NextGen Healthcare Inc (NXGN) 2010 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the 2010 first-quarter results presentation on the July 30, 2009. (Operator Instructions). I would now hand the conference over to Steve Plochocki. Please go ahead, sir.

Welcome everyone to the Quality Systems fiscal 2010 first-quarter earnings call. With me are Paul Holt, our CFO; Donn Neufeld, the Senior Vice President of our QSI Dental division; and Pat Cline, the President of our NextGen division.

Please note that the comments made on this call may include statements that are forward-looking within the meaning of security 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 and the implementation of potential impact of legal, regulatory or accounting requirements. I will provide some opening comments and then turn it over to Paul, Donn and Pat in that order.

First, the Company posted record net revenues of $66.6 million in the first quarter, an increase of 21% from the $55.2 million generated during the same quarter of the prior year. The Company reported net income of $10.3 million, down 7% when compared to net income of $11.1 million earned in the comparable quarter of the prior year. Fully diluted earnings per share was $0.36 in the quarter, which was down 10% compared to $0.40 per share earned in the same quarter last year.

On February 17 of this year the stimulus package for healthcare IT was signed into law. It laid the groundwork for a positive long-term outlook for our Company and for the sector in general. We remain very bullish on the stimulus impact as it continues to gain momentum throughout this year and into 2010. However, in the short run the market continues to wait for clarity and certainty on the areas of meaningful use and certification.

Our latest information tells us that the criteria for meaningful use will be published for final comment by December and formally adopted by April 2010. The plan for certification will be finished by the end of August. And the transition process for certifying EMR providers will begin in the fall of this year. This is what we know as of yesterday. We continue to believe, as we have consistently stated, that material impact will begin more so in 2010, with initial pick up later this calendar year.

In the meantime, however, we are moving ahead. We are investing in sales and marketing, training and implementation and development. We are using a multimedia approach to the market in terms of our marketing plans. We are targeting physicians, community health centers, Indian health services and commercial insurance carriers.

Some of our market specific approaches include local and regional seminars or webinars on a regularly scheduled basis. The development of a stimulus micro site which keeps us up to date on all the information of the stimulus. A series of targeted direct mail campaigns throughout the remainder of this year into early next year. Telemarketing approaches for follow-up and qualifying leads. And expansion of our trade show schedule. Continual development of our communication pieces for the buying market. And the routine use of e-mail blasts to follow up on existing prospects and new customers.

Additionally, we have established a grants resource center to help our customers understand not only federal, but state, local and other grant processes which are emerging out of the stimulus plan. We are also expanding our leadership speakers series this fall, and will be carrying that into the next calendar year as well.

We are planning our user group meeting for November in Washington DC, which is obviously an appropriate setting for the times. Last year we had 2,500 attendees at our meeting. We have planned to top that mark this year. At that meeting we are going to host an analyst day similar to the day we had in Horsham last year.

You know, as the community health centers are starting to receive their grant money, and that is this month, July, right now they are getting their information on the amounts they're getting and making decisions on how to utilize it. They have a two-year process in which to do that.

As our Web hits continued to grow at a 50% growth clip, and as our leads are now more than doubling on a monthly basis out of all those initiatives that we have rolled out, we are continuing to make investments in the business.

One thing that we can control is we can control our state of preparedness for this great five-year opportunity that is ahead of us. We can't control the pace or the timing of the definition or certifying process. That's sites in the government's hands. But by adding personnel and programs now we will better ensure the future success of the Company and put ourselves in a better position to enhance shareholder value.

Now I will turn it over to Paul, and Paul take us through our financials.

Hello everybody. I'm going to start with a high-level discussion. I'm going to move on to more detail about each of our divisions. As Steve mentioned, our consolidated first-quarter revenue of $66.6 million represents a 21% increase over prior year. And our EPS this quarter of $0.36 was off $0.10 -- 10% from the $0.40 we reported a year ago.

And also, as Steve mentioned, we had -- I think the most notable items is the -- on our results you see the system sales, which were impacted by uncertainty regarding final rules related to stimulus incentives, as well as delays in purchasing decisions related to the timing of grant award announcements for federally qualified health centers. This resulted in several opportunities being pushed into the September quarter and beyond.

We do have numerous opportunities in this space for the September quarter and beyond with many of these grant award announcements being made in this month in July. As Steve cited, we have increased spending and sales, marketing implementation, development and other critical areas in order to ramp up our capabilities to deliver on future -- expected future volume related to the stimulus money.

