NextGen Healthcare Inc (NXGN) 2008 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Quality Systems fiscal 2008 results conference call. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. Mr. Silverman, you may begin your conference.

Thank you. Welcome, everyone, to Quality Systems' fourth quarter and fiscal 2008 earnings call. Paul Holt, our CFO; Pat Cline, President of our NextGen Healthcare Information Systems Division; and Donn Neufeld, Senior Vice President of the QSI 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, product, 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 and the year. Paul, Donn and Pat will follow with additional details. For the quarter, the Company recorded revenue of $51.2 million, which is a new record for the Company. This represents 14% year-over-year growth over the very strong prior year quarter. NextGen's revenue for the quarter was a record $47.3 million, up 16% over the prior year. The QSI Division reported revenue of $4 million, which was down approximately 11% over the prior year but well within our historical band. Fully diluted earnings per share for the quarter was a record $0.41 per share, up 32% over the year ago quarter.

For the fiscal year ended March 31, 2008, total Company revenue increased 19%, net income increased 21% and EPS increased 19% over the prior fiscal year. The Company's annual totals were at record levels across the board. For fiscal '08, NextGen revenue increased 21% over the prior year and the Division's operating income increased 18%. Those were also records. The QSI Division reported a 3% decrease in annual revenue and a 17% decrease in operating income. And despite the year-over-year decreases, on a hard collar basis, the QSI Division did operate within its historical performance band.

I'd like to take this opportunity to welcome Donn Neufeld to the team of Company management representing us on today's call. Donn's assumption of the overall management responsibilities for the QSI Division has been seamless. At once, a credit to his strong management and interpersonal skills, and completely unsurprising, given his 20-plus-year tenure with the Division and the Company. You will hear from Donn later on today's call.

In a similar vein, I'd also like to welcome the management staff and customers of HSI, the revenue cycle management company acquired by the Company last month, both acquirer and acquiree are optimistic about our prospects for the combined Company. Additional details are available in our press release and 8-K issued regarding the acquisition. But the basics are that we acquired the company for $15.4 million, approximately, split basically evenly between cash and stock, with additional incentives in place that can take the overall transaction up to about $17 million. Based on the quarter ended March 31, 2008, HSI had a revenue run rate of just under $17 million per year and we expect the acquisition to be modestly accretive to earnings during fiscal '09.

As previously announced, our Board approved another $0.25 per share quarterly dividend to be paid to shareholders of record as of June 13, 2008, with an anticipated distribution date of July 2, 2008. The Company's annual shareholders meeting will be held on September 4, 2008, at the Center Club here in southern California in Costa Mesa, California.

Shareholder and Director, Ahmed Hussein, filed a 13-D towards the end of May, which details his latest version of certain events in the Company's history, as well his disagreements with the Company, various of its advisers, management and Board members. A majority of the Board has and continues to disagree with Mr. Hussein, finding his statements to be both factually inaccurate and misleading.

Regarding investor conferences, during the March quarter and during the June quarter to date, the Company has presented at that JPMorgan, UBS, Raymond James, Deutsche Bank and JMP Conferences. Road shows were held in Chicago, Minneapolis, Boston, New York, San Francisco and Portland, Oregon. During the remainder of the current quarter, the Company is not scheduled to present at any investor conferences.

Regarding acquisitions, as we move through the initial stages of integrating HSI, we continue to review potentially interesting acquisition opportunities that come to our attention. And in closing, my prepared comments for this call, I want to again thank the dedicated and talented members of the NextGen, QSI, and Corporate teams for their contributions to the year's performance. Also, as is customary on these calls, I want to 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 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'll now turn the call over to Paul Holt, our CFO.

Thanks, Lou, and hello, everyone. Our consolidated systems sales of $24.4 million this quarter was roughly unchanged, compared to $24.5 million in the prior year. The prior year quarter was a particularly strong quarter for system sales. System sales were up 3% compared to the prior quarter system sales of $23.7 million. Consolidated maintenance, EDI and other services revenue rose 30% to $26.9 million, compared to $20.6 million in the prior year quarter.

