NextGen Healthcare Inc (NXGN) 2009 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Quality Systems 2009 third quarter results conference call. On the 30th January, 2009. I would like to welcome everyone to the presentation. Participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions) I would now hand the conference over to Steven Plochocki. Please go ahead, sir.

Well, thank you very much. And welcome, everyone, to Quality Systems third quarter fiscal 2009 earnings call. Paul Holt, our CFO; Pat Cline, the President of our NextGen division; and Donn Neufeld, our Senior Vice President of our QSI division join me this morning as participants. Please node that the comments made on this call may include statements that are forward-looking, within the moving of securities laws, including, without limitation, statements related to anticipated industry trends, the Company's plans, products, perspectives and strategies, preliminary and/or projected and then capital equity initiatives and the implementation of regulatory or accounting requirements.

I will now provide some summary comments on the quarter. And then Paul, Don, and Pat will follow with additional details. For the quarter, the Company recorded revenue of $65.5 million. This represents 36% growth versus prior year quarter. NextGen's revenue for the quarter was a record $61.5 million, up 40% over the prior year. Aggregate NextGen operating income was up 28% over the prior year. The QSI division reported revenue of $4 million, and Don will share with you more in terms of the continued progress of our joint marketing efforts with NextGen with federally qualified health care clinics.

Corporate expenses came in at about $3.6 million, down from $4.3 million in prior quarter, which included proxy-related expenses, if you remember, that were associated with our summer proxy contest. Fully diluted earnings per share for the quarter was $0.46 per share, up 15% over a year ago. Over the past quarter, the Company presented at the JMP Securities conference, at Oppenheimer's conference, and Piper Jaffray as well. Two weeks from now, we will be presenting at the UBS conference in New York City. I will now it over to Paul and, Paul, can you take us through some of the financial information?

Sure, thanks, Steve. Hello, everyone. As Steve mentioned we are pleased to report our consolidated revenue of $65.5 million representing a 33 -- 36% increase over the prior year. Our consolidated revenue growth, not including our recent acquisitions, of HSI and PMP was 21% on a year-over-year basis. Earnings per share of $0.46 is 15% above the $0.40 we reported a year ago. Consolidated systems sales represents a 6% increase, compared to the $23.7 million in our prior year quarter. Consolidated maintenance, EI, revenue cycle management, and other services revenue rose 66% to $40.5 million, compared to $24.4 million in the prior year quarter. Excluding revenue from our recently-acquired revenue cycle management acquisitions, this category of revenue rose 36% compared to the prior year.

Total revenue in this category accounted for 62% of our total revenue this quarter versus 51% a year ago. Our consolidated gross profit margin this quarter came in at 64.7% that's down from 66.4% a year ago. The decrease in our gross margin over last year was due primarily to the inclusion of revenue cycle management services at lower margins as well as a proportional increase in EUI and other services as a percentage of our total revenue. These services carry lower margins compared to systems sale.

Total SG&A expense increased by approximately a $5.3 million, to $18.6 million in the quarter, compared to $13.3 million in a year ago. Primary drivers of the increase included SG&A expenses associated with the new acquisitions of HSI and PMP. Other SG&A expenses in the NextGen division, as well as higher year-over-year corporate expenses.

Interest income for the three months ended December 31, 2008, decreased to $328,000, compared to $710,000 a year ago. Our interest income this quarter was impacted by much lower interest rates earned on our cash investments. As of December, we had approximately $10.6 million in auction rate securities versus $12.7 million at the end of last quarter. We were happy to see a couple of auction rates sold this past quarter.

The Company's effective income tax rate increased just slightly this quarter versus last year at 35.8%. The effective tax rate for this quarter was impacted primarily by the re-enactment of the R&D tax credit statutes which allowed us to record a benefit for R&D tax credits.

Moving on to divisional performance, system sales in the NextGen division rose 7% to $24.4 million, compared to $22.8 million a year ago. Continued growth in NextGen's base of installed users, continued add-on purchases of licenses from existing customers, as well as recent acquisitions of HSI and PMP, continue to drive higher maintenance, EDI, and other revenue in that division. Total maintenance EDI revenue cycle management and other revenue grew 75% higher compared to last year, at $37.1 million, versus $21.2 million. Organic revenue in this category grew 41%. Operating income in the NextGen division was up 28% to $22.822 million compared to $17.823 million a year ago. And our general division reported a year-over-year, a slight decline in year-over-year revenue of $3.969 million compared to $4.072 million a year ago. Operating income for this division was $944,000.

And moving on to our balance sheet, our total cash and marketable securities declined by approximately $15.1 million this quarter to $67.5 million, or $2.38 per share compared to $82.6 million, or $2.92 at the end of the prior quarter. Note that the Company paid approximately $18 million, including the repayment of acquired debt from the PMP acquisition during the quarter. Also note that the Company paid a dividend of approximately $8.5 million, or $0.30 per share, in October, 2008. The Company's Board of Directors has declared a $0.30 per share dividend for shareholders of record March 11, 2008, to be paid in early 2009. As of December 31, $8.199 million of the Company's marketable securities was included in long term assets due to the fact that these assets relate to auction rate securities with I are no longer liquid, due to the failed auctions for these securities. In December 31, quarter, we reduced our after-tax unrealized loss on our auction rate securities to $17,000, versus $994,000 as of September 30.

