NextGen Healthcare Inc (NXGN) 2009 Q4 法說會逐字稿

Ladies and gentlemen welcome to the fiscal year 2009 fourth-quarter and year-end results conference call on May 29, 2009. Throughout today's recorded presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions). I will now hand the conference over to Steve Plochocki, CEO. Please go ahead sir.

Thank you, David, and welcome, everyone, to the Quality Systems fourth-quarter and year-end earnings call. Paul Holt, our CFO; Pat Cline, our President of our NextGen Division; and Donn Neufeld, the Senior Vice President of our QSI Dental Division join me this morning as participants.

Please note that the comments made on this call may include statements that are forward-looking within the meaning of securities laws including, without limitation, statements related to anticipated industry trends, the Company's plans, products, perspectives and strategies, preliminary and projected and capital equity initiatives in the implementation of potential impact of legal, regulatory or accounting requirements. I will provide some comments and then turn it over to Paul, Donn and Pat, in that particular order.

First, we are pleased to announce that revenue for the fiscal year end March 31, 2009 was $245.5 million, an increase of 32% over 2008 revenue of $186.5 million. Net income for fiscal year 2009 was $46.1 million, an increase of 15% over fiscal 2008's net income of $40.1 million. And fully diluted earnings per share of $1.62 in fiscal year 2009 up from $1.44 earned during fiscal year 2008, a 13% increase. All three of these categories mark our 10th straight year of double-digit growth in all three of those categories, which attests to the fact that we have a strong foundation historically and we presently still have a very strong foundation to build on in preparation for our upcoming year.

Earlier in this year, the Obama stimulus package for healthcare IT laid the groundwork for a positive long-term growth outlook relative to our Company and the sector. We remain very bullish on the stimulus impact as it gains momentum throughout the remainder of this year and into calendar year 2010.

However, in the short run, particularly our fourth-quarter, we experienced delays in our closures cycle which had an adverse impact on the quarter. The lack of clarity by the stimulus plan on defining meaningful use and now a December 31 deadline for an initial set of standards have contributed to buyer delays.

Yet we are seeing activities accelerate. Increased hits to our website, increased leads as a result of that, grant requests for federally qualified health care centers are due June 2. All are contributing to the momentum and our sense of timing for a positive stimulus benefit as the year rolls on.

We continue to believe as we have stated all along that material impact will begin more so in calendar year 2010 with initial pickup later this calendar year. We've made investments in RCM this past year with the acquisitions of HSI and PMP, our two RCM acquisitions in the East and Midwest. We've made investments in sales and marketing, we've upped our budgets in those areas, we're expanding our reseller base, and we're seeking out further strategic alliances along the lines of Siemens and Perot Systems.

We've added to our implementation and training teams as well as we prepare for the continued growth off the impact of the stimulus. We have made investments in communications, website development and public relations as we have taken a leadership role in keeping the buying market as current as possible on the stimulus plan changes and new initiatives. These are all necessary investments as we prepare for an increased market move towards electronic paperless health-care. I can tell you we are ready, and we are anticipating that move as the year rolls on.

I would like to now turn it over to Paul Holt, our CFO, who will take us through the financial review. Paul?

Thanks, Steve, and hello, everyone. Our consolidated fourth-quarter revenue of $65.8 million represents a 29% increase over prior-year revenue of $51.2 million. Our earnings per share of $0.40 was off a penny or 2% from the $0.41 reported a year ago.

[Now with that] our earnings per share this quarter were negatively impacted by the lower system sales, a higher tax rate, lower interest income and a charge we recorded to other expense related to auction rate securities. Pat and Donn will talk further about system sales later on in this call.

Consolidated system sales of $24 million this quarter was down 2% compared to $24.4 million in the prior-year quarter. Our consolidated maintenance EDI and other service revenue rose 56% to $41.8 million compared to $26.9 million in the prior-year quarter. Our recurring services including maintenance EDI and revenue cycle management accounted for approximately 64% of total revenue this quarter versus 52% a year ago.

Our consolidated gross profit margin this quarter came in at 61.5%, down from 66.8% one year ago. The decline in our gross margin over the -- in the year-over-year period was due primarily to the inclusion of revenue cycle management services that lower margins as well as proportional increase to EDI and other services as a percentage of our total revenue. These services inherently carry lower margins compared to system sales.

Our total SG&A expense increased by approximately $4.2 million to $18.3 million in the fourth quarter compared to $14.1 million a year ago. The primary drivers of the increase included additional SG&A expenses associated with our new acquisitions, HSI and PMP, as well as higher SG&A expenses in the NextGen division and higher corporate related expenses. SG&A expenses as a percentage of revenue remained relatively unchanged at 27.8% compared to 27.6% in the year ago quarter.

Our interest income for the three months ended March 31, 2009 declined to $161,000 compared to $567,000 one year ago. Interest income this quarter was impacted by significantly lower interest rates earned on our cash investments.

We also recorded an expense of $279,000 related to a decline in the value of certain auction rate securities which the Company is classifying as trading securities. As of March 31, 2009 we had approximately $8.1 million in par value of auction rate securities compared to $10.7 million in par value at the beginning of our quarter. So during the quarter we sold approximately $2.6 million in par value. All were sold at par. Our upcoming 10-K filing will have more detailed information concerning our auction rate securities.