Our consolidated gross profit margin this quarter came in at 66.8%, that's down slightly from 67.2% a year ago. The decrease in our gross margin over last year was due primarily to both a higher amount of lower margin recurring maintenance and EDI revenue as a percentage of total revenue, as well as some lower margins from our implementation and training revenue.

Total SG&A expense declined by approximately $0.4 million to $14.1 million in the fourth quarter, compared to $14.6 million a year ago. The prior year SG&A expense included higher Corporate expenses, as well as compensation expenses tied to the Company's incentive plan. The quarter ended March 31, 2008 did not include any expense related to performance-based incentive plans for the executive management team. The Company did not meet any of its planned targets for fiscal 2008. The overall decrease in SG&A expenses, compared to the prior year, was primarily due to the lower compensation expenses just discussed, lower Corporate expenses, offset by increased selling related expenses and other general and administrative expenses.

Our -- moving down to interest income. Interest income for the three months ended March 31, 2008 decreased to $567,000, compared to $885,000 in the prior year period. Our interest income in the three months ended March 31, '08 declined, primarily due to a greater portion of our cash being invested in tax favored auction-rate securities, which offer lower interest rates but higher after-tax yields compared to money market or short-term U.S. treasuries.

And just an update on auction-rate securities. At the end of last quarter, we had approximately $48.4 million invested in auction-rate securities. In response to the well publicized failures in the auction market for these securities, we moved a significant portion of our portfolio over to short-term U.S. Treasury bills and money market accounts. As of March 31, 2008, we had approximately $22.6 million in auction-rate securities, of which $2.5 million was recorded as current due to its sale subsequent to March 31, '08.

The Company's effective income tax rate declined to 36.2%, compared to 39.3% in the prior year. The effective rate for thus current quarter was reduced by both an increase in the statutory reduction for qualified production activities, as well as the addition of tax exempt interest income and deductions related to incentive stock options. Note that the R&D tax credit statute has elapsed as of January 1, 2008, and therefore, we will not be recording a benefit related to our R&D activities until the statute is put back in place. And as of today, that has not happened. So that will be a "stay tuned."

Moving down to divisional performance. Systems sales in the NextGen Division rose 2% to $23.8 million, compared to $23.4 million a year ago. On a sequential basis, NextGen system sales grew 4%. And continued growth in NextGen's base of installed users drove maintenance, EDI and other revenue in that Division 37% higher, at $23.5 million versus $17.2 million a year ago. Operating income in the NextGen division was up 24% to $19.133 million, compared to $15.444 million a year ago.

The Dental Division, QSI reported a year-over-year decrease of 11% in reported revenue of $3.977 million, compared to $4.460 million last year. And as Lou mentioned, the operating income for the Division was $666,000.

Moving on to our balance sheet. Our total cash and marketable securities increased by approximately $3.3 million this quarter to $81.7 million or $2.98 per share, that compares to $78.4 million or $2.86 per share at the end of the prior quarter. As of March 31, 2008, $20.124 million of the Company's marketable securities was included in long-term assets, due to the fact that these amounts relate to the Company's position in auction-rate securities, which are no longer liquid due it to the failed auctions for these securities. We have recorded an unrealized loss of $326,000 on our auction-rate securities. That was recorded in comprehensive income and not in our income statement according to U.S. GAAP.

And note, that the Company paid a dividend of approximately $6.8 million or $0.25 per share in January 2008 and again in April 2008. And our Board of Directors has already declared an additional $0.25 per share dividend to shareholders of record June 13, to be paid in early July 2008. This quarter, our DSO's declined by two days, compared to the prior quarter, at 136 days. DSO's in the year-ago quarter was 129 days. DSO's, net of amounts included in both accounts receivable and deferred revenue, declined by five days, compared to the prior quarter at 85 days, compared to 90 days last quarter. Our DSO's by Division this quarter was 95 days for the QSI Division; and 140 days for the NextGen Division.

Our deferred maintenance and services revenue was up $3.6 million for the quarter at $44.9 million. That's also up $5.4 million compared to the prior year. Deferred annual licenses and implementation and training revenue in the NextGen Division, as well as deferred maintenance continue to grow in the March quarter versus prior periods.

