend to show up in a larger way downstream. So that would be how it works here and, to be fair, how it works in most businesses.

Also, as a follow-on, some of the decisions that we might make today will impact more than SG&A downstream. For example, they will impact revenue. A salesperson that's hired today would start the expense ticking, but that salesperson won't typically be productive the day that you hire him. Also, when we hire implementation people, training people, customer service people, the expense starts pretty well right away.

But you don't hire somebody and have them train your customers the next day, which is a billable revenue generating event. We typically train somebody for many, many months before the revenue comes online that's affiliated with that hire. So it kind of works both ways. Do you follow?

No; I understand. Could we get a sense on whether this is mostly (technical difficulty) or G&A increases, because G&A should normally be actually, as a percentage, should be going down as the businesses growing?

I think that each of the three letters are amply represented.

On the maintenance revenue, I don't quite understand how can maintenance revenue be growing so much faster than software sales.

Maintenance revenues is a trailing item. It's a function of licenses that are on maintenance and licenses that have been sold in other periods. So we're just -- and it's also a smaller number compared to our system sales figures. So it's going to be easier to show bigger percentage increases coming out of maintenance, for that reason.

In other words, your maintenance, quote-unquote, penetration rate, could be increasing, and that's why your revenue would be growing faster than the system sales?

There could be many reasons. Another reason, may be that a customer's maintenance is tied to when licenses are deployed, and the customer makes a purchase in one period, and over the next year or two deployment accelerates and therefore their maintenance bill comes online and accelerates. It's going to be very difficult to tie maintenance together with the system sales line for that reason as well.

Even on a longer-term -- I'm just trying to understand the business. Even on a longer-term basis, let's say if you are to look at a five-year period, can maintenance consistently grow faster or slower than -- I guess, slower than -- (multiple speakers)

Maintenance is going to grow consistent with licenses that have been sold by us. So that's really -- it's not that tricky, really. It's growing because we've sold licenses, and maintenance is a percentage. What we charge for maintenance is a percentage of a license fee.

I understand. Obviously, there could be a lag, so you might be growing maintenance substantially on systems that were sold in the past?

Yes, that follows up after the license is sold, yes (multiple speakers) happen in the same quarter.

Can we get a feel for the -- if you have a range or an idea about the industry penetration as of now? What is your view in terms of how much of the market is actually already penetrated on the EMI side?

In our opinion, it's under 20%. A lot of that depends on what you call an EMR. Is it a certified EMR, or is it some component technology that calls themselves -- that's called an EMR? But a true electronic medical record system more electronic health record system -- it's somewhere between 15 and 20%, in our opinion.

What was the length of the sales cycle from the day the salesperson actually has a contract with a potential customer until the day he closes the transaction, what is the average sales cycle?

I don't know what the average is, but it's a broad range, typically faster at the low end and slower at the high end. The range is probably 60 days to two years. Generally, you see the larger organizations making decisions maybe over a six-month period, the smaller organizations a few-month period.

We're going to have to just limit it to just another couple of questions. This is one of the first times in forever we've got some people with some commitments here that we need to honor. So we'll take two more questions, and then wrap it.

Charles Rhyee, CIBC World Markets.

I actually want to circle back to a question early on in regards to your hosting strategy to. If I recall, Lou, I think you've mentioned in the past hosting -- you offer the hosting service, but it's not really -- you price it in a way that customers are not necessarily trending towards it.

That would have been on the subscription-based pricing, Charles.

So then hosting -- Pat, I think you mentioned that a lot of it goes to third-party vendors. Is there any thought of bringing that in? Is that margin that you could potentially be having that you're giving away because you are not focused on it, or how do you view hosting as a business in itself?

It's certainly something that we continue to look at as a potential business opportunity. It's a part of our discussions frequently, and we'll see where we go.

I think you mentioned you host some of your customers already. Can you give a sense of the capacity that you have to host? Would you need to really build out on your data center if you wanted to meaningfully get into it, or do you have capacity now to expand that part of your business, if you chose to?

If we chose to, we could host more than we host, and it would be within the realm of possibilities to expand that capability. But thus far, what we have done is partnered with other hosting organizations and have referred customers to those organizations. As Louis mentioned, we're continually discussing bringing that in-house, and it's something that we look at. Hosting has been a part of our business for a long time, it's just done with third-party partnerships.

Jeff Schmidt, Sidoti and Company.

Just your best guess on what percentage of the pipeline would be Stark buying versus non-Stark?

I'm not even sure I would venture a guess. In terms of revenue, it might be -- this is going to be a wild guess -- 20%. As far as number of deals, good question.

Is there any difference in pricing on Stark-related deals versus non-Stark?

No.

I'll thank everybody for their interest in the Company and participation on the call. I apologize for having to cut this off. As I mentioned, we have people on the call with other commitments, which is an unusual event. Again, I'll apologize for that. Once again, thank you for your interest and attention.

That concludes this evening's Quality Systems second-quarter fiscal 2008 earnings conference call. You may now disconnect.