Our total headcount increased by 37 FTEs during the quarter. And that was as a result of some of these investments that we have been making. We also continue to be very optimistic about our opportunities with the upcoming stimulus.

Consolidated system sales of $21.2 million this quarter was down 15% compared to $25 million in the prior year quarter, due to the issues that I just mentioned. Our consolidated maintenance EDI and other service revenue rose 50% to $45.4 million compared to $30.3 million in the prior year quarter. Excluding revenue from our revenue cycle management businesses that we grew through acquisition, this category of revenue rose 29% compared to the prior year.

Consolidated maintenance, EDI, revenue cycle management and other service revenue accounted for approximately 58% of total revenue this quarter versus approximately 55% a year ago.

Our consolidated gross profit margin this quarter came in at 61.1% down from 65.2% a year ago. The decline in our gross margin from last year was due primarily to the inclusion of revenue cycle management services at lower margins, as well as a proportional increase in EDI and other services as a percentage of our total revenue. These services carry lower margins compared to system sales.

Our total SG&A expense increased by approximately $5.2 million to $20.5 million this quarter versus $15.3 million a year ago. Primary drivers of this increase included additional selling and marketing expenses in advance of the stimulus plan, category expenses associated with the new revenue cycle management division, as well as other SG&A expenses in the NextGen division.

Our SG&A expense as a percentage of revenue this quarter was up to 30.7% compared to 27.6% a year ago.

Moving on to our interest and other income for the June quarter decreased down to $136,000 compared to $374,000 a year ago. And this was driven primarily by lower interest rates earned on our cash investments.

Our effective income tax rate declined to 37.1% compared to 38.3% a year ago. The prior year tax provision did not include a benefit for the R&D tax credit, as the reenactment of the federal R&D tax credit statute did not occur until the fourth quarter of fiscal 2009, and therefore we had no benefit in the prior year tax provision.

Moving to divisional performance. System sales in the NextGen division decreased 14% to $20.6 million this quarter versus $24 million a year ago. Continued growth in NextGen's base of installed users, as well as the revenue cycle management acquisitions, continue to drive maintenance EDI and other revenue in that division. Total maintenance EDI revenue cycle and other revenue grew 55% higher than last year at $42.2 million versus $27.2 million. Revenue in this category, excluding revenue cycle management, grew 32%.

Revenue cycle management revenue was up 360% to $9 million versus $2 million a year ago. We continue to grow our backlog of business, which has already been signed, but not fully implemented. And we are encouraged by existing NextGen client interest in our revenue cycle management solutions, which offer streamlined claims processing and improved cash flow practices. We have many opportunities in this space which we are working on, and believe we are well positioned to succeed in this space.

Our backlog of contracted business not yet fully implemented stood at a $6 million annual run rate as of June 30, 2009. This translates into approximately $1.5 million in quarterly revenue, which we expect to be able to achieve once we are fully implemented with our new customers.

Our gross profit margin from revenue cycle management revenue was 27.5% this quarter versus 33.3% a year ago, primarily reflecting costs associated with transitioning to the NextGen platform, as well as some initial ramp-up cost, which we are working through. We expect to achieve improving profit margins over time as we work to achieve greater operational efficiencies and economies of scale. Operating income in the NextGen division overall was down 3% to $19.4 million compared to $20 million a year ago.

Our QSI Dental System division reported revenue of $3.9 million compared to $4.1 million last year. And operating income for that division was $664,000.

Moving on to our balance sheet, our total unrestricted cash and marketable securities increased by approximately $7.3 million this quarter to $84.8 million or $2.96 per share, compared to $77.6 million or $2.72 a share at the end of the prior quarter.

Also note that our Company paid a dividend of approximately $8.5 million or $0.30 per share during the quarter. And our Board has declared a $0.30 per share dividend to shareholders of record as of September 25, 2009, to be paid in early October 2009.

This our DSOs declined by 11 days compared to the prior year quarter at 127 days versus 138 days a year ago. On a sequential basis our DSOs increased by 2 days. Our DSO drop versus last year was primarily attributed to the cumulative effect of increasing revenue cycle management revenue, which generally turns over at a faster pace compared to other revenue streams.

DSOs net of amounts included in both accounts receivable and deferred revenue was unchanged from a year ago at 88 days. And our DSOs by division this quarter was 89 days for the QSI division and 129 for the NextGen division.

Total deferred revenue at $46 million was down slightly by $1.6 million from the prior quarter, reflecting a slight drop in deferred service revenue.