For those of you who are tracking this, our noncash expenses for the quarter break down as follows. Total amortization expense, $1.060 million. That breaks down to $35,000 for the QSI Division and $1.025 million for the NextGen. Total depreciation expense, $614,000. That's $68,000 for the QSI division and $546,000 for NextGen. Total stock option expense, which is a noncash expense, was $801,000.

Total investing activities for the quarter were as follows. Capitalized software, $1.545 million. That's $55,000 for QSI, and that's $1.490 million for NextGen. Investments in fixed assets totaled $441,000 for the quarter. That's $94,000 for the QSI Division and $347,000 for NextGen. I want to again thank you all for being on our call and your interest in our Company. And I will now turn things over to Donn.

Thank you, Paul, and thanks everyone on the call for your interest in our Company. The QSI Division numbers have been addressed in detail by Lou and Paul. So, I'd like to briefly address other areas of interest within the Division. The quarter saw three new joint QSI/NextGen clients purchasing the CPS product, as well as other purchases expansions to the QSI Division exclusive client. Our reference to CPS, the clinical product suite, is the dental electronic record equivalent of EMR. We see increased synergy with our NextGen Division and joint sales. And see increased penetration of our client prospect base.

During the quarter, we made a number of enhancements to CPS, which improves both range of functionality with the patient share side and ease of use for practitioner in the operatory. Most noteworthy to me, was integrating the scheduling within CPS, allowing the back office staff to quickly access, create, modify patient appointments. We will continue to enhance this product offering. We conducted our annual Dental Users Meeting within the quarter. Attendance was up 20% from the prior year. There was strong interest in the new features and offerings that were presented at the conference.

A note on our sales and staffing pipeline. Our staffing remains unchanged from last quarter. Our pipeline is approximately $3.3 million. Our pipeline is defined as, sale situations where QSI is the final three purchase choices and we believe that the sale will occur within 180 days. With that, I'll turn it over to Pat Cline, President of our NextGen Division.

Thanks, Donn. Hi, everyone. NextGen continued its record setting performance in the fourth quarter and fir the year. During the quarter, we executed about 70 new agreements. The Company's pipeline for license and related sales has increased to about $83 million.

Our sales force stands at 58 people currently. And though we haven't grown the sales force recently, we're confident we're improving the quality of the sales force. And early indications are very positive with some of the new people we've brought on board. We continue to interview aggressively and hire selectively.

We also continue to compete very effectively in the marketplace and win key deals. As Lou mentioned, during the quarter, we acquired HSI, expanding our revenue cycle management capabilities. And we think we're very well positioned for rapid growth in this area. We think the Company's future remains very bright. And in closing, I'd like to once again thank NextGen employees for their dedication to customer satisfaction. And thanks to our customers, as well, for the confidence they've placed in our Company. We're ready for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Sean Wieland with Piper Jaffray.

Thank you. Pat, one question for you. The pending Misys/Allscripts merger, how is that impacting the landscape and the environment in -- on the practice management and EMR side?

We haven't seen a heck of a lot, Sean. The marketplace is, of course, curious whenever that sort of thing transpires or is announced and there are a lot of questions about it. And I think some questions in the minds of some purchasers. But the market hasn't discounted those two companies and we continue to compete with them.

Okay. Something on the sales force. Were there new hires in the quarter? I know the number stayed flat, the net number. But was there any new hires and people exchanged out?

Yes, there were, Sean. Over the last few months, there were a few people that were hired and, yes, the number stayed flat. NextGen is a great place for sales people who are honest and care about the customer and who sell. And it's not such a great place for those who don't. We've, as I mentioned, gotten a little more selective in the hiring process. We continue to interview but we're going through a much more rigorous process on the hiring. And overall, we're very happy with the quality that we're seeing. And we think we've seen a big upgrade in the sales force. And hopefully, that will turn into something very positive in the future for us.

Okay. Great. Thank you very much.

Your next question comes from the line of Charles Rhyee with Oppenheimer & Company.

Hi, Just had a couple questions. Maybe, first with Paul. You talked about the DSO's and you gave two sets of numbers. Right? The straight-up DSO's and then the one if we back out some of those things that are reported in other line items in the balance sheet. And there was discrepancy between the number of days, two days and then five days. Can you just give me a sense on what the difference is?