This quarter, our DSOs were unchanged compared to last quarter, and the year-ago quarter at 140 days. We did see some change in our unpaid deferred revenue, and that resulted in our DSOs net of amounts included in both accounts receivable and deferred revenue being up 11 days, at 99 days this quarter. Our DSOs by division were 82 days for the QSI division, and 143 for the NextGen division. Deferred maintenance and services revenue at $47.5 million was up $1.4 million from the prior quarter, and up $6.3 million compared to the year-ago quarter. The amount of deferred maintenance revenue declined sequentially due to the timing of certain maintenance billings, deferred annual licenses, and implementation and training in the NextGen division however continued to grow versus prior periods.

Finally, for those of you who are tracking this, our noncash expenses for the quarter break down as follows. Total amortization of capitalized software, $1.324 million. That breaks down to $45,000 for QSI, $1.279 million for NextGen. Total depreciation expense, $830,000. That is $84,000 for QSI, and $746,000 for NextGen. Our investing activities for the quarter were as follows. Capitalized software, $1.315 million in total, that's $57,000 for QSI and $1.256 million for NextGen. Fixed assets, $616,000 in total. That's $173,000 for QSI and $443,000 for NextGen. We had $463,000 in stock option expense. That's a noncash expense as well. And we also recorded $325,000 in amortization expense of acquired intangibles related to the PMP and HSI acquisitions.

I want to thank you all for being on this call again and your interest in our Company and I will turn things over to Donn Neufeld, Vice President and General Manager of our QSI division.

Thank you, Paul. And thanks to everyone on the call for the interest on our Company. The QSI division numbers have been addressed in detail by Steve and Paul but I would like to make a couple of brief comments within other areas of interest within the division.

Again this quarter we saw growth in new federally funded entities purchasing the QSI electronic dental record along with the NextGen EPM and EMR. We had five new joint sales this quarter and two upgrades to existing joint customers. A note in our sales staffing and pipeline, our sales staffing remains under changed from last quarter and our pipeline is approximately $5.6 million. Our pipeline is defined as sale situations where QSI is in the final three purchase choices and we believe that a sale will occur within 180 days. With that I will turn it over to Pat Cline, President of our NextGen division.

Thanks, Donn. Good morning, everyone. During the quarter, the Company executed approximately 60 new agreements and our pipeline increased slightly to $86 million. Our sales force grew by two to 68 people at the end of the third quarter.

The market front we're encouraged by the new administration's commitment to the adoption of electronic health records and some of the programs that I'm sure you heard about. We temper that enthusiasm a little bit due to the general economic conditions. We're also encouraged by the improving performance of our revenue cycle management operations and the strong results that our customers are seeing and we're confident that like our software offerings, our offerings in the RCM space are superior to anything else on the market. In closing I would like to thank NextGen employees for their dedication and hard work and thanks to our customers for the confidence that they continue to express in our Company and our products and our services. We're ready for questions.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) One moment for the question, please. The first question come from Charles Rhyee, please state your company name followed by your question.

Hi, Oppenheimer and Company. Just a couple of questions here. First, Paul, I think you were talking about the revenues here, in the NextGen division, it looks like implementation and training service revenues were down in the quarter. Am I thinking about that correctly and can you touch on why we're seeing that?

Sure. There is some seasonality to implementation revenue in the December quarter, and this particular quarter, the way the holidays fell out, that made things a little bit even more difficult for us to render some of those implementation services. This is a joint effort, implementing systems, and sometimes the calendar can get in the way. But I think Pat may have a couple other comments on that as well.

Yes, I would echo what Paul said with Thanksgiving and Christmas and New Year's and in particular Christmas and New Year's falling kind of midweek, a lot of customers don't want to have trainers in their offices at that time, that cuts it down a little bit. The only other thing I would add is that over the last couple of year, as I've said on one or two other calls, we have been really trying as a Company to make our systems easier to use and easier to implement. And I think we've seen some success in that area. And I've in the past talked about some initiatives like our computer-based training and those kinds of things. So while I think most of the slight decline is just a seasonality issue that we discussed, I hope that we're also being successful in that our systems are requiring a little bit fewer -- fewer hours to implement. Because that in the longer term is what will allow us to scale.

Great. And another question here, I think you were talking about the tax rate. It looks like that is a little bit lower than we were looking for and I think, Paul, you just mentioned, some unrealized losses on the auction rate securities. Does that -- do you get a tax benefit in the quarter from that? Is that why we see maybe a down tax rate from last quarter? Or is that just the R&D credit?

No, that really is a mutual thing, the unrealized loss on auction rate securities. That doesn't play into the tax rate at all, actually. What we're seeing this quarter is the R&D tax credit being re-enacted that allowed us to record a year to date benefit so to speak. Because we hadn't been recording any benefit in Q1 and Q2.