And again, I will give out our non-cash expenses for the quarter, which break down as follows -- total amortization of capitalized software, $1,444,000. That is $55,000 for QSI and $1.389 million for NextGen. Amortization of acquired intangibles, $357,000. Total depreciation expense, $886,000. That is $95,000 for QSI and $791,000 for NextGen. Stock option compensation expense, $462,000.

And our investing activities for the quarter were as follows -- to capitalized software, $1.420 million. That is $67,000 for QSI and $1.353 million for NextGen. Fixed assets, $1.669 million. That is $40,000 to QSI, and $1.629 million for NextGen.

I want to thank everybody for their interest in our Company, and for being on our call. I will now turn things over to Donn Neufeld, Vice President and General Manager of our QSI division.

We continue to have success with federally funded entities purchasing the QSI electronic dental record along with the NextGen EPM and EMR. We had five new joint sales during the quarter.

Many of our FQHC prospects were awaiting grant approvals during the quarter. These started being delivered in July. We already have several of our FQHC prospects who have received their grant approvals this month.

In July we purchased the source code for a software-as-a-service dental system. This investment will enhance QSI's position in the emerging SaaS marketplace, and position the division for future growth.

Our sales staffing remains unchanged from last quarter, and our pipeline is approximately $7.4 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.

Hi everyone. During the quarter the Company executed approximately 60 new agreements. Interest in our software-as-a-service delivery model has also increased, and we have executed a number of these contracts over the last couple of months.

The size of our sales force remained steady, although we have hired a couple of people since the end of the first quarter. Interest in our products and services continues to be on the increase, with our pipeline currently sitting at over $90 million.

Thanks again to the NextGen employees, and thanks to our customers for the confidence they continue to express in the Company. And we are ready for questions.

(Operator Instructions). Charles Rhyee. Please state your company name, followed by your question.

It is Oppenheimer. Just a quick question. You talked about 60 new agreements in the quarter, but then you also talked about implementing a few SaaS agreements -- software-as-a-service agreements. Can you give us a sense of how many of maybe the 60 new agreements were in the subscription model here?

I am going to take a guess at it, but it will be a reasonable guess. This is Pat. I'm going to give you an educated guess of about five of them.

When you talk -- And I think, Steve, you mentioned about a lot of the interest has been -- interest in the product has been growing at a doubling speed here. In that interest, how much of it do you find is coming at these software-as-a-service model versus maybe the traditional license model?

It is difficult right now when you're taking a look at leads. The bill was signed February 17. We have only had one full quarter since then to start culling through the number of leads we've got and qualifying them into potential buyers. So that is still way too early in terms of their decision this early stage to determine what kind of a model they are interested in.

Thanks. The last question would be, obviously you had some higher level of spending ahead to prepare yourself for this upcoming stimulus as it comes forward. Is the number we saw here in the first quarter, is that sort of indicative of a run rate that we should think about, or is there more expense that we should expect down the road or perhaps some of this rolls off?

It was always our intent to add expenses as this entire situation was going to be unfolding. The lack of certainty and clarity is something that we have to live within. And at least based on everything we know today, that won't be established until the end of this year.

We made the decision to move ahead. We're not going to wait any longer. We wanted to make these investments. We think the timing is right for the investments. There is a lot of activity going on, a lot of questions that are unanswered. We needed to get our buying market up to speed so that we could move them quickly once there is certainty and clarity established.

So then really when is -- when do you think we're going to close this gap between higher expenses relative to the revenues? Because it seems like the software revenues in NextGen, if I am backing into the numbers correctly, were maybe down 5%, 6%. Is it like another couple of quarters before we should kind of reverse?

I think as we said in our prepared statement, we said that we anticipate the growth beginning at the tail end of calendar year 2009 and growing on a sequential basis throughout 2010 and beyond.

Great. Thanks for the comments guys.

Constantine Davides. Please state your company name, followed by your question.

JMP Securities. Pat, you mentioned, or somebody mentioned purchasing the SaaS source code on the dental site. Just wondering what your thoughts are on the EMR side? Do you guys feel that you are where you need to be with the SaaS offering that you have now? Or I guess maybe generally, if you can talk a little bit about what sort of R&D expenses you are making this year, and maybe give us some sense for the product roadmap.

This is Pat. The architecture is something that we are relatively comfortable with. We, in addition to our more recent SaaS announcement and offering and the pickup in SaaS interest, have had our software delivered using that architecture via the Internet within front ends to tens of thousands of physicians, hosted by third parties or by hospitals and communities or those kind of things. And the software is performed in that environment in a Web-based environment very, very well.