Well, the difference is the way that the -- what's being included in the calculation. If you take the amount of unpaid deferred revenue, which is sitting both in accounts receivable and deferred revenue and you net that out against your AR. Then you run your calculation, you come up with 85 days versus, the number that I reported there was 136 days.

No, what I mean was versus the year ago. Right? I would think that if you backed it out, wouldn't your days -- I'll go back and do the calculation. That's fine. My second question is, you made a comment on SG&A costs lower than expected due to some lower compensation from management targets. And I recall, you said none of the targets were hit for the year.

That's correct.

Can you give us a sense on what those targets were and have new targets been set for the coming year?

Charles, this is Lou. We're going respectfully decline to give you the targets for last year and can tell you that our Compensation Committee is at work on the fiscal '09 program.

Okay. Maybe if I can ask in a different way. What are sort of the targets that the Compensation Committee considers when setting these targets? Is it just looking at what you guys did in the past and sort of extrapolating? Or is it that you guys sit down and say, "This is our pipeline and this is what we reasonably expect to do"? Or can you give us maybe a little more idea on --?

I think it's fair to say that thematically the areas of focus have been top line and bottom line for revenue and earnings per share growth. And I think that there has certainly been input in terms of -- at least historically, there's been input of terms of where the management team feels like the business is going to go or where it's going to be. And that gets mixed in with some of the Board and Comp Committee thoughts and ideas, in terms of what they would like to see. And somewhere within those sets of numbers -- from those sets of numbers, emanates the plan for the year. That's how it's worked historically. As I mentioned, the Comp Committee and the Board are continuing to work on the fiscal '09 plan.

Okay. And just finally, you had mentioned three new joint deals on the -- joint QSI/NextGen clients. How are those sales booked? Is it all just falls into NextGen or does the particular revenues fall to each Division when you guys are reported?

Yes, the particular revenues fall to each Division. So if there's a QSI license piece that's in that deal, then QSI is going to get credit for that revenue.

All right, great. Thanks for the questions.

Your next question comes from the line of Bret Jones with Leerink Swann.

Good afternoon. I was wondering if we could talk about the add-on sales. And maybe I missed it. Did you disclose what the add-on sales were for NextGen or is that just going to be in the K?

Stay tuned for the K. We did not talk about that on this call but I would just defer until the K gets filed.

Okay. And then if we could just talk about, as for as the add-on sales go, at least through the first three quarters of the year, they were in the 40% to 50% range. How much room is there really to grow in up-selling your customer base? And when I say 40% to 50%, I mean 40% to 50% of total NextGen licenses.

Well, just as an overall theme here, add-on licenses were not as big of a piece as they were in the last quarter, December quarter. We had -- it was a -- proportionally, we were more on the new customer side, as opposed to add-on licenses this quarter.

And is that reflective of some of the larger deals that we've talked about in the past where they would historically be phased implementations, similar to like DHMA, as an example?

That would be one example. As Paul mentioned, the add-on sales were a little lower but stay tuned for the K. We're very happy with the new customer revenue that was generated, and while year-over-year we had a very tough comp, we're happy with system sales performance looking at the component parts. And to get to another part of your question, you asked how much room in there to continue the add-on sales. I'd characterize it as a heck of a lot.

Okay. And is that primarily from the large enterprise deals you've signed recently or is it -- just historically, it's been an underpenetrated base?

Both. There are many, many customers that, some of which are the largest health systems in the country, that will start out with a certain purchase. And as long as we go in and do a good job and the software does a good job, meets their expectations and they see what was promised coming to -- turning into reality, they'll continue to expand and purchase more software and more licenses. But frankly, it's not limited to just the large health systems, either. That takes place with some smaller practices, clinics, groups, networks, et cetera.

Great. If I could switch gears to revenue cycle management. When you guys announced the that practice solutions division, I think it was last December, maybe it was November, you talked that it was primarily aimed pretty much at the small practice segment. And I'm wondering how the HSI acquisition, does that really change the target of who you can attract as clients? Does that move you more to the mid and large practice base?