Okay. So then we should see the tax rate maybe either stay at this level as you're continuing to -- or did you take the entire credit for the year to date period?

We took a year to date amount in this quarter, so we did see that -- some benefit there that -- some extra benefit that we're not going to see next quarter.

Okay. Great. And then my last question here, can you just -- I know in the past, we talked about deferred revenues, and some of the reasons why changes in deferred revenue don't relate to your reported revenues, and I think one of the reasons you often talk about are a lot of your implementations can occur in a relatively short period of time, and so it never hits deferred revenue. More in general, can you talk -- give us a sense on -- so how much your current quarter books are recorded as revenues, typically?

Well, in the recurring side of the house, it is really very little. EDI, maintenance, those kinds of things are on automatic pilot. And I would also add the RCM business is also pretty much on automatic pilot. But obviously, a big portion of the system sales is -- relates to revenues that we had sold there in the quarter.

Would we say that is like over 50%? Or can you give us a ballpark area?

Well, actually, Paul, correct me if I'm not stating this properly, but our recurring revenue now with our RCM business, as a Company, our recurring revenue is about 60% now.

Oh, I understand that. And I'm not disputing that. I was just asking the software portion.

The software?

Yes.

I wouldn't want to get into an actual percentages, but I would say a majority of the systems -- now, the implementation services typically have been sold and that is stuff that has been recognized off the balance sheet. But you're looking at just the license revenue that is included in system sales, so I would -- clearly, a majority of that is what is sold during the quarter.

And my last question would be on the other line you said that is additional software licenses sold. Is that entire other line basically still software sales, just not necessarily to new customers?

You're talking about other revenue?

Yes, other revenues, system sales line. Or I'm sorry, in the EDI maintenance and other.

What is included in that line are other types of services, including annual licenses. We sell third party annual licenses, as well as some T&M service, consulting-related services. We also have some hosting services included in that category. It is just a number of different things.

Okay. Great. Thanks a lot for the questions.

The next question comes from Ross Muken. Please state your company name followed by your question.

Hi, it is Ross Muken from Deutsche Bank. Good morning, gentlemen.

Good morning.

So as we think about sort of the complexity around the stimulus package, I am looking for your comments specifically on what you think we're going to see out of the government regarding sort of saturization, and how they're going to sort of handle this whole idea of intraoperability and are we going to see kind of a get-together of people from your side of the table, from the government's side of the table, providers, et cetera, and decide on sort of how we're going to move forward here? And is that going to be sort of the in between before we actually start to see whatever funding is available start to flow to the end customers?

Well, that's a monster question and we wish we had the answer to most of it. As we understand it now, in general terms, there is the $20 billion to be broken up into two piece, $18 billion for hospitals and physicians, and probably built around some kind of a pay for performance modeling. And then $2 billion which should come out sooner. When sooner is defined, we don't know yet. And then there is about $1 billion in renovation for health IT systems, $550 million for Indian health services, which as most of you know or may not know, we've had a long-established relationship with Indian health services as a Company, and this should be a strong opportunity for us. The answer to your question, Ross, is something that we're staying very close to. Because we need to understand it as well.

The information that I just cited to you was provided to us by our government liaison officer this morning, based on information and his understanding of events last night. So we are staying as close as we possibly can to it. What we do know is that there is a desire to move fast but when you define that in terms of the government terms, we view that we might have some impact from this in the upcoming second half of our fiscal year to maybe the latter half of our upcoming fiscal year, but that perhaps the calendar year of 2011 is where we're really going to see -- excuse me, 2010 is where we're really going to see a greater impact. I don't know if I helped you at all there?

Oh, no, that is helpful. And sort of a follow-up, Steve, I mean as we think about this, what are your customers focused on now? Because here, they're seeing all of this chatter, some of it, particularly around maybe moneys being available, I mean is that causing them to think twice about implementing something today, or going through kind of an RFP process, or thinking about a solution? And then also, is there any fear on your end that we see something from the government where the government offers a competitive free EMR, maybe it is the VA solution or something like that, and that is something that they view as a benefit for the real or the low end of the market? Or do you think that that is something that is pretty much a nonstarter?

Pat, you you want to address the customer issues?

Yes, in fact I will try to address both. On the customer front, we have found that a couple of customers have stalled their purchases because they misunderstand what the government seems to be -- the direction that the government seems to be headed in. As Steve mentioned, by all indications, the vast majority of the money that will flow to health care providers will be based upon quality reporting and health quality measures and sort of pay for performance or pay for performance reporting kinds of things. We have not heard anything that says the government is going to hand a check to every doctor so that they can go out and buy systems. Maybe they learned a little bit from what they did with banks.