Our expenses on a go-forward basis related to the product roadmap have to do a little bit with architecture, but more so related to pay for performance, and things that will help our customers take better advantage of the stimulus dollars and achieve the interoperability that they need to achieve to reach meaningful use and those kinds of things. So interoperability, quality reporting, clinical metric reporting, prescribing those kinds of things are where the near term investing is going on.

All right. And then just one follow-up on the community health center side it sounds like that grant money is coming in. Are you -- can you just help us understand, are you starting to see RFP activity accelerate there? Or maybe can you just frame for us how big of an opportunity in the near term that might be? Because it sounds like that is the most accelerated aspect of what you might see, and maybe help us understand the timeline there in the process a little bit better.

It is tough to quantify the opportunity. I can tell you that the total potential opportunity is probably between $2 billion and $3 billion. But in order to achieve those types of levels a lot of the dollars that are unclear as to their direction would have to be directed to that segment.

The Medicaid -- the large Medicaid groups could see dollars starting to flow in late 2010. That is the last calendar quarter. And based on what we know, the Medicaid program is looking at doing an upfront payment, which might amount to slightly over $20,000 per provider. And then, of course, Medicare kicking in in 2011.

There was a little over $1 billion directed toward the community health centers, but unfortunately it isn't directed solely at healthcare information technology. There are other things that those centers can, under the stimulus package, spend that money on. So it is impossible once again to quantify.

We can tell you there is a heck of a lot more money in that market than there was. And we can tell you that the interest level -- and to get to part of your question, the level of RFPs are coming up significantly.

Our sales into that market seem to also be coming up quite a bit. As you probably know, we lead that market. So overall we are optimistic about the market, but again, tough to quantify.

Then one last follow-up on revenue cycle, and then I will hop off. Is the $6 million backlog number, which I think is what I heard, is that quoted in pipeline -- or do you generally quote revenue cycle in pipeline? And then secondly, can you just give us a sense where margins go in that revenue line this year? Thanks.

In the pipeline number there is no revenue cycle revenue. And on the margin it is tough to give you accurate guidance. We are working on the margin -- on expanding the margin. As was explained in the preamble, a lot of the investments are being made in getting customers moved over to the NextGen platform. And we are also pushing on realizing economies of scale, and ultimately integrating the acquisitions, and a number of other things as we layer on revenue and have certain fixed expenses in the business. Based on that alone, the margin should expand back to the where they were, and we are confident, beyond that.

Are there further questions?

Donald Hooker. Please state your company name, followed by your question.

It is UBS. Just a quick question, I think for Pat. I miss the number of sales people. Did you add safe salespeople or is it flat for now?

It stayed flat. We have added a couple of salespeople since the close of the quarter though, so when we talk next you should see the number come up a little bit.

You are kind of -- I mean, I guess, just thinking ahead, there is going to be -- I think we are all anticipating sort of a bolus of business coming up here for you guys. Is that an important metric to grow? Is that -- where do you want that to go over the next year or two to meet that demand do you think?

We would like to be at 80, or it maybe a little more than 80, as I have said, by the end of the fiscal year. We are focusing first on quality though and then on quantity. We've got another -- in addition to the couple that we just hired, we got a couple of other people that we are looking at pretty seriously, so you should -- we hope to meet that goal.

Right now we think it is important to make investments in addition to that area in other areas of the business, the implementation services, the support services, because it takes in those areas six months to train a new person. And we hope to have them online within that kind of timeframe. But again on the sales side we want to grow it, but we want to make sure that we are bringing on the right people, not just filling spaces.

That's fair. So I guess these people are more experienced. They are going to hit the ground running, we probably should assume, right -- or roughly?

That's correct. That is the hope.

Then just -- I won't take too much more of your time, but then that is your direct sales force. Has there been any developments on the reseller side? I mean, you still -- is that still kind of a minor channel for you? I know this isn't a quarter that is a normal quarter. It is kind of the lull before the storm. But is there any -- is that reseller channel, what are you doing here?

No big shift either way.

Is that 10% kind of -- when you look out in '10 is that a big part of your strategy or not?

It is an important part of our strategy with partners, as we have explained previously, like Siemens, for example, they are an important partner. And Siemens customers by seeing demand in their communities on the ambulatory side. So those types of partnerships and other reseller relationships are important to us. But I don't see a big shift such that more and more of our business moves in that direction.

I might guess that as our sales force -- our own direct sales force, that is, grows in size that the total percentage of reseller revenue might come down slightly, but again nothing real material.

To get to the other part of your question, I think reseller business has run somewhere in the order of 20% or a little bit less than that historically.

Great. Well, thanks for the color, and good luck with everything.

