NextGen Healthcare Inc (NXGN) 2008 Q3 法說會逐字稿

Good afternoon. My name is Jonathan and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you, Mr. Silverman. You may begin your conference.

Thank you, Jonathan. Welcome, everyone, to the Quality Systems third quarter fiscal 2008 earnings call. Paul Holt, our CFO, and Pat Cline, President of our NextGen Healthcare Information Systems Division join me as participants 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, perspectives, and strategies, preliminary and/or projected operating results, capital and equity initiatives, 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'll now provide some summary comments on the quarter. Paul and Pat will follow with additional details.

For the quarter, the Company reported revenue of $48.1 million, which is a new record for the Company. On a year-over-year basis, total Company revenue increased approximately 25%. NextGen's revenue for the quarter was a record $44 million, up 29% over the prior year. The QSI division reported revenue of $4.1 million, which was down approximately 4.6%. Over the prior year, fully diluted earnings per share for the quarter was a record $0.40 per share, up from $0.32 in the year-ago quarter.

Note that the quarter's financial performance was impacted by a net $0.03 per share increase as a result of life insurance proceeds and associated compensation expense related to the recent passing of Mr. Greg Flynn, our former Executive Vice President and General Manager.

To take care of a couple of housekeeping items relevant to the QSI division, divisional sales staffing is at 4 FTEs and the division sales pipeline is approximately $3.9 million. As a reminder, the QSI division's pipeline is defined as sales situations where QSI is included among the final three purchase choices, and we believe that the sale will occur within 180 days.

As previously announced, our board approved another quarterly $0.25-per-share dividend to be paid to shareholders of record as of March 14, 2008, with an anticipated distribution date of April 7th, 2008.

Regarding investor conferences, during the quarter, the Company presented at the Piper Jaffray and CIBC conferences and in January, the Company presented at the J. P. Morgan conference in San Francisco. During the remainder of the current quarter, the Company is scheduled to present at the UBS, Raymond James, and Sidoti conferences.

Regarding acquisitions, we continue to review potentially interesting acquisition opportunities that come to our attention.

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 the future. It's 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'll now turn things over to Paul Holt, our CFO.

Thanks, Lou, and hello, everyone. Consolidated system sales of $23.7 million this quarter represents an increase of 25% compared to $19 million in the prior-year quarter. Our consolidated maintenance, EDI, and other services revenue rose 25% to $24.4 million, compared to $19.5 million in the year-ago quarter.

Consolidated gross profit margin this quarter came in at 66.4%, down slightly from 67% a year ago, but the increase in our gross margin over the last year was due primarily to a relatively larger amount of hardware and third-party software [the percentage of system failed-04:42].

Our total SG&A expense increased by approximately $2.7 million to $13.3 million in the quarter. That compares to $10.6 million a year ago. The increase in SG&A expenses compared to the prior year was primarily due to $1.9 million in higher compensation expenses due to increased head counts, $.6 million in increased selling-related expenses, $.5 million in higher corporate expenses, and that was offset by a decline of $.3 million in other general and administrative expenses.

SG&A expense as a percentage of revenue this quarter increased to 27.6%. That's roughly unchanged, but slightly higher compared to the year-ago quarter, which was 27.5%.

Interest income in the three months ended December 31, 2007 decreased to $710,000 compared to $935,000 in the year-ago quarter. Interest income this quarter declined primarily due to a greater portion of funds invested in taxpayer reduction rate securities, which offer lower interest rates but higher after-tax yields compared to money market or short-term U.S. Treasuries.

The Company's effective income tax rate was roughly unchanged compared to the year-ago quarter at 35.7% compared to 35.6% a year ago. The effective rate for our current quarter was impacted by the receipt of tax-free insurance proceeds during the quarter, as well as an increase in deductions for qualified production activities, the addition of tax-exempt interest income, and deductions related to incentive stock options.

Prior-year quarter included the reenactment of federal R&D tax credit statutes which occurred here in the quarter, resulting in a catch-up of the prior two quarters R&D tax credits.

Moving to divisional performance, system sales in our NextGen division rose 28% to $22 million this quarter compared to $17.9 million a year ago. Continued growth in NextGen's base of installed users drove maintenance, EDI, and other revenue in that division 30% higher than last year at $21.2 million versus $16.3 million a year ago.