The Company's effective tax rate increased to 38.2% compared to 36.2% in the prior-year quarter. Our effective tax rate in the year ago quarter was impacted by a fairly significant benefit from stock option exercises as well as a larger amount of tax exempt interest income received in the prior-year period.

Moving on in terms of divisional performance, system sales in the NextGen division declined by 1% to $23.5 million compared to $23.8 million a year ago. Continued growth in NextGen's base of installed users as well as our 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 service revenue grew 58% higher than last year at $38.6 million versus $23.5 million.

Operating income in the NextGen division was up 13% to $21,684,000 compared to $19,133,000 a year ago. Our QSI Dental division reported a year-over-year decrease of 7% reporting revenue of $3,703,000 compared to $3,977,000 last year. Operating income for the division was $550,000.

Moving on to our balance sheet, our total cash and marketable securities increased by $14.9 million this quarter to $79.9 million or $2.77 per share. That compares to $65 million or $2.29 per share at the start of our quarter. I want to point out that our total cash and marketable securities position was down by only $1.8 million for the year despite paying approximately $30.8 million in cash dividends and making two acquisitions during the year. We believe that points to the powerful cash generation that this Company possesses.

Also note that our Company paid a dividend of approximately $8.5 million or $0.30 per share in January 2009. And our Company's Board of Directors has declared a $0.30 per share dividend for shareholders of record June 12, 2009 to be paid in early July 2009.

This quarter our DSOs declined by 11 days compared to the prior-year quarter at 125 days. On a sequential basis, our DSOs declined by 15 days. Our DSO drop was primarily attributed to the cumulative effect of the increase in revenue cycle management revenue, which generally turns over at a faster pace compared to other revenue streams; the receipt of some large payments received immediately after the end of the last quarter which we did talk about on our last call; the receipt of some large upfront payments on certain transactions and a strong performance from our collections team during the quarter. You could say it was a perfect storm of these favorable events.

While I'm pleased to see the drop in DSOs I would not assume that this represents a trend going forward. DSOs, net of amounts included in both accounts receivable and deferred revenue, was down two days at 83 days versus 85 a year ago. Our DSOs by division this quarter was 81 days for the QSI division and 127 for the NextGen division.

Deferred maintenance and services revenue at $48.1 million was up $0.6 million from the prior quarter and up $3.2 million compared to the prior-year. And once again I'm going to give out our non-cash expenses for the quarter. Total amortization of capitalized software $1,376,000. That is $49,000 for the QSI division, $1,327,000 for NextGen. Amortization of acquired intangibles $357,000, depreciation expense $746,000. That's $79,000 for QSI and $667,000 for NextGen. Non-cash stock option expense $386,000.

Our investing activities for the quarter were as follows. Capitalized software $1,378,000. That's $98,000 for the QSI division, $1,280,000 for the NextGen division. Fixed assets $1,282,000. That's $15,000 for the QSI and $1,129,000 for NextGen. Again, I would like to thank you all for your interest in our Company and I will turn things over to Donn Neufeld from our QSI division.

Thank you, Paul. Paul and Steve have already reviewed the numbers, so I would like to give you some comments on the fourth quarter. Again this quarter we saw continued success in federally funded entities, purchasing the QSI electronic dental record along with the NextGen EPM and EMR. We had four new joint sales during the quarter.

The QSI division experienced delayed purchase decisions in the quarter due to the uncertainty surrounding the ARRA Act. We had approximately $1 million of potential sales delays. Interest in the division products remains high as FQHC prospects prepare their grant proposals. We've already done about twice as many demonstrations so far this quarter as we did in Q4. As the details of the ARRA Act become clearer and initial grants get processed we expect this to translate into sales in future quarters.

A note in our sales and staffing pipeline, our sales and staffing pipeline remains unchanged from last quarter and our pipeline is approximately $6.4 million. Our pipeline is defined as sales situations where QSI is in the final three purchase choices and we believe that the sale will occur within 180 days. With that, I will turn it over to Pat Cline, President of our NextGen division. Pat?

Thanks, Donn. Hi, everyone. During the quarter, NextGen executed about 60 new agreements. As Steve and Donn pointed out we experienced certain headwinds related to the economy and to the stimulus announcements. We had a few agreements being negotiated that essentially froze because customers didn't feel they had enough information.

We do think the worst is behind us and things seem to be picking up again. The number of visits to our website has nearly doubled in the last few months from about 30,000 visits to about 60,000 visits per month. The number of bona fide leads generated from the website has also nearly doubled.

Our pipeline remains steady at about $85 million, with the new leads not yet being reflected. But we are optimistic that that pipeline is going to come up. The sales force grew by 3 to 71 people at the end of the fourth quarter. And in closing I would like to thank our employees and thank our customers for the confidence that they express in our Company. David, we are ready for questions.

(Operator Instructions) Atif Rahim, JPMorgan.

Pat you mentioned the worst is somewhat behind you at this point. Is that a fair indication that you think the revenues from software sales seem to have bottomed out? Or do you think there is another couple of quarters or so before contracts get signed and we are just seeing an increase in activity at this point but can't confirm that? And then I have a second question please.

Well, Atif, we're optimistic. But the bottom line is that it's impossible to know whether the increased activity that we are seeing, and we certainly are, will result in near-term sales. Again, we are optimistic. We've got a lot of things that we're working on at this point. Typically, that type of activity is going to lead to an increase in system sales, but I don't want to make any promises on this call.