Corey Tobin. Please state your company name, followed by your question.

William Blair & Co. Thanks for taking my question. Let me start with two housekeeping questions, if I could. Paul, did you mention what the hardware number was this quarter for revenue?

No, I did not. It was a lower number. We are just getting the final touches on our 10-Q, so we expect to be able to get that out shortly so you could see a lot more detail.

You are saying lower than Q1 or lower than last year?

Lower than last year.

Lower than last year, okay. Then on the stock comp expense can you give us -- I got the absolute number, but can you give us the breakdown by expense line item?

You mean by COGS and SG&A, that sort of thing?

Exactly.

Yes, that will be coming -- that will also be coming out in our Q. I would like to defer to that document, if I could.

Okay, we will wait for that. Then just -- a couple of things related to the business, if I could. Paul, you mentioned that the backlog of signed but yet not yet implemented business was up in the quarter. Did you give an absolute number for that?

I did. And just to be clear, that is not part of the pipeline numbers that Pat gave out today, and that is not any part of the pipeline number that we have given out historically. But it is, I think, relevant when you talk about the revenue cycle management group as a whole.

Got you. What was the number again, if you could?

For the $6 million -- about a $6 million annual run rate.

Okay, that was the $6 million. Okay.

Yes.

Got it. And then finally, Steve, last quarter you mentioned that you guys were actively pursuing to expand the distributor channel, and also seeking some new alliances, like you have with Perot and Siemens and whatnot. I guess the question is, can you just give us a quick update as to where that stands, and when we should expect to see some additional announcements on that front?

Essentially what we were talking about was creating relationships that can help enhance our ability to penetrate the market at a quicker pace. The example that Donn gave earlier about our source code relationship with Planet DDS is one of those. And we are working on several others right now.

So is that something you expect to see here in the third quarter or before the end of the year or (multiple speakers)?

It is too difficult to predict the timing of these things, but we are looking to continue to prepare ourselves for this next three to five year run. That is the game right now is to make sure that we are in great shape to take on this movement over the next three to five years.

Got it. Thank you.

George Hill. Please state your company name, followed by your question.

George Hill from Leerink. Thanks for taking the call. Pat, I am wondering if you can characterize to the best of your ability what the average customer looks like this quarter? I guess who the 60 deals that you sold and went to versus what you're seeing in the pipeline with respect to who the incoming requests are coming from a practice size perspective? Also from a functionality perspective, how many of these -- the new prospective customers want to see the SaaS product versus the thick client product? And just what the average deal trend should look like?

Great question. In the quarter under discussion we did see a bit of a pickup at the lower end, and a little bit more interest on the SaaS side. Anecdotally, I can't, once again, nail this down, but anecdotally probably about half or a little bit less than half of the people that expressed interest in the SaaS model initially might flip over to a software model, if that helps you gauge things at that lower end.

We saw a little bit of a slowdown, nothing again material, at the high end. We saw the interest level pick up at the high end. There is more, I think, in the pipeline on the high end that is sort of seven-figure deals. But no huge shift.

We do think over the next maybe few quarters we could see a little bit more of a pickup at that higher-end, as some of the clarity that we have been talking about surrounding the meaningful use definition and the certification body and the certification criteria and those kind of things is much more solid.

A brief follow-up then, because that is an interesting comment. What do you think is driving practices at the low end to want to switch from the SaaS type offering to the thick client offering?

I think it is a matter of dollars and cents. At the low end we charge $599 per provider per month. I think provided a practice can get adequate financing based on where interest rates are, and based on the cost of purchasing licenses and purchasing hardware, if you do a five-year return on investment analysis, and then take it a little bit beyond five and maybe go to six or seven, which is more accurately reflecting the life of these kinds of systems, it becomes pretty clear that it is more economical to purchase the software.

Now if either the credit is not available or people don't choose to make the upfront capital expenditure, the software-as-a-service is a terrific model -- or if they are not quite as comfortable making the upfront purchase.

I am sorry. Then I'm going to have to follow up with one last one. So then can you remind us again what is the ASP right now on the thick client product for the EMR and the combined product, and what is the pricing environment looking like?

The $599 per provider per month for either one of our products, that would be the practice management system or the EHR, $799 for both.

And that is the thick client, the software product?

The thick software purchase gets a little more complicated. There is a practice license that is about $20,000, and then a per provider per product price of about $10,000. And then when purchased together there is a bundled EHR practice management price of $15,000. So a solo doc would see a retail price tag of about $35,000 on the software side. And of course there are, like our competitors, optional charges for