But if that is the case, and if the government were to announce that at a date and time let's say next year, which is early indications are pointing to that there would be bonus payments to providers if they can do -- can achieve certain quality, or do certain reporting or report certain metrics, then I think the benefits would accrue to companies like ours sooner. Because people would need to purchase and go through an implementation cycle and collect the data in order to position themselves for those things. But we have again seen some customers who say, hey, I'm just going to hold off, because I've heard the government is going to buy my system for me.

Thanks very much, Pat. Appreciate the color.

And then to the second part of your question, the Vista system, there is also an indication that as part of the bill, and some folks say that it is nonnegotiable, that the government will be offering the Vista system, or a low coast system. But I will remind everybody that the Vista system has been free and part of the public domain and that is something the government did a couple of years ago. While I don't know the differences between the free Vista system today and the free Vista system a couple of years ago, didn't really have any impact and I don't forecast that if the government makes a new Vista type system available that it will have a big negative impact on companies like ours.

Okay, great, thank you again.

You're welcome.

Thank you.

The next question comes from Mr. Newton Juhng. Please state your company name followed by your question.

Thank you very much. Good morning. BB&T Capital Markets. Good morning, guys. I did have a question regarding the production out of HSI. It looks like about a 17% sequential growth. On the top line. And we've talked in the past about upsell of the service into your customer base. First of all, success breeds selective questions. Do you see this kind of revenue growth as sustainable, one? And secondly, do you see PMP generally potentially generating similar types of growth in the future?

This is Pat. Yes, that type of growth and in fact accelerated growth is sustainable. The cross-selling opportunities are and have been tremendous. We've got a lot of very exciting deals in our pipelines and deal that we have closed that are still coming online and being deployed. So we're encouraged by what we see.

And with regard to your expectations on PMP?

Same answer. Now, PMP, as you know, that transaction was just closed a couple of months ago here, but -- so it will be a little bit slower start than what you're starting to see from HSI, but yes, we continue to feel as we did prior to pulling the trigger on that transaction that these companies can sustain tremendous organic growth.

Okay. Thanks for the color there, Pat. Longer term, as revenue cycle management ramps up, if you need to build up more capacity, and I know that you're far from this point right now, do you have the ability to expand your current facilities or would you be looking to new sites or even an offshore type of model?

Well, we're actually not too far from that point. And that I just approved some build-out, some additional build-out of current facilities, and capacity, and disk and those kinds of things based on the growth that we're seeing and what is in our pipeline. As far as offshore, I think there are opportunities and we've taken advantage of some of those opportunities. We don't want to create certainly a sole offshore type of entity or an entity that does most of its business offshore but there are a couple of rote type of things that we can and do and have offshore for quite some time. And I think most companies in our business, Athena and others, use that same type of model.

Got you. Switching gears here a little bit, just to the sales cycle, we're wondering, obviously, you gave some commentary on some customers who are choosing to delay, but in general, with the rest of your customers, are you seeing a lengthening of the sales cycle at all? Or in particular, classes of customers, small, medium or large, just kind of curious what your thoughts are on that front?

We haven't seen anything material at the low end, in the mid range. On the high end, we have seen a little bit of lengthening, not huge, but you may be familiar with the AHA study that recently came out that indicated that just about two-thirds of hospitals and health systems have indicated that they're slowing or suspending their IT investments and clinical investments and we have seen a little bit of that on the high end. However, all of this discussion about pay for performance and various hospital to physician linkage and interoperability and infrastructure discussion has a lot of the forward thinking. Health systems moving a little faster. Net-net, slightly longer.

Thank you very much for the comments, Pat.

You're welcome.

The next question comes from Constantine Davides. Please state your company name followed by the question.

JMP Securities. Thanks. Paul, I just wanted to, or I guess Pat, maybe go back to Charles' question, just around implementation revenue, and I get that there is some seasonality in that number, but that is really the lowest number you guys have had since December, 2005, and I just want to kind of understand, is there any kind of upsell versus new account issue that is going on there? Or something I might be missing?

No, if there were anything material, I would be happy to tell you about it. But no, there really isn't. As I mentioned, directionally we're trying to make our systems easier to learn, easier to use, easier to adopt. You may see a little bit of our success in that area. But most of it is the seasonality and I don't have all of the numbers in front of me, but there is nothing that would jump off the page.

And I would add that once you see our Q, you can see the details of what we have in deferred revenue, but we did grow the backlog, if you will, of implementation services, so I don't think there is necessarily any kind of a slowdown. I think the other thing to mention here is that we have had good success with selling add-on licenses to existing customers who have been successful with the product, and have continued to roll the product out and purchase additional licenses. Those folks typically don't require the same amount of implementation services that somebody brand new might. So I think you might want to factor some of that in as well.

And I guess typically, in any given quarter, or maybe the last few quarters, what is your mix of add-on versus sort of greenfield territory?

Well, I don't have any exact percentages here, but we have had a pretty good success in the add-on category and I think we've had, directionally, we've had more, proportionally more licenses being sold to existing customers included in the mix. I can just give you direction there, but I don't have actual numbers.

Okay. And I guess one housekeeping item, Paul, did you -- you didn't disclose an operating cash flow number in the release. Is that something you have handy?