Operating income in the NextGen division was up 33% to $17,823,000 compared to $13,423,000 a year ago. The dental division reported a year-over-year decline of 5%, reporting revenue of $4,072,000 compared to $4,266,000 a year ago. Operating income for the QSI division was $650,000.

Moving on to our balance sheet, our cash and marketable securities increased by approximately $5.5 million this quarter to $78.4 million, or $2.86 per share compared to $72.9 million or $2.67 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 October of 2007 and again in January of 2008.

The Board of Directors has also declared an additional $0.25 per share dividend to shareholders of record on March 14th of 2008, to be paid in early April, 2008.

This quarter, our DSOs were unchanged compared to the prior quarter at 138 days. DSOs in the year-ago quarter was 140. DSOs net amounts included in both accounts receivable and deferred revenue was also unchanged compared to the prior quarter at 90 days. DSOs by division was 96 days for the QSI division and 142 days for the NextGen division.

Deferred maintenance and services revenue at $41.3 million was up $1.4 million from the prior quarter and up $.7 million compared to the prior year. And as I customarily do, I'm going to provide our non-cash expenses for the quarter, which break down as follows.

Total amortization expense, $1,085,000, $33,000 for QSI, and $1,052,000 for NextGen. Total depreciation expense, $616,000. That's $64,000 for QSI and $552,000 for NextGen. Stock option compensation, which is a non-cash expense, was $921,000 in the quarter, and our investing activities were as follows.

Capitalized software, $1,447,000 at $62,000 for QSI and $1,385,000 for NextGen. Fixed assets, $487,000; that's $30,000 for QSI and $457,000 for NextGen.

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

Thank you, Paul. I'm very pleased with NextGen's record-setting performance. During the quarter, we executed about 50 new agreements, and our pipeline has increased to over $80 million. As I reported on our last call, the size of our sales force is reduced somewhat from -- well, it was reduced somewhat last quarter.

Our sales force currently stands at 58 people. Directionally, we want to continue to increase the number of salespeople but we feel it's critical to maintain top quality as we do. NextGen continues to compete very effectively in the marketplace, winning key deals against our competition, and our market continues to be robust.

I'd like to once again thank NextGen employees for their dedication to customer service, and I'd like to thank our customers for the confidence that they place in our Company.

Jonathan, we're ready for questions.

At this time, I would like to remind everyone if you would like to ask a question, please press star and the number one on your telephone keypad. Again, that's star and the number one. And we'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Bret Jones.

Hi, good afternoon. I was wondering if we could dig into the decline in gross margin a little bit more. You mentioned the primary driver was hardware, I was wondering if you could quantify that a little bit.

We get into a lot more detail on the Q, which is going to be filed shortly. So I guess if I could just point you in that direction for now, and if you have anything more, you can follow up.

So can you speak maybe to was there increased pricing pressure compared to last year, or what you've seen recently in the most recent quarters?

That, I can speak from a competitive standpoint. We, over the last few quarters, as I've mentioned on the last call or two, we have seen our competition get a little more aggressive with pricing. And while we haven't changed our list pricing, we have reacted on a case-by-case basis where it strategically makes sense to do so.

But I think the decline in margin is more attributable not so much to any abnormal level of discounting but to the mix, as Paul mentioned. Just a little bit of hardware with the margins that we get relative to hardware, as you can imagine, can swing the gross margin number a little bit.

Mm-hmm. So would you say that the number of these strategic relationships where you might discount, have those gone up?

Those are pretty much the same. Over the last few quarters, we've seen a little bit of a trend where we might meet competition a little bit more, but no, I actually looked at this a few days ago, looked year-over-year, actually went back a few years, and didn't see anything meaningful.

Okay, great. Thank you. I'm sorry; did you say there were 50 new agreements signed in the quarter?

Yes.

So that's down from 70 in the quarter before that? Would you say the average deal size has gone up since sales (inaudible)?

The average deal size has gone up. I mentioned also on a prior call that some practices were waiting to see what the local health system, hospital, or other organization was going to do relative to the stock relaxation at Safe Harbor, but at the same time, fortunately, we have some of those large health systems and organizations making purchases. So the number of deals is down, but the average deal size is considerably up.