Okay. What about the funding that health centers have to apply for by June 2? What role do you expect to play in that? And then separately on the Indian Health Services side, did you sign on any business during the quarter or is that expected to be signed sometime soon? Any update on that contract would be great.

Atif, you cut out in the beginning part of your question. Would you repeat the first part?

The question was about the health centers that have to submit their proposals by June 2 and the second is about the Indian Health Services.

The activity that we are seeing in that area for our Company is unprecedented. We've got a very significant market share, as you know. It is an area that we have focused on for many, many years, and I believe that we lead that market.

There are many, many grant proposals that are in where health centers have been speaking to NextGen about possible future purchases should they win the grant applications that they have developed and submitted. We are not part of the grant process developing or submitting grants for them. So it is impossible to know what is in the actual proposals. But we are again very optimistic.

And the same would go for Indian Health Services. Our sales people I know are very active in both of those markets. And I think I can predict that on our next call we will talk about a number of new contracts in those markets.

That sounds great. Excellent. Thanks very much.

Donald Hooker, UBS.

Thanks for taking my question. I guess quick question for Pat. It looks like the pipeline held up well. How are you defining the pipeline?

We define our pipeline as those prospective sales we think are 50% or more [likely] to close within 120 days.

Okay, got you. Is there any kind of trend there in terms of the type of physician practice or size of physician practice that you are going to -- I think you had -- are you sort of trying to go after some of the smaller doc practices?

I can't point to a trend quarter-to-quarter, but over a longer period of time we have seen the size of the deals actually increase where all -- small physician offices are participating in agreements with either IPAs or hospitals or integrated delivery networks that are purchasing these systems for their smaller community practices. So one sale to NextGen might mean 100 or 200 practices. We have not seen a meaningful shift in the number of small practices that are in our own pipeline.

Got you. I think other vendors have talked about sort of a trend towards I guess deferred pricing in subscription. Is that true for you or is that not true?

Yes. We announced our subscription pricing or software as a service model recently and proposals started to go out in about the April timeframe. We are starting to execute subscription-based contracts or I should say more subscription-based contracts. Our sales team thinks that at current interest levels and based on current activity that in the near-term we're going to be executing two or three of these types of contracts per month.

Thanks. I'll jump off. Thanks.

Charles Rhyee, Oppenheimer.

Thanks for taking the questions. Maybe the first one Steve and Pat, Steve you mentioned at the beginning and Pat you had also talked about some of the delays we saw. But one comment you made was sort of the uncertainty around the lack of definitions and meeting that -- since deadline is in December, how much of the delays are you seeing that people are really feeling that they want to see sort of the standards and definitions first before making a decision?

Secondly for Paul, can you repeat the DSO numbers again? If I heard you correctly the reported number was down 11 days year-over-year but the net, when you back out the deferred revenue portion, was down only two days. If you can just remind me what the difference is for that. And then what was the operating cash flow in the quarter?

I will start with that. We're going to file our K within the next -- either today or on Monday. I wonder if I could just sit tight on the operating cash flows until we file the K. The adjusted DSO number that I gave out reflects -- it takes out unpaid deferred revenue that is sitting both in our accounts receivable and in deferred revenue. That number did move from 85 days to 83 days as I mentioned.

Right. But I think you reported the number that is not adjusted was down 11 days. Can you just help me reconcile why? Is it just the change in the unpaid deferred revenues then?

Are you asking about what drove the drop from, in our reported -- the 125 DSO number versus last quarter?

Yes. I would think those two numbers together would maybe move together. Is that not necessarily the case?

Not necessarily. Did you hear all of the points I made earlier on the call?

I did, I did. I just wanted to make sure I understood that.

And this is Pat. I will try to take the first part of your question. We did have a number of deals, we think probably collectively close to a couple of million dollars' worth of deals, where we had been and still are a vendor of choice where the customers didn't feel they had enough information about meaningful use and timing of funds and those kinds of things.

And specifically in the community health center market there was word at a recent national meeting in Washington that it's possible or many people felt probable that clinics that were new users would see more money or more incentives, and clinics that were existing users would see a less amount of money which sort of stands to reason because the purpose is to get people to adopt and use.

However, there was no definition of new user versus existing user. So people said well, heck, if new user is somebody who buys at the end of September I'm going to wait. And I'm at least going to wait until I have that definition. And there has been some -- a lot of question about what is meaningful use and what will certification be and who will be the certification body. But most of those things, I would say the worst of it happened in the February/March timeframe and as I mentioned, we have seen -- we think the worst of it is behind us.

We have done a lot to educate the market. Our competitors have done a lot to educate the market. I think people at this point are reasonably comfortable with what the certification process will be and what meaningful use will be. Those things are not out and set in stone yet but there are a number of clues.

The meaningful use definition is high on the list for completion quickly and the current feeling is that we are shooting for September to have the meaningful use definition out for public comment, even though it may not be out until December. Finally, there is more and more coming out all the time. So again the worst, we think, is behind us as far as the information flow is concerned.

Great. Thanks a lot for the comments.

You're welcome.

Richard Close, Jefferies.

I had a couple of questions here. Pat, I was wondering if you could give us sales to existing customers versus sales to new customers in the quarter.

I don't have that in front of me. Paul is that something we typically give out? I can give you a little commentary on it. But I don't --

Commentary is fine.

Let's stick with commentary.