It does give us that capability. The practice solutions division was, in fact, announced in December. HSI is a terrific company that expands our capabilities across the board, small to large. And we also see a heck of a lot of synergy within our existing customer base and within their customer base. So I think it's a terrific thing for both companies.

Okay, great. One final question, just if I could, for Paul. DSO's at 136 days. Ever since the first Siemens deal, DSO's have been much higher than they were traditionally. I'm wondering, at 136 days, is that concerning at all to you? And what level do you think it should be and how do you go about working that down?

Well, you're correct that since we've been involved with Siemens, there's been an effect on our DSO's overall. And we continue to be involved with Siemens and so there still is some effect that's there in our DSO. But I would say, am I concerned? No, I'm not concerned. Our DSO's are relatively constant. You're not seeing a whole lot of wild swings there. And in terms of bringing that down, it comes -- a lot of that comes to just your basic blocking and tackling and making sure that you're following up correctly with your customers and whatnot. So, would I like to see that number move down? I think I have to say, yes, to that question. But am I concerned about -- that there's something wrong? I would say no. And the other answer there is, also if you look on a net basis, if you net out the unpaid deferred revenue and you get to an 85 number of days, that's not an outrageous number.

That's more than where it has been historically, right?

Bret, this is Lou, I'll just add one point to Paul's point, which is that cash flow has been relatively strong and write-offs have been relatively constant, if you will, not moving up materially at all. So, I would echo Paul's comment about keeping an eye on DSO's and AR but it's not particularly an area of grave concern at all.

Okay. If I could just follow up really quickly, is there something structurally in the Siemens contract that would keep it from -- keep you guys from moving it down from the 130-ish to 140-day range?

We respectfully decline to give out the details of the relationship with Siemens. Back several quarters ago, we did talk about a receivable concentration with them. We do not have that concentration at this point in time. That's to say, they do not represent more than 10% of our AR at this point in time. But past that, we haven't given out the details of that relationship.

Great. Thank you very much.

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

Hi, Paul, I was wondering if you could give the cash flow from operations number this quarter?

We're going to file the K shortly here, so I would just point you to that. As we historically have done, we get the K or the Q filed relatively quickly after the call. So, you'll have everything there for you.

Okay. And then on the deferred revenue side, was there anything unusual this quarter? I think when you look at historically, December to March, you had substantial growth this year. Is there anything to point out there?

Well, as I mentioned earlier, we had the ratio of our add-on sales versus our new contracts moved to a little more on the side of new contracts. And those typically will have more implementation services associated with those. So we also have your normal growth in maintenance, as NextGen's customer base continues to expand and there's more and more people who are beginning to pay maintenance, and you'll see that's just a natural process there. And we also have, in prior quarters, we had some amount of deferred maintenance that had been paid up-front by our significant customer and that's been worked off. And so, I think a combination of those factors is the biggest part of what you're seeing.

Okay. And then lastly, Paul, for you again, is on the tax rate, is it fair to assume that the biggest change is related to the R&D tax credit, in terms of year-over-year difference in the tax rate, or is that not a fair statement?

Well, I would say that you also have a higher benefit from the qualified production activities that we've been able to benefit from, which -- we benefited from it last year but we got a bigger benefit just by statute. And that benefit is going to remain the same next year. And then the following year, assuming that Congress doesn't change it, it's going to get even higher out in our fiscal 2011.

Okay. Thank you.

Your next question comes from the line of Constantine Davides with JMP.

Great. First question for Paul. Paul, in the past, you've disclosed the revenue from VAR's in your K. Is that something you have handy at the moment?

I don't have it handy at the moment and I'm not -- I don't have an answer for you, whether or not that's going to be in the K, either. I would say, stay tuned and we'll get that out promptly.

Okay.

We'll get the K out promptly. Just, Constantine, this is Lou. Just for clarification, we have not made it a permanent policy to disclose VAR revenue. We only disclose if we feel like it is significant enough in terms of its variations on a year-over-year or sequential basis to -- if it helps the understanding of the -- it's helpful in understanding the numbers. But it's not something that we have historically said is going to be in our MD&A discussion quarter in and quarter out.