Okay, so that's primarily structured.

Well, it's difficult to say. We do continue to see more interest or a heightened level to interest related to the stock relaxation at Safe Harbor. Some of our large accounts have that in mind as they make the purchase, yes.

All right, great, thank you very much.

Thank you.

Your next question comes from the line of Ross Muken.

Hey, guys. It's actually Mike in for Ross. Congratulations on the quarter.

Thank you.

I just want to delve a little bit into this issue you talked about in terms of some of your competitors being a little more aggressive on pricing. Can you talk about what end of the market, in terms of big deals versus the small deals, and where you're seeing the pricing pressure?

I haven't done -- or we haven't done an analysis on that, but it seems to be in our sweet spot, which is the midrange and high end, where we see our competition getting more aggressive. But again, it's not that big of a change.

Okay. And then just in terms of notation times, what kind of trends are you seeing in terms of being able to implement the overall suite? Is the trend going up or down, or any type of trends you could talk about there?

The trends are long-term, but it's becoming easier and easier to implement our systems as we focus on that issue and develop quick-start tools, methodologies, and better training programs, computer-based training, and those kinds of things. It's an area where we've focused for a number of years, and the long-term trend is it gets easier and we implement faster.

Okay, and then just one more final question. I know Lou mentioned that you guys would continue to look to acquisitions if there was anything attractive. Is there any one kind of technology or customer area that you're looking to potentially beef up, should something come up?

Right now, we're keeping our eyes open, ears open, and options open, so I think we prefer to look on a kind of broad range of things as opposed to focus on one place or another. Over time, I've talked about interest in potential market share acquisitions as one example of something we might be interested in. A second example would be opportunities to expand and deepen the relationships that we have with the customers that we know and that know us. A variety of service opportunities exist in that area.

One that comes up at discussions frequently from your guys' end of the table is revenue cycle management, and I would certainly keep that on the list. But I think the broad theme is that from an interest and search perspective, we'd like to keep our options open, but those are a couple of areas that they're on the list for us.

Great. Thanks, guys. Congratulations again.

Thank you.

Your next question comes from the line of Sean Wieland.

Hi, thank you. First question on the sales force, Pat, can you remind us the number of reps you had last quarter?

I believe that number, Sean, was 67.

Okay. And did you say 58 this quarter?

58, that's correct.

Okay. So can you give us a little insight as to what's going on there?

Well, I'm not sure. As I mentioned, it's important to us that we maintain quality, not just in terms of the rep's ability to sell, but also with respect to their integrity and honesty, and their care for the customer. And while we lost a couple of reps that I would have liked to keep, most of the turnover was caused, or most of the turnover decisions were made by the Company.

Generally, it's the weaker sales reps who are let go, the ones that aren't performing or aren't performing well enough. So shrinking sales force a little bit as we strive for that quality really doesn't have a significant impact on sales, as you can see from the performance in the quarter. Again, directionally, we want to grow the sales force, and 58 is at this point what I see as a good jumping off point.

For most of, or at least many quarters in '07, that's about where the number was, and we think we've shored up the quality. We've got a number of terrific performers and a number of new folks that we think we'll be bringing to the Company in short order.

Okay, I'm just trying to get a little more clarity on this. So a year ago, you also had 58 reps, and it looks like over the three quarters you added about nine reps, and now you're back down to where you were. The incremental nine reps, are those reps still here, or were they bad hires and they're gone?

Well, it's going to be a combination, and I don't have the person-by-person details in front of me. But we made what I would characterize as very good hires in the last year, and we've made, as all companies do, I would characterize this as a few lousy hires. And I think we're being prudent and taking the ones either that were on-board prior to this period that we're discussing that aren't performing and weeding them out, or making decisions quickly enough on the ones that aren't coming up to speed fast enough.

Sean, this is Louis. If this helps at all, there was no strategic initiative put in place to downsize the sales force. This is really more of a sales management issue, and as Pat mentioned our objective continues to be to increase the sales force. So there was no -- if you're thinking about was there a corporate effort at downsizing or anything like that, the answer is no.