No meaningful shift. I didn't notice any shift one way or the other. And as I have said in the past, I think it is sort of hard to tell given that we do a fair amount of reseller business probably on the order of 20% of our business goes through value-added reseller partners. And they may show up as an existing customer because it is the reseller that puts the order in to us.

But by and large they're new medical practices that are meeting and seeing NextGen for the first time and that our own direct sales force is joint calling with these partners. Also when we sell to an existing customer, given that so many of our customers are hospitals and even national organizations of hospitals, those systems again even though the purchase order might come from an existing customer, usually the systems go to new medical practices.

Okay. With respect to the DSOs, the question on the DSOs or the change decreasing year over year, it was mentioned there were some large upfront transactions. Is there any more clarity with respect to that comment?

We benefited from getting some really nice sized deposits on some of our deals that really contributed to what happened. But those are -- that is not necessarily -- I don't want to leave the expectation that that is the new paradigm because it is not.

Okay.

I think the best way to characterize it is in the past we have seen DSOs climb up from time to time. It hasn't been because of anything earth shattering, and at this point we see them coming down and there's nothing earth shattering. It is just a lot of it depends on the size of the deposits and the size of the payments that either end users or resellers will make in the quarter. And Paul also mentioned the business in our RCM division tends to -- the payments tend to be or the DSO -- the payment period seems to be shorter.

And then Pat you mentioned I guess to one of the questions on uncertainty in the definitions and delays that you did have a couple of million dollars that you think was pushed out. Would that actually hit the P&L or was that contracts that would've been signed not necessarily all fully recognized in the March quarter?

That is a good question. Most of that would have hit the P&L in the quarter. And to do the math for you based on our margins, we're probably looking at about $0.04 a share.

And then the commentary on the 20% reseller comment, along with I guess Steve's comments in the beginning talking about investments and expanding sales and marketing with the resellers, can you give any more information in and around expanding with resellers and what you see that 20% maybe going to? I know you guys don't give projections. But should we think about that 20% getting larger as the stimulus dollars kick in?

I don't anticipate that 20% changing one way or the other. It is possible that it does but my prediction would be that it doesn't. We are, like many similarly situated companies, constantly talking about and trying to figure out how to capture as much of the incentives as possible as we get physicians across the country to adopt our system rather than our competitor's system.

Part of that has to do with educating the market and we have quite a campaign to do that. And part of it has to do with marketing and our own direct sales force, but all of those things also benefit our reseller population. On the education side we are getting somewhere in the neighborhood of 5000 hits per month to our micro site which is NextGen.com/stimulus. And we have had many hundreds, I think 800 or 1000 people attend our webinar series and those kinds of things.

And relative to the part of your question about the spending and the investments we are making that we have opened over the last few years, additional training centers where we can bring more customers to leverage one trainer across more purchasers at a time. We have worked hard and continue to work hard on our computer-based training facilities, remote web-based training and those kinds of things. But we are also hiring and training more partners and trying to make our system itself easier to implement and easier to use, all of those kinds of things that are investments in a lot of those areas.

Do you think you've made the necessary investments to take advantage of the stimulus at this time? Or is this -- you expect continued investments over the next several quarters?

It is impossible to say. In order to answer that I would have to know the amount of business that will be coming to us based upon the incentives that the physicians will see.

We are optimistic. We're encouraged. But we think we're investing properly at this point for what we think will happen and what we hope will happen. If it turns out that more than that happens or if we think more than -- if our thinking changes in the future we may wind up investing more.

Okay, thank you.

Michael Cherny, Deutsche Bank.

I just wanted to go back to the commentary surrounding the new SAS product you launched earlier this quarter. Can you talk about, kind of on the back of that, what are the market dynamics you are seeing out there? Is this in reaction to some of the noise being made by some of the other players out there regarding their SAS offering as they try to penetrate the [smaller end] of the market?

I know that is one that historically has been tough to get at, and with the stimulus the thought being that eventually this could be an easier market to penetrate. I just wanted to get your market commentary thoughts on the backdrop of the SAS product.

We see the market shifting somewhat. That is, end users are becoming more comfortable with that model on the EHR side where they had not been comfortable going back a number of years or comfortable enough to make -- sign meaningful agreements based on that model. And part of that is people have learned a little bit more about security provisions and have gotten more comfortable with web delivered solutions.

I think part of that is, to your comment or question, marketing being done by some of our competitors. I think they're educating the market to a point. But for all of those reasons we do see some market shift.

And our particular offering was aimed, if you looked at the press release, to the lower end, the practices that are solos or small group practices. But more of the larger practices and some of the enterprises are expressing an interest in that model. I would say that practice size is in the minority but we do have interest even at the high-end in that delivery model.

Great and just another question going back to your commentary about how you saw some deals freezing during the quarter. I know, Pat, you said specifically, I have the words here and correct me if I'm wrong -- a few agreements froze during the quarter. Can you give us any update on those few agreements, whether those have turned around? Or is it still too early to tell on those?

Too early to tell. They haven't executed yet but they are no longer frozen and they are progressing once again.

Great, thanks guys.

Constantine Davides, JMP Securities.

Thanks, a follow-up to an earlier question on resellers, Steve, you mentioned expanding that base and I guess just a little bit more clarity there. Are you targeting some larger national organizations similar to a Siemens or some other partnerships we have seen your competitors rollout the last few quarters? Or is this mostly building out your bases of regional resellers?