I don't have it handy. Just stay tuned. As we typically do, we will have the Q out shortly.

Was it positive?

Well, certainly. Yes, as I mentioned in my notes, our cash was down in the quarter but you have to -- we're down $15 million, but you have to bear in mind that we had $18 million leave the Company related to the PMP acquisition. So you also have to remember we're paying an $8.5 million dividend at the same time. So certainly, we had positive cash flow from operations, but we bought somebody. So you have to factor that in.

Of course. Okay. All right. Thank you.

The next question comes from Franz Tudor. Please state your company name followed by your question.

My questions have been answered.

The next question comes from Atif Rahim. Please state your company name followed by your question.

Hi, it is JPMorgan. Good morning, guys. I guess my questions would be more towards Pat and jut trying to follow-up on the previous question you answered, and you said directionally the percentage o, f I guess new licenses you would be selling within your customer base would be up and I think the number you have given in the past is two-thirds so would you be saying it is getting closer to 70? Is that correct in the thinking? And then secondly, what is your win rate? And has it changed at all outside of your existing customer base? How has the competitive environment been there over the last few months? Thanks.

On the two-thirds issue, it is actually not the mix of sales to existing customers versus sales to new customers. The two-thirds number that I've cited in the past is the number of new customers that purchase both the electronic health record product and our practice management product, and that hasn't changed. That number has stayed pretty much the same. It has gone up to three-quarters and some quarters, 80%. But it seems to stay in that band. The actual percentage of new customer sales in dollar amounts or in numbers of sales to sales to existing customers is not something that we break down. But we don't see a big downturn in sales to new customers. As I mentioned in my prepared comments, we signed approximately 60 new customers in the year-ago quarter, the number was 50, though it is down sequentially from the last year so nothing alarming relative to selling to new customers. I think there is a lot of good news in our increased sales to existing customers because that is evidence that our existing customers are productively using the product and are happy with it and want to do more with it and are expanding and those kinds of things and no bad news there.

Understood. And in terms of the win rate, given you had more clients, is that a function of just your pipeline growing or are you winning more deals as a percentage of your--?

I don't think there has been any big change in our win rate. We've seen probably a little bit of a lower win rate at the low end, and probably a little bit more at the higher end. But I think they net out to be about the same. We have seen our competitors in this economic environment, and based on what is going on with some customers, pulling back a little bit, get more aggressive with discounting, that makes it a little tougher on everybody in the business, but no, nothing big on the win rate one way or the other.

Okay. And then just a quick question on RCM, too. The contribution from those acquisitions seems pretty impressive especially sequentially, what's your plan going forward? Do you think you can scale up your current position or would you be looking at more M&A within that area or any other areas for M&A going forward?

Well, I think it makes good sense for us to make sure that the acquisitions that we completed are firing on all cylinders and we're very happy with both of those companies and the people and the management teams and the customer relationships. But as we said early on in this process, we think there are a lot of opportunities for synergies, financial synergies, and strategic synergies, so we want to make sure that we have those as positive as we can get them, and if we feel comfortable with that, and as we feel more comfortable with that, I wouldn't rule additional acquisitions out. Now, talking out of the other side of my mouth, we do think that we can scale these companies, and we are adding capacity based on what we see in the pipeline.

Okay. And to fund these acquisitions, would this be mainly through stock, cash, or debt? Any idea there?

I think we would have to look at it at the time.

Okay. All right. Thanks a lot. And just one quick follow-up. I mean a new question actually. On the guidance in the past year you said you might be giving out guidance at some point. Any update there?

Well, one of the things that we did talk about guidance back in August, the 21st, at our annual analyst meeting. And one of the things that we've been observing over the last six to seven to eight months is the incredible changes that are taking place in the marketplace. With the macro economic trends and general market uncertainties, approaching historic levels, the Board in conjunction with management, we made the decision to not provide guidance for our upcoming fiscal year. There is too many changes taking place out there beyond our control. We have full confidence in exercising our strategic plan, because we have been doing that pretty much on target as we had outlined it for the upcoming year. But I've been with the Company as the CEO since August, but I've been on the Board for five years. I've seen more change in the last seven months than I've seen in the last five years. And I think 2009, just across the board, in American business in general is going to be a very complex year. So we are going to steer away from direct guidance. But we will be open. We will be available. We will be as honest and forthcoming as possible. And we will continue to be strong performers in this sector in executing the plans we put together.

Okay. That's good. That's definitely understandable. So we will stay tuned. And thanks a lot. And congratulations on a good quarter.

Thank you very much.

The next question comes Richard Close. Please state your company name followed by your question.

Yes, Richard Close here at Jefferies and Company. Thank you for taking my questions. First question I guess would be around the maintenance number from your press release. It looks like we had a pretty big sequential bump in that number going from about $17.2 million up to the $19 million, or $19.2 million, in the December quarter. Just was curious, it seems like a pretty large increase and if you could give us some details, what drives that number specifically, the timing of when things flow into maintenance, and anything around that.