Okay. The beginning of the year, you talked about a goal, year-end, of having 70 reps. Can you update that?

I think I'm going to stop short of updating it. I think we'll finish the year in this regard in better shape, but I doubt we'll hit the 70.

And we've also said consistently, Sean, that whatever goals we put in place for sales force head count, at no time were we interested in sacrificing quality for quantity, and that remains a key part of our overall sales staffing and hiring strategy.

Okay. One other question; CCHIT certification -- can you update us on where you are with that, and I believe you have the '08 certification done, and how is that helping you in the field?

Actually, the '08 certification process has not commenced. No company has the '08 certification. But we're one of the few companies to have '07 certification, as many of our competitors still talk about their '06 certifications. It has helped us in the market. The Stark exemption states pretty clearly that in order to quality for Safe Harbor, your solution has to be certified within the last 12 months, and many of the sophisticated purchasers out there understand that and look toward products that have been certified in the last 12 months, as opposed to those that claim that they're certified under the more relaxed criteria.

We continue to try to drive the criteria and raise the bar, because we feel confidently that we can shine in that regard where our competitors will fall down. So we look forward to going through the process in '08, but we're not there quite yet.

Okay, and then one last question as it relates to that, on Stark. Would it be possible for you to quantify the impact that you've seen in the quarter because of non-Stark-related deals?

No, it really wouldn't be possible. I wish that it was possible, I'd love to have that information as well. But there are so many factors that go into these decisions for health systems that all we have is sort of anecdotal evidence.

So of the 50 contracts that you signed, is there maybe a ballpark number that were bought by hospitals?

I also don't have that in front of me, but typically out of that number of agreements there are going to be 10 or so percent that might be large deals, and some subset of that that would be hospital deals.

All right, thank you very much.

Thank you.

And your next question comes from the line of Richard Close.

Yes, just I guess follow-on to some of Sean's questions. With respect to the sales force, how would you characterize the tenure today, maybe average tenure versus, you know, at the beginning of the fiscal year? Has it gone up, is it about the same?

I'd say it's probably about the same.

Okay, so in that net, you've lost maybe some experienced people, I don't know, I guess maybe some super-experienced people, but also some of the new guys.

Well as I mentioned, there are a couple -- let me say two of the nine that I would have liked to have kept. Experienced, tenured people, and there are a number of others that we didn't feel were performing up to par. And I liken it to needing to weed the garden so everything else can grow appropriately.

Okay, and then when we're talking -- I guess 50 new agreements, but your pipeline's bigger, you have less salespeople. Are your salespeople -- do you have to have, I guess, different qualities in salespeople nowadays with the changes in the Stark? Maybe some larger deals in your pipeline, salespeople that have to be more focused in on selling hospitals? Is it a different animal, so to speak?

Well, it is a slightly different animal, but I like to think that most of our talented salespeople can sell at that level, and most of them do sell at that level. I don't know whether the 50 deals and the larger average selling price is a long-term trend; we'll have to wait and see. But frankly, whether we do 10 $3 million deals or 30 $1 million deals or 65 $100,000 deals -- I'd probably like to see 50 deals, 60 deals in a quarter, and like to see the selling price continue to come up as large health systems make purchases for hundreds of providers at a time.

They're easier to deal with from an implementation standpoint and a contract management standpoint and a maintenance standpoint, so I don't think there's any bad news in this.

Okay, and then maybe if you could characterize, you know, I guess NextGen sales to existing customers versus the new customers? Have you had good response from people coming back to the well, so to speak?

Absolutely. Our sales to existing customers continue to go well and continue to trend up over time, and I think that's good evidence that our system works out there. And as customers implement what they've got, they come back for more.

Okay, thank you.

Thank you.

And your next question comes from the line of Sandy Draper.

Thank you. A couple of questions. Pat, I missed it -- did you give the NextGen pipeline?

Yes, just over $80 million.

Okay. And then a question I think for Paul. The maintenance line had bumped up pretty nicely. Looking back over the last few years, it's done the same. I guess did you sort of do a step-up in the December quarter for higher rates for folks? I'm just trying to understand why the maintenance line tended to jump up in the December quarter.