You know, we have always been working in terms of developing more strategic alliances, similar to Siemens and Perot Systems. Those usually turn out to be a byproduct of our search along the lines of strategic alliances. There are several things we're working on, but we're always working on developing alliances that will help us either enhance our product lines or business lines or expand into other ones. That is always going to be ongoing.

I think when you see the possibilities for the next few years off the plan, and we have always commented on the fact that there will be further consolidations in this market place and sector, we as a company that likes to stay at the forefront of things will always be engaged in the types of discussions that can help us strategically.

Okay. A question for Pat. That 71 sales rep total, is that an end of March number? And if it isn't, where does that stand right now?

That is an end of March number. I don't know exactly what the number would be today. We have released a couple of sales reps since the end of March and I believe we have hired a couple. So I don't have the number today but it is probably in the same neighborhood.

Do you have any idea where that heads over the next few quarters? And similarly, how do you stratify the reps heading into the next fiscal year? Are you going to break it out more by market segment or can you give us a little bit of color on how you think about allocating reps to the low and medium, high-end of the market?

We would like to get to 80 or more good quality sales reps by the end of the current fiscal year. And we're going to continue to evaluate that just about monthly to see if that needs to be increased based on the demand and the coverage, but that is where we are at the current level. We don't think we want to quickly move to 90 or 100 for example because we don't want to put our expense too far out ahead of revenue. But that should help you.

It is tough to, again, predict on a quarter to quarter basis, especially when you are going for quality over quantity. But that should help you to gauge that.

And are you going to allocate them by a particular market segment or is everybody going to have every sort of market group in their bag, so to speak?

We currently allocate them by market segment. So we have people that are focused on the lower end and we have people that are focused on the higher end. And for certain opportunities we put teams in place and those kinds of things. I don't want to get too far into the structure. But we currently segment them and I don't anticipate a change in that regard.

All right, thank you.

You're welcome.

Sean Wieland, Piper Jaffray.

The money back guarantee program you announced around HIMSS, is that having the intended effect?

We are seeing interest in it. The interest is picking up as our sales force uses it and uses it a little bit earlier in the sales cycle. We think the customers -- that the interest comes because customers want to be more comfortable that not only will the software work but it will be certified and will help them meet the definition of meaningful use and those kinds of things.

So have you actually employed that language in any of your new contracts yet?

I believe we have.

And how about cross selling in revenue cycle management? Are you getting any traction there?

We are. The result of cross-selling is -- was probably at its peak last quarter, at least its historical peak. We don't think it is at its peak relative to the future, but we are encouraged.

Okay. And then in the federally qualified health systems and Indian Health Services, can you quantify what that market opportunity might be?

I probably cannot. Anything I tell you would be guessing. There are people in my organization that would be able to answer that question, but unfortunately I'm not one of them. There are many hundreds of federally qualified health centers and community health clinics. We have probably in the neighborhood of a couple hundred of them at this point. And in terms of locations it's, I'm sure, well into the thousands. But I don't know from a dollar or market size anything more exact than that.

And another point on that. The grant deadline is June 2 and clearly shortly after there, within 30 to 60 days we will have a lot more visibility in terms of who filed for grants, how much they got, how they're going to apply it etc., etc. So we are right in the throes of the beginning of that translating into some significant business. And not just for our Medical Division but for our Dental Division as well.

As Pat indicated, we have had a long-standing relationship with federally qualified health care centers and Indian Health Services, largely because they provide doctors and dentists to the community. So that has always been a target market for us. We're kind of fortunate that some of the elements of the stimulus funnel right directly down into those two areas.

Right. Last question, given that we are two thirds of the way through your Q1, can you give us any commentary into how the current quarter is going?

Even though we are two thirds of the way through it is too early to tell given that most of our business, and I believe most of our competitors' business, comes in the last month of the quarter. As I mentioned earlier, the activity levels are way up and we do think that the worst is behind us.

Okay, great. Thanks a lot.

Newton Juhng, BB&T Capital Markets.

Thank you very much. I wanted to go back to the quota carrying sales reps and understanding that you and it sounds like a lot of your competitors are also gearing up for greater demand. I can see where you are saying we don't want to go to 90 or 100 right now because of that, but what I'm wondering about is recruitment costs for those sales reps, how difficult it is to get them on board and trained. As well as, can you pick a sales rep that already deals with doctors' offices but with different products and get them up to speed on your offerings in a reasonable amount of time to take advantage of dollars that could be -- that otherwise you might be leaving on the table?

We think we can bring good-quality sales reps aboard and that we can meet the demand that we see from the market. Again, we don't want to go to 90 or 100. But should we want to go to 90 or 100 we think we can bring them aboard and find good-quality people.

There is obviously a recruiting and training time lag, which is months typically between the recruiting time and the training time. But we haven't stopped recruiting. We are going to continue with the recruiting, continue with the resume reviews, continue with our rigorous interview processes and those kinds of things. So we have a pipeline of sales people as well.

I see. That is very helpful Pat. And this other question is actually I guess more geared more towards Donn. We've had a lot of talk about the $2 million of sales that pushed out for [them] but he also mentioned $1 million of his potential sales that seem to have been delayed. I'm just kind of curious if you wanted to give us any more commentary on that and whether or not those sales look like they might be coming kind of in a similar time frame as what Pat has been talking about?