Lou, can you just remind us of when that Siemens agreement is scheduled to terminate?

It was initiated February of '05, and until and unless there is a renewal, I believe it had about a four-year life to it. I think that both sides of that agreement are happy enough with the relationship that we -- I think both sides would like to see that continue. And so, that's not to say that it absolutely will or absolutely won't but we're having some discussions.

Okay. And then, just one follow-up on the HSI transaction. Obviously, you guys put that HMA agreement for practice solutions on the tape shortly after that deal. And can you just talk about what kind of role HSI is going to play with that? And, that is to say, would that deal have been executed without HSI through your own organic efforts?

I don't want to get too far into the exactly what HSI's role will be in the HMA agreement. I can tell that you HSI is a very capable company and will be participating in the delivery of those services. To answer the second part of the question, yes, we believe we would have executed the HMA agreement irrespective of the HSI merger.

Okay. Thanks.

You're welcome.

Your next question comes from the line of Leo Carpio with Caris & Company

Good afternoon, gentlemen. I had a quick question regarding the market, in terms of the physician market, for sales. Has there been any change or any impact from this whole credit crunch impact we've heard about last quarter on the hospitals and the physician side? And then, in terms also of the physician side, what is motivating for them to buy EHR's and practice management systems at this point? Thanks.

Well, to the first part of the question, no, we don't -- we haven't seen any significant -- or any really at all negative impact related to the credit crunch on the part of the ambulatory market. The drivers that are there in the marketplace that are causing physicians and hospitals to purchase are numerous. We've talked on prior calls, about the relaxation of Stark and the Safe Harbor that allows entities like hospitals to purchase electronic health record systems. There have been more in the way of government programs, government grants, government pilots. More talk about e-prescribing, more talk about Medicare bonuses, payment bonuses. Trying to push hard on e-prescribing and of course, e-prescribing is a key part of our system. There's more in the way of pay-for-performance out there, largely in the private sector but some government sponsored programs at well. There's a better awareness of systems, the technology is better, hardware is less expensive, bandwidth is better. There's all kinds of different drivers, things are coming together very, very nicely for the business.

Okay, thanks. That was all my questions.

You're welcome.

Your next question comes from the line of Richard Close with Jefferies & Company.

Yes. Yes, just maybe a little bit of top of the ways commentary on the market. You mentioned your pipeline at $83 million and I believe in the NextGen. Can you refresh us a little bit exactly what goes into pipeline? Maybe that the separation of add-on sales and maybe new clients of the pipeline or the composition there? And how would you characterize the overall electronic medical record market practice management? Do you see it as maybe better today than a year ago?

On the first part of your question, what NextGen refers to as, out of pipeline, are those that the total of the specific deals where we feel 50% or more confident that the deals are -- that we'll close the deals over the next 120 days. So we keep a list of all of those and what the status is and who is assigned and what the next steps are and those types of things. And if we see a probability, and there are a few input points to that, if we see a probability better than 50% and a time frame of 120 days, that's what goes into the pipeline. Pipeline has been slowly growing over the years. It doesn't fluctuate all that much. To the second part of your question, the EMR market continues to be very robust. And yes, I would say the market is slightly better today than it was a year ago.

And what would you -- is there anything you specifically would attribute it to the market being better today than last year?

Just those things that I went through. The Stark exemption is something that we have this year that we did not have a year ago. There is more in the way of pay-for-performance. Awareness is coming up. The talk about e-prescribing bonuses. I think most people feel fairly confident that the legislation that's being talked about will be pushed through on that, so there's more in the way of consumerism. I think there are a lot of things about the market today that weren't in place a year ago.

Okay. And then just stepping back or moving back to the fine line, 50% probability of closing in the next 120 days. So it's safe to say that your add-on sale potential is not included in the pipeline number? Those are new clients?

Well, no, the pipeline number does include some add-on revenue that we are aware of. Unfortunately, tracking this isn't an exact science and we're not always aware of the add-on revenue. We may get a call from a customer tomorrow, not having any idea that they were about to merge or acquire another practice and need another 100 licenses and that type of thing. So there is add-on revenue in the pipeline but it's -- tracking the add-on portion is a little more difficult.