Maintenance is -- this is Paul. Maintenance is something that follows the sale of our software. There is different -- different customers may have negotiated different terms, more typically though, they will start within 60 days of an installation. And there's -- I could just tell you in general, that it is something that follows the sale of licenses. If you look at -- and I grant you that there is some -- some variability in those numbers on a quarterly basis, but if you look at the year-over-year increase, it does make some good sense, based on the licenses that we've sold, and the prices that we charge for maintenance.

Okay. So I know you had a really big add-on license sale, I think for the June quarter, if I'm not mistaken. And I was curious, would something like that drive an increase in maintenance this far out in the future, hitting in the December quarter? Was there some sort of large like license deal, I mean I guess that you could point to that would all of a sudden lead to a $2 million bump in that front?

No, I wouldn't -- that is too far out. I wouldn't try to point to that. I would more point you to the overall growth in the number of licenses that are out there, which grows -- has been growing consistently every quarter.

Yes, I guess I'm looking at the software sales numbers for NextGen. And it has been pretty consistent in that 18.5 sort of range over the last three or four quarters and we haven't necessarily seen such a big jump in the maintenance. So with the system sales for NextGen being at around I think you said $24.4 million, was that the number?

Yes.

Okay. So with the system sales being at 24.4, is it safe to say that software was around 18.5, $18.5 million for the quarter?

Well, which quarter are you talking about? This quarter?

Yes, third quarter. December quarter.

Yes, if you want to back out the implementation services from the system sales line, that would give you the -- what we recognized in software license fees. Not necessarily -- it is not going to tell you other factors which play into what we're earning for maintenance. You have to remember that the maintenance -- our maintenance prices are based off of the list price of the software, not necessarily what we actually sold the software for.

Okay. So does that imply that there has been a higher level of discounting going on over the last couple of quarters?

I wouldn't -- I don't have any kind of analysis that would point to that, so I really couldn't tell you.

This is Pat. I will follow-on a little bit to that. I don't think the discounting that we've done would be up materially. I think it is on a deal by deal basis, we've discounted the software to meet the competition, or come closer to competition, but not on an overall level. Quarter in and quarter out, we find ourselves signing contracts with new customers at three times the price that some of our customers are quoting, and that is because many customers, the more sophisticated ones look at value and not just the price. They look at things like the return on the investment, not just the check they need to write. So we don't typically have a lot of pressure, but as I mentioned, there has been a slight amount of increased pressure on the discounting side.

Okay. That's very helpful. And then a quick question on the revenue cycle side of the business. Obviously, you have two companies that you have acquired. Primarily focused on certain geographic areas. Have you guys been successful in taking those services and expanding the footprints to a national level with the revenue cycle?

We have, yes.

Okay. Great. And then obviously big merger, within the industry, the Allscripts-Misys merger. I would be curious to hear your thoughts on whether you're seeing, maybe that NextGen is not being as successful in the Misys space as maybe previously prior to the acquisition, or any changes on that front?

I have not -- and I specifically asked this question of a few of our sales people and a couple of sales manager, and I have not seen any -- they have not seen any material downturn in our replacement sales to the Misys space but with that said the universe of our sales into the Misys space wasn't huge to begin with. I would speculate that we'll be less successful going into the Misys space with the advantage that Allscripts now has. And I think that Allscripts had a great advantage back when they had the relationship with IDX, and then when that -- when IDX was acquired by GE, that advantage went away, and I think they once again have some low-hanging fruit within the Misys customer base and terrific for them.

Thank you very much, I appreciate it. The next question comes from Sean Wieland. Please state your company name followed by your question.

Hi, it is Sean at Piper.

Question on receivables. What kind of DSOs do you have in the revenue cycle management business versus the core NextGen business?

They're typically 50, 60 days.

So on a net basis, I mean what -- DSOs, I know you said were unchanged at 140 days. But could we look at it on a -- DSOs and NextGen were 143 but if we backed out the life cycle management was there an uptick in DSOs excluding life cycle management?

Yes, I don't have that number handy but I think it was in the order of a few days.

So what is going on there? Because that is something that you guys have talked about wanting to bring down. And it seems to keep going the other direction.

This is Pat. There were a couple of things. Directionally, yes, we want to bring it down. Although we're not very concerned about it. We've run in, in this band for quite some time. We had a fairly sizable order that had extended payment terms that came in during the quarter which will directly affect DSOs and we also had a couple of customers that held off in paying us until the very first couple of days in January that we couldn't record in the December quarter, which, had we gotten those payments a few days earlier would have brought the DSOs down as well. I don't think there's a trend here, it's just more of an anomaly with those couple of things.

Okay. Was that sizeable order then, revenue recognized in the quarter?

Go ahead, Pat.

We were about to give the same answer Paul, so go ahead.

Pat mentioned the word extended payment terms. I just want to clarify. They're still within a range of payment terms that we typically offer but they were more lengthy than others, I guess, so to speak. So I wanted to make sure we're not talking about it. When we say extended method or extended payment we're not talking about something wild and crazy. It's still within the typical range but more lengthy than some others.