Yes, a similar time frame to what Pat said and like we said there was the pause that we saw and people were assessing, and as the education that we bring to them and the marketplaces bring to them we'll see them getting more comfortable [to move forward].

Okay.

And just a little color on that. If you remember the stimulus was signed in February. Details started to come out in late February. March, the third month of the quarter is pretty significant for us, the -- that disruption to our closure cycle.

We talk about the pipeline and we work our pipeline pretty well. It is one of the reasons we have been one of the more consistent companies over the years. But they caused disruption to our closure cycle. And that was the reason that Pat talked about $2 million, Donn talked about $1 million where we are vendor of choice but the issues and the timing of the issues around the stimulus started to percolate in March after the signing of the bill in February. So it is just a unique sense of disruptive timing for us.

Got you Steve. Hopefully you will get those people off the fence soon.

Yes sir. We're working hard. We're spending -- it seems like we're spending more time these days as a communications company than a software company, simply by trying to inform people and let them understand exactly how the stimulus works and what the benefits are and why they shouldn't wait. They should just get going.

Sure. Last quick question, just on the other services line and the revenue. It was up about $6.5 million this quarter. I'm just kind of curious as to how you see that on a quarterly basis over the 2010 -- up at that level or should we see a little bit of a pullback as we move through 2010?

You are talking about the other revenue?

I'm sorry. The other revenue line item, yes.

What is included in that is annual licenses. Those are things that -- you sell somebody a 12 month license and you defer that upfront and you recognize that over time. So that is a fairly consistent revenue pattern. There is [TNMs] in there. We've got some amount of hosting services. So they are relatively consistent. So, I wouldn't -- I will just leave it at that. We have a policy of not giving out forward guidance, but that is more of a recurring kind of line item.

Okay, that is helpful. Thank you.

Gene Mannheimer, Auriga.

If I could just play devil's advocate for a minute. If the definition of meaningful use will not be provided until maybe September or even December, what makes you think that deals that were deferred out of the March quarter would close in the June quarter or even the September quarter?

We think, as I mentioned, that the industry now has a pretty good handle on what meaningful use will be, the kinds of things that it will include. It will not serve the country's purposes to set the meaningful use bar higher than any vendor can jump over. And as far as system capabilities, we think we are at the top of the mountain.

And from everything that is coming out through all of the educational programs and coming out from the government themselves, e-prescribing is going to be a component. Interoperability is going to be a component. Quality and data reporting will be a component. But there is enough I think now since the February and March timeframe on what the definition will be that people I think are feeling much more comfortable. Is that a guarantee? Is it a promise? No, but again the anecdotal is that people are feeling better about it.

It makes sense. And then with respect to CCHIT certification, has NextGen been certified for 2008? I assume that it is. And what is your best guess on whether the government will adopt CCHIT as the accreditation standard?

We are one of the few vendors that are certified for CCHIT 2008. The criteria for 2008 did include a significant amount of interoperability, interoperability provisions. So again we think we're very well positioned and leading the field in that area. I think probably in the neighborhood of maybe 10% or 15% of the companies that qualified for '07 were certified at least initially with the 2008 criteria.

To the second part of the question, right now the conventional wisdom is that CCHIT will be the official certification body. But it very well could be some other body or it could be a new version or a new flavor of the current certification commission. There are some people that are concerned that various vendors have people that are part of the certification committees and of course the notion is that we don't want a vendor dominated certification commission. I don't feel that this commission is vendor dominated by any means, but there is chatter about that going on.

So it's impossible to know. But we feel comfortable, again, that whatever that certification body is we're going to be able to get our system certified at the most current level as we go forward.

Okay, thanks Pat. Switching briefly to the revenue line, you made some comments about a trend toward more of your subscription offering. Can you talk about or disclose the percent of subscription type revenue versus traditional software license fees? And if that trend continues do you expect to have it -- that it would have a muted effect on revenue growth in the short run?

Based on the current interest -- levels of interest and what we are seeing in the market without any meaningful shift, it could be that maybe 10% of our contracts move immediately in that direction. When we sign a subscription model agreement or a software as a service model that does have an effect versus a license sale. So with license sales we recognize quite a bit more upfront. With software as a service model we recognize ultimately more money but it is spread over time.

The good news is that the software as a service revenue or subscription model revenue is steady. It is visible, it is recurring and a lot of people really like that. I don't see a huge drop off, but I would predict a little bit of muting but far more visibility.

Right. And maybe you have said this, but what percent of revenue in the quarter was recurring versus last year for example?

I might have to lean on Paul for that.

We said or I said that it was 60 -- I think it was about 63%. 64% versus 52% a year ago.

Okay, great Paul. Last question and I will jump off. In terms of the lead activity you mentioned has been increasing nicely from the website, can you talk about the percent of leads coming from the small, medium or large practice? And just what are your general thoughts on which segment of the market the stimulus will help the most? Thank you.

The smaller practice lead flow has picked up a little bit as the stimulus information is disseminated, but all leads are up across the board as I mentioned, roughly doubled from where they were just months ago. I think the stimulus will help the -- sort of the midsize -- it is going to help everybody, but the midsize and down to adopt faster. I don't think it is going to ultimately change the market penetration over time, but will have I believe a tremendous accelerating effect.