And then maybe if you could comment a little bit on how the length of the sales cycle has changed from the most recent quarter compared to a year ago?

I would say no meaningful change. The sales cycle continues to be what it has been throughout the years. I would have predicted, maybe a year ago, that the sales cycle would extend a little bit. And we've seen that with certain sales. The very large ones, obviously take, in general, longer to close than the small ones. But with 70 new customers coming in and joining the NextGen family within the last quarter, obviously, they weren't all big ones and they weren't all long sales cycles. So, we're pretty happy with the way that piece of things is working as well.

And then, just one final question here. What would you say your retention rate is? Are you noticing that you guys are maybe being replaced in certain accounts any more or less than you have previously? And then, if you could characterize maybe the opportunities you see at replacing other vendors.

It's a very good question. We -- our retention rate, to answer the first part, is very, very good. We're a Company that's focused on quality and delivering and testing our software thoroughly and making sure that when it goes in, it goes in well and that people see a return on their investment. We do get replaced from time to time. Not all of our implementations go perfectly. And that's unfortunate and it's something that we're striving to make them all perfect. But we do, I believe, get replaced far less frequently than we replace competition systems. We do see a little bit of an uptick in replacement sales on the electronic health record side. But it's probably a piece of the market that's as robust as it has ever been.

Okay. Thank you very much.

You're welcome.

Your next question comes from the line of [Mike Meranocu] with [Millrock Capital].

Hi, Paul. I just had a couple of quick questions. The performance-based incentives in March '07, what was that number? Did you have a number for us?

I don't have it handy in front of me. I'm not sure what else I can tell you. I don't have it handy but it was a part of what was going on there.

Okay. Will that number be able to be gleaned from the proxy or last year's 10-K or something?

My recollection, and it's only a recollection, is that it may be there at a fairly high rounded level, but I don't recall exactly.

Okay. Regarding the tax rate going forward, I know you don't want to give us guidance but it sounded like maybe you're expecting the tax rate to be just generally higher in fiscal '09. Would that be accurate?

Well, from what I know today, of course, you've got the R&D tax statute lapsing situation. What happened the last time that this happened is Congress waited until the last minute and then they reinstated it. And then we had to play catch-up in the quarter that they did that. It's quite possible that that happens one more time, given that the R&D tax credit is pretty popular provision, at least in the business community. So unfortunately, that may result in some volatility in our effective tax rate but can't really predict what Congress is going to end up doing. We know -- the other thing that we know of is we have moved a good portion of our funds out of auction-rate securities, so we may have less in the way of tax free type of interest income. And that may have some modest effect on the rate. And then outside of that, those are the only two changes, I think, going forward. We won't see a change in the qualified production activities deduction next year. But as I said earlier, the following year, we're going to see that move up again in terms of our benefit.

Okay. And I don't know if you provided this in the past, but do you have any guesstimate as to what the forex impact was on the top line for the quarter or the year.

What is forex?

The foreign exchange.

We don't have any international operations, so that would -- maybe I'm not clear what your question is.

No, no, that would be it. If you have no international sales, then there's no impact.

Correct.

And then just lastly, would one expect the DSO on the maintenance business to be a lot lower than on the software side?

Yes.

Okay. So given the big sort of shift, at least this quarter from software to maintenance, at least on a percentage basis, would we have not expected the DSO's to be lower than they've been, rather than higher?

I don't have any kind of analysis of that or ability to say, "Well, here's the impact from the fact that we have more of this amount of invoices, with these payment terms, as opposed to other payment terms." I think taking a step back and looking at, certainly the payment terms on our maintenance invoices are going to be better for us, as opposed to a new contract. But I can't really tell you -- I can't really quantify what kind of impact that might have.

Okay. Fair enough.

It's not necessarily.

All thanks, Paul.

Your next question comes from the line of Steven Halper with Thomas Weisel Partners.

Hi this is actually Alan Fishman for Steve Halper. Most of my questions have been answered. My only one, Pat, if you could comment on average deal size in the quarter. It probably ticked up sequentially, is that right?

Average deal size I think came down. I believe last quarter were at around 50 new customers. This quarter, around 70. I don't have the number in front of me, but --.