Then kind of as a tangent to that, have you seen any change in how customers are financing deals in terms of use of third party financing and access to third party financing and have you seen any meaningful change in what groups are asking for on payment terms?

No real change in the financing. With everything you hear about the credit markets you would expect a change, more difficult time financing customers or having customers get their own financing but we just haven't seen it. We have been -- any customer that has wanted to finance their system we've been able to put them in touch with our financial partners who are readily lending money and we haven't heard that customers have had difficulty getting credit on their own.

Okay. Good. And last question, Pat, what do you see in terms of the pipeline of new sales reps that you're looking at?

We've seen an increase in the pipeline. I think that might have to do with some of the difficulties that a couple of our competitors have faced, have had, but we're encouraged by a good pipeline of what we think are more talented people.

So I think you added two reps in the quarter. Is that something that would be appropriate to put into our model?

Well, I don't want to -- it is impossible for me to tell you what we will do in this quarter and next quarter. I have said directionally that we want to continue to expand the sales force based on the opportunities that we see out there and two is not an unreasonable number.

Okay. All right. Thanks.

You're welcome.

The next question comes from Sandy Draper. Please state your company name followed by your question.

Yes, it is Sandy Draper, Raymond James. Most of my questions have been answered by this point, but maybe just another follow-up to what Richard said with some of the other folks, I just want to make sure I understand this, Paul, that when do you -- when you are looking at an add-on license sale versus a new customer sale, do all additional models and add-on sales to new customers go into the maintenance line? Is that -- I just want to make sure that is correct? It sounded like that's what you said.

Yes. Well, the sale of an add-on license typically -- certainly there is going to be maintenance associated with that license, and which will go into maintenance.

I understand the maintenance will, but does the actual software license revenue go into that maintenance line? Because I question, maybe framing it very simply, what Richard was asking as well, is, intuitively, software sales should grow at or above the rate the maintenance does. And so I'm just trying to understand right now, you guys are growing your maintenance line faster than software and so I'm just wondering if there is a way to adjust that, because there is a certain portion of that maintenance line that is actually software licenses, not just monthly maintenance.

Oh, no, there is no -- there are no software license revenue in this line. That's maintenance.

So how does -- maybe so I understand then, how do you grow maintenance faster than you're growing software?

I think there is a couple of things you have to keep in mind. What we're reporting as software revenue is for the most part, we're reporting it under the residual method, under SOP-97-2, which means any discounts that have you in the arrangement get applied against the software revenue that you're recognizing.

Okay.

Now, so the -- so I guess what I'm saying is it is not -- it is not correct to just take whatever revenue we recognize in the software line and take that times 18%, let's just say, and say that is what I should have for maintenance. That -- you have to remember, our list price of maintenance, and also maintenance can be negotiated as well, what we charge somebody for maintenance, but the maintenance is typically driven off the list price of software, not what we're recognizing as license fee revenue.

Okay. That helps a lot. Then my second question, and this may have been asked and I may not have heard it, but obviously, a lot of growth in the maintenance specifically the line that was significantly higher than what I would have expected was EDI. Is there anything from the acquisitions that maybe would have gone in there, the step-up in EDI was the biggest we've seen, or did you guys run a special program, or anything -- any way to think about why EDI specifically jumped up so much?

And Pat maybe ought to speak to some of this as well. I think we've been having some good success there in EDI. Selling to the base of NextGen customers. I think to some degree, EDI has been something that we have been trying to do a better job of selling to our customers, our existing customers. And we would like to continue to do that to expand that base of customers. I think there is still -- we know that there is still more room to go in terms of not just selling EDI services to a new customer, but going out to that base of customers that -- NextGen customers that are out there, because it makes sense. I mean they're running our system already. They're already using our practice management software to do their collections. Why not go to the same company that you bought your software from to get those kinds of services from. So I think it is just, for the most part, it is a testament to the better success internally from selling to existing customers.

Okay. Great. And so just one just follow-up on that now and I will stop. Can you give me an estimate on what your penetration of your existing customer base is with your EDI services?

This is Pat. We don't have that estimate. We've got internal sort of sales forecasts and things, but I can tell you that the penetration is far lower than we think it can be, and we think we've got a heck of a lot of room to run selling EDI and not just the existing EDI, but also we're starting to bring on additional offerings, so we've got a lot of runway ahead of us.

Great. Thanks very much.

You're welcome.

The next question comes Leo Carpio. Please state your company name followed by your question.

Hi, good morning. It is Leo Carpio, Caris and Company. I guess I will probably beat up this horse again. Regarding the economy and the credit crunch, what type of impacts have you seen so far? And is there any -- does it concentrate on any particular market segment?