That is if we look out 10 years from now we might say that 90% or 95% of the market are going to be using electronics. It's going to be using electronic health record systems. I don't see a change. But there is an acceleration of the adoption curve going on and that will really help the small practices who could not previously afford to or chose not to afford to enter into the system agreements.

Great. Thank you.

Alan Fishman, Thomas Weisel Partners.

Thanks for taking the question. First you mentioned that there was a perspective in the marketplace the FQHCs would be paid more if they were new adopters rather than legacy users. What happened with that?

I think more information has come out and they are more comfortable that a new user isn't going to be defined as somebody who buys a year from now, but I don't know the particulars. We have seen, as I mentioned, the worst we think is behind us. The deal with the FQHC deals that were in the pipeline frozen have been unfreezing. Again, they are progressing at this point.

Okay. Lastly I guess on hiring, are you targeting any particular geographies beyond your regional strengths currently for a broader market saturation campaign like we have seen from some of your competitors?

No. I would say we're not targeting from a sales rep standpoint any particular geographies. There are geographies that from a marketing standpoint we are targeting and that is getting the word out. And those tend to be the geographies where there is a much heavier Medicare population as an example. That is not really a big change regarding the stimulus. That change started to happen for us when e-prescribing incentives came out because of significant increases potentially and penalties downstream related to e-prescribing.

Okay, thank you.

Leo Carpio, Caris & Company.

Good morning gentlemen. My questions are on the competitive landscape. How much have you seen? Has that changed much in the last few months in terms of competitors lining up to try to capture this stimulus package opportunity? And if so, has that had any effect on pricing?

Good question Leo. With well north of $20 billion available, competition is heating up. New competitors, existing competitors are fighting to win and we expect new competition. We expect increased competition. But I would say we are certainly not afraid of it.

We have seen a lot of large players in our space in the past. We have seen announcements where drug companies and IT companies have gotten together. There was an announcement you might remember years ago where Microsoft and IBM and others were getting together and bringing out an electronic health records system. There have been a lot of big players in the game over the years.

NextGen has partnered with a number of very large organizations including IBM, including Microsoft and Siemens and some of the others that you have heard about. We are probably not as interested in putting out press releases as some of our competitors. We're more focused I would say on results. And we are happy about the partnerships that we have and pursuing other meaningful partnerships.

To the second part of your question on the discounting, I don't see a big change over the last couple of quarters. But the last couple of quarters, Leo, you have heard me say that we have seen an increase to the extent that our competitors are discounting. So, no big change this quarter but our competitors continue to be pretty aggressive. We are not changing our pricing policies or discounting policies but we continue, as I have said, to react on a case-by-case basis.

Okay. And in terms of -- and then turning over to the issue on meaningful use, how important is that in terms of unlocking the sales pipeline? That is, is it a situation where as soon as we have full clarity the pipeline just turns on? Or is it just -- will it be a trickle effect?

I think it is more of a trickle effect. The trickle is turning into a little better flow. But I don't think it's -- everybody is going to wait until meaningful use is defined and then everybody is going to purchase after.

There have been a lot of industry reports and predictions that show that a lot of the pickup in the market will happen in calendar 2010. I don't want to dispute that or acknowledge it, but that is what I am seeing and it is certainly possible. So, hopefully again the worst is behind us. We think it is starting to pick up. But it is not going to be -- comes out for public comment in September and all of a sudden the floodgates open.

Just a little further color on that, Leo. The federal HIT policy and standard committees have now been formed and they are now just beginning to meet regularly in terms of setting these standards in terms of definition for meaningful use. And as Pat said earlier, the first definition for public comment is probably going to be out there about September 1.

When all of this started back in February and March these committees were not even set yet. So I think what we are seeing is as time goes on we're going to start seeing more and more comfort in the marketplace amongst the buying community for them to move forward. Because the clock is still ticking on 2011 when the incentives really start kicking in for them.

So somewhere between now and probably the early part of 2010 we're going to start seeing the movement take place because there will be further clarity, further understanding, further comfort on meaningful and certified. And the deadline is approaching in terms of selecting a system, implementing training and being fully operable and prepared for 2011. So as that accordion squeezes a little bit tighter, we think we're going to start seeing more movement.

And turning to the physicians, with the whole issue of the economy affecting their finances and the rising unemployed and uninsured numbers, has that had any impact on the deal flow in terms of doctors saying, yes, I hear you. Obama is (indiscernible) -- be ready for you yet. My finances worry me.

Yes, that has been a factor. That has been some of the headwind we have seen. Once again, we think the worst is behind us.

Last question, any chance we will get sent any guidance in the coming quarters or is that just still on hold?

I think you will see a trend over time toward more guidance. But until we feel real comfortable that we have better visibility, we don't want to just move to that sort of cold turkey. Steve, do you any comment on that?

No, I think that is absolutely correct. The visibility that we really need to see is the -- now that the government is in our sector and now that they are applying this money to our sector, they have a lot more control and we need to see how much of that control they're going to exercise and how that is going to influence us and the sector.

It is a whole different dynamic than the sector has been accustomed to in the past. I've been a 30 year healthcare executive. I know what it is like to drink from the government trough and they are subject to make changes periodically. We are still in the very early stages of the stimulus plan not only in terms of its application but in terms of its definitions. And we need more visibility as a company.

All right, thank you.

Sandy Draper, Raymond James.