Yes, Pat's statement is correct, just from the big picture point of view. Last quarter was a particularly large quarter for average deal size.

All right and then one more. The pricing environment, you said the last quarter, there was some competitors getting a little more aggressive on price in the market, at least. Could you comment on that this quarter, please?

Yes. Pretty well the same comment. I mentioned that some competitors are discounting more aggressively and I mentioned that we have reacted only on a case-by-case basis, but have tried to hold the line.

Okay, generally you'd say it would be about the same level?

Yes.

All right. Thank you very much.

Thank you.

Your next question comes from the line of Jacob [Houseman] with Raymond James.

Hi, this is actually Sandy Draper. Most of my questions have also been asked. Pat, I'm going to ask you this. You may not want to or be willing to answer this one. Could you give us any color on sort of the -- now that you've got HSI, what the go-to-market strategy is to existing customers, the focus there, versus to net new customers? And then just a line item, will the revenue from HSI go into, I would assume, somewhere around the -- in the maintenance lines or where would that revenue show up? Thanks.

Thanks for your question. You're right, I don't want to get in too deeply here related to our strategy. HSI is part of a revenue cycle management expansion strategy, as well as part of an overall strategy. NextGen has been quietly building our base of recurring visible long-term stable revenue, and this also folds right into that, or falls right into that strategy.

To the part of your question about some of the synergies in existing customers, there's a heck of a lot of synergy there. There are a lot of HSI's customers, as you might imagine, that are in the market for electronic health record systems. We see that as a terrific opportunity. Likewise, many of NextGen's existing customers are in the market for HSI services. For example, revenue cycle services, as evidenced by the HMA deal. We hope that's one of many, many of those types of things. HSI also offers things like credentialing services, that we look forward to offering to NextGen's entire customer base, which, as you know, is very significant. So there's a lot of operational synergy and strategic synergy with that deal.

And Sandy, this is Lou. Just to address the last part of your question. We are still working out the exact reporting or display of how all this going to be laid out. It's something that is under active discussion internally at this time.

Okay. Thanks.

Your next question is a follow-up from the line of Charles Rhyee with Oppenheimer & Company.

Thanks for taking the question. I just wanted to follow up on, a couple other people asking about the tax rate. If I look back here at fiscal '08, sort of your full-year tax rate was right about 37%. The year before it was about 39%. Do I take that difference to be either the R&D tax credit or is that really a function of the change in this qualified production activities deduction?

Well, hi, Charles, it's Paul. Part of what you're seeing there, too, you have to keep in mind, in the December quarter we had an executive who passed away and there was an insurance policy that the Company owned on this person's life. And that was -- we recorded some income there, some benefit that was all tax-free. So, that was really kind of a one-time event. So, you've got to consider that, along with the addition in the QPAD deduction.

Okay. So between those two is really the difference between the tax rate this year and last year?

And then thirdly, there's the fact that we had tax-free interest income related to auction-rate securities this year, which we didn't have in the prior year.

Okay. And so if we -- since we moved out of the auction-rate securities, largely, that benefit kind of goes away a little bit. And then obviously, we're not going to have insurance piece again.

Right.

Okay. All right, thanks.

Your next question is a follow-up from the line of Frank Sparacino with First Analysis.

Hi, Pat. I just wanted to follow up regarding your comments around the overall market being slightly better and then, the small end of the market being very robust. And just how you sort of reconcile that with the growth over the last sort of four to eight quarters, obviously, has been trending down? Your comments would suggest that we should be trending upward at some point but just curious how you reconcile that with reported numbers?

I guess the difference in our views is of long-term view versus a shorter term view. The market is robust. That's something that we see, we feel, we live every day. Growth in the last two quarters was higher than the growth in the first half of the year. So if we're looking at trends, that would be -- if we're looking for positive news, that would be certainly be positive. I'm not sure how else to answer that question.

(OPERATOR INSTRUCTIONS) There are no further questions at this time, sir.

Okay. I'd like to thank everyone for their interest in the Company, their participation in the call. And we will see you next time.

This concludes today's Quality Systems fiscal 2008 results conference call. You may now disconnect.