Well, I wouldn't -- there's not a lot of seasonality to that maintenance number. It's moving up because we're adding to the number of customers and the number of customers that are already on the system are taking on more licenses in the form of add-on purchases. And those things are bumping up our maintenance numbers, as well. Beyond that, I think that's really mostly what there is to say about that number.

Okay, great. And a follow-up question maybe for Pat. Pat, have you seen any increasing interest in hosting -- there's obviously one of your competitors that went public that has gotten at least a lot of attention with the whole hosting and software as a service model. Is that something you guys are having to respond to, or are you getting more questions and just I'd love to get your thoughts there, thanks.

We've had a significant amount of interest in hosting for quite some time. In fact, I would venture a guess that north of 10,000 NextGen providers are operating in a hosted fashion today. Hosting is something that NextGen offers as an alternative to practices going out and spending a lot of money on their own environment for their own servers and so forth, and it's something that we're happy to do.

If you're talking about Athena Health and their public offering, I'm not so sure they're a direct competitor. We compete with them from time to time, but they're more of a revenue cycle management company, and while there is some crossover, they're really two different markets.

Great, that's helpful, thanks.

Thank you.

Your next question comes from the line of Chris Sassouni.

Yes, could you give us an update on the implementation of the contractor agreement that you signed with Bulk Management Associates?

I'm not aware of probably enough details on that to go into with you, but we have a terrific relationship with that organization. It's a press release that I'd refer folks to, if they're unaware of that relationship and the additional purchase HMA made some quarters ago.

As far as I know the implementation is going well, and certainly if it's not we'll be all over it to get it turned around. Generally, those are the types of customers that we speak about that roll a certain number out, do well with them, and purchase more. NextGen's customer base is comprised, in addition to having small practices and midrange practices, of some of the largest health systems and national providers of care, hospital systems, health systems, in the country, so we hope that these add-on purchases and what happens to maintenance and ongoing services continues.

Would it be fair to say that given the way that the implementation of new kinds of contracts go, that at least some of the revenues in this quarter were attributable to that contract?

Chris, we try very hard not to keep individual scores on individual contracts in individual quarters. Each dollar pays the rent the same way, and that's been our policy and that continues to be our policy.

Okay, thank you.

Your next question comes from the line of Atif Rahim.

On stock related sales, particularly if there's any geography you've seen strengthen in particular. And then secondly, the competitive pressure from selective clients is that perhaps more on the stock-related sales, or in some of the smaller deals that constitute the majority of your sales?

We saw a little bit of lead from the Western states relative to their interest regarding stock relaxation and purchasing or donating or subsidizing the purchases of electronic health records systems, but we are seeing a heightened level of interest in all geographies, to answer the first part of your question.

To the second part of your question, no, we've seen competitors at the low end get more aggressive. Generally, we're not all that eager to do price matching or discounting very heavily at the low end, and we've seen other competitors at the high end get more aggressive.

I think if I were a competitor of NextGen's, and I wanted to take the focus off of NextGen's superior solutions, I would try to bring the discussion to price pretty quickly. And I think we're just seeing that more often.

Okay, and then in terms of the pipeline going up, I guess is that a function of more stock-related deals, which allows (inaudible)?

I took a look at the pipeline because I had the same question, and I didn't see any material change in mix.

Okay, and then final question, and maybe I missed this on the call, but the SG&A seems to have gone up sequentially while the number of salespeople is down. Is there any reason for that being up still in the 20%-plus range, and maybe if it's an issue during the timing during the quarter, would you expect that go down by any chance next quarter?

Well, I think the commissionable revenues were up in the quarter, so you may have had a drop in the number of sales folks that we talked about. But that could be part of the timing. I don't have the exact details on all that, but the commissionable sales were higher, and so there was a corresponding increase in commission expense to sales folks.

And we've got a couple of other pieces to SG&A that are corporate-related and whatnot that don't really have anything to do with the number of sales folks that we have with the Company.

Okay, that's it, thank you.

And you have no further questions at this time.

All right. Well, we appreciate everybody's attendance on the call and interest in the Company, and we'll talk to you again soon. Thank you very much.

This concludes today's conference call, you may now disconnect.