Thanks very much. I'm not sure there are many questions left. One quick question, I may have missed it Paul, did you comment on the decline in gross margin in revenue cycle? Was there some amortization from the deals that flowed through? Was it the (technical difficulty) system acquisition was maybe lower gross margin? I'm just trying to understand the drop in the gross margin on the revenue cycle side.

Yes. Part of the growth -- first let me take a step back. As we said in the last quarter, we do have a number of initiatives and projects that we are working on that we intend to push through that will help raise the profitability in revenue cycle management. There are some initial -- when you are growing a revenue cycle management company there are some expenses that relate to, for example, moving customers off of their whatever platform that they were using and moving them onto NextGen. So we have some expenses there.

We have some expenses that relate to the initial taking on new business and we are in a flat-out growth mode over there. So, you have some of those issues that to work -- we have some of those issues that we are working through. And Pat, I don't know if you have anything else to add on that?

Yes, to maybe further clarify it, we are working hard to grow that segment of our business very aggressively. And in the RCM business the expense leads the revenue. So a new customer executes a contract we need to go in and deploy a system and train that customer. And the customer through our back-office services begins to do billing and begins to, weeks later, collect money based on that billing and only then can we recognize revenue.

The more aggressively we grow that business in the very short term, the more margins might appear to contract. So it is somewhat of a balancing act. The good news is it is growing pretty aggressively. We're seeing revenue come up and overall we are pretty pleased. As Paul mentioned we're working hard both to add that revenue but also to improve margins going forward.

Okay, thanks.

Operator, we will take one more call please.

Corey Tobin, William Blair.

Good morning. I just want to reconcile a couple of comments made. I understand the demo activity is way up in recent quarters and that there is still not perfect or greater clarity in the requirements of the stimulus package. But, Pat, just to come back a comment you made in response to, I believe, Sean's question, if the majority of the business is signed in the last month of the quarter, and as you mentioned it is too soon to comment out the current quarter looks, how do you accurately gauge if the worst of the market pause is behind you?

We gauge it more subjectively than anything, unfortunately. But with the lead activity, with the demo activity and of course we are out there talking to customers constantly. I'm out of the office right now talking to you from a hotel room because when I hang up the phone I'm going to talk to another potential customer.

So, what we are hearing from these prospective customers is what their timelines are and when they think they're going to execute agreements and achieve their requisite approvals on their end and those kinds of things. So it is tough to quantify for you. But that is what we used to make our statements.

Do you feel that the close -- you mentioned the pause, or Steve might have mentioned the pause on the close rates earlier in the quarter. It seems like those are firming up and should go back to historical norms going forward. Is that a fair way to think about it?

That is what it seems like.

I was also going to comment that part of our confidence level is fueled by the fact that these -- for the federally qualified health care systems and Indian Health Services, the grant deadline is a hard date. It's June 2. So we know at that point in time grants are in and grants will be decided upon. So sometime within the next 30 to 60 days decisions will be made and money will flow. So in terms of the federal pieces, we have hard dates on that on a practical basis.

In terms of the definitions and in terms of people's comfort levels, we are starting to see that improve as well commercially based on the hits we are getting to the website and the leads we're getting off the hits that Pat and Donn have cited in the course of this call. So, these trends are pretty good. The trends are pretty good.

Excellent. And shifting to the current quarter for a second, we have seen some bigger sequential increases in the maintenance growth recently than was posted this quarter. I'm just curious, is that related to an increase of churn or is it related more to recent system sales activity? I guess the question comes down to, we would've expected to see a bit bigger of a maintenance increase sequentially. I'm just curious why it did not come through that way.

Paul might be able to give you some more color, but it is almost impossible to gauge maintenance on a quarter over quarter basis. We might execute one agreement that defers maintenance payment for six months. Another one might defer for two months or three months. It is really impossible to track maintenance against the top line.

I would just add to that I think it is more important to look at the year-over-year than trying to do things on a quarter-by-quarter sequential basis. I think year-over-year is more meaningful.

Like you, we wish we could project it on a quarter-by-quarter basis. But it is just not possible given the nature of the agreements.

Understood. It is safe to say that there's been no change in the churn rate of the current customer base?

Sure. Very safe to say.

Thank you.

Steve?

Well, we want to thank you all for your interest in the Company. And what we want to do is reassure you that the events of our fourth-quarter, as you know from a company like ourselves, historically are really not the norm. The disruption to our closure cycle was significant based on the February announcement of the stimulus plan and then the lack of clarity that followed that.

We want you to be comfortable with the fact that the foundation is strong. Our patterns for pipeline and closure cycles are still in place and intact and that we have remedied any problems we have had in those areas as the meaningful definitions start gaining a little bit more clarity.

The organization has being gearing up. We are ready for the movement of the market in terms of the stimulus plan. We are anticipating, as we said before, some improvements in growth and impact on the stimulus rolling between now and the end of this calendar year but the real material impact hitting the market and hitting our Company in calendar year 2010. We still feel that way. But the early indications are very good.

We are in perfect position to be the right catch basin for this type of business. We expect the federally qualified healthcare system and Indian Health Services business to start materializing in the next two to three months and that will be the beginning of the movement. So we are in great shape.

We are confident in the future. We are bullish on the stimulus plan. And we again thank you for your support and thank you for your interest in the Company and look forward to seeing you on the travels out there in the market place. Thank you.

Thank you. This concludes the fiscal year in fiscal 2009 fourth quarter and year-end results conference call. Thank you for participating and you may now disconnect.