I don't think I have anything to add to the prior comments that I have made. To summarize them, we've seen a little bit of a protracted sales cycle at the high end, but nothing huge. We have not seen customers have difficulty in securing credit at any end of the market. We have had some customers tighten up a little bit with their purchase, just because they're kind of spooked about the economy. There are some studies that have showed that hospitals, the large systems have pulled back a little bit, but some of that is tempered by the enthusiasm and what's going on with all of the discussion of various components of the stimulus bill, and spending, and government programs, some of which are already in place, relative to pay for performance, pay for reporting, E-prescribing, and some of them that are coming down the road that seem to be showing that customers that have these types of systems will fare far better financially as they report and improve quality. So I think the economy has stalled things a little bit. I think we've been very effective at managing through it as a Company. And we're encouraged by what we see relative to the future.

Okay. And then turning briefly, have we talked about Siemens lately or any updates on that relationship?

Relationship is going well. Siemens continues to place NextGen systems within their customer base and proposed NextGen systems, we're very happy with the relationship. I believe if you ask Siemens, they would be happy with the relationship. Nobody sees that relationship ending any time soon.

Okay. And then turning to the whole Obama health care IT proposal, how quickly or what type of ramp-up would you need to meet what would be the projected or anticipated demand for systems?

Well, not knowing what that demand will be, it is impossible for me to say we will need this much time or that much time, but I will say that as a Company, we spend a good amount of time thinking about that, and how we scale, and looking at things like how we could deliver two times, three times the number of systems should the demand be there. We hope it will. And we think we've got strategies in place. We think we're pretty well positioned. In fact, better positioned than most of our competition to scale should that happen. We, as I mentioned, focused quite a lot on making the system far easier to implement. We've trained a number of -- an increasing amount of implementation partners, should we need to call on them. We've done a lot with computer-based training and E-learning programs, those kinds of things. So again, we think we're well positioned but it is impossible for me to tell you that we will need this much time.

Okay. And then lastly, in terms of the competitive environment, any competitor becoming more aggressive or just pretty much the same, same situation?

Pretty much the same.

Okay. Thanks.

The next question comes from [Jean Vanheimer].

Hi, it's Jean Vanheimer with [Ariga]. First, congrats on a nice quarter. I have two questions. First, I guess, Pat, related to your comment on studies about hospitals curtailing spending has this, have you seen this effect perhaps your start related deal -- lead activity?

We have not seen a downturn in lead activity so it's tough for me, Jean, to say, that -- we have, let me say this, we have kicked off and executed certain more agressive marketing programs in the hospital space. We have not seen a downturn in hospital leads but it's not possible for me to guess that, gee, is that a result of spending or doing more in the way of marketing, targeted toward hospitals while general starts, lead situation might be down. I just don't know that answer.

Fair enough. Then I guess in a way this could be construed as my asking for guidance, but certainly with the layering on of the revenue cycle management pieces at lower margin, is it fair to say that this is something we should become accustomed to? Higher revenue type growth but at lower margin?

First, Jean, we don't mind you asking for guidance and we'll give you as much as possible. I think Steve had mentioned that we pulled back a little bit, but directionally we do want to give you more information than we've offered in the past. And while we might not come out today and say we think our fiscal '10 is going to be X dollars here and X dollars there, we do want directionally to give you more. So I just wanted to paint that as a backdrop. What was the primary part of your question, Jean, I'm sorry?

Simply that, certainly with the layering on or the revenue cycle management components, should we become accustomed to modestly lower margins than we've seen in the past?

I hope not, Jean, I think our plan internally is to bring these companies that, granted, do have traditionally lower margins in line with the rest of our business. And while some might ask, well, how the heck are you going to do that based on the margins that you achieved on software licensing we think we've got a very effective plan to be able to get there. It's not something we'll do overnight but we predict that our margins in the rev cycle space will be far better than any other company in this space.

Very good. Thank you.

Are there any other questions? Operator?

Sorry. The next question comes from (inaudible).

Hi, guys. I don't want to prolong the call. I can just follow-up offline so thanks.

All right. Well, then I'm assuming that we're done. One of the things I'd like to say before we conclude here is in concert with the lines of questioning it's pretty clear that the marketplace right now, we have a bit of schizophrenia. We have market conditions to be concerned with overall, market, macro economic trends that have not been along these lines probably in most of our lifetimes. And then we have the other side where we have enormous incentives geared towards deferred increased adoption of practice management, EMR. The incredible demands for revenue cycle management. The government's support. The dollars pouring into the system to reach a timeline of 2014 where we can have enough critical mass of systemic health care to engage in a reform.

So you've got both of these things working at the same time. My guess is that the compelling elements of pushing this forward will outweigh and defeat the economic elements over the next year to year and a half. And we'll continue to see the further expansion of paperless electronic health care and that will move at a much faster pace though the economic conditions will slow it down. And that's our view on a going forward basis. And we will continue to execute our plans to the utmost with extreme effort and extreme enthusiasm and in conclusion we want to thank all of you for your support and I'm sure, as I get out of my travels this spring season and clearly in New York in a couple of weeks at the UBS I'll see many of you out there. Thanks again, and thanks for your support. Bye now.

Ladies and gentlemen, this concludes the Quality Systems 2009 third quarter results conference call. Thank you for participating. You may now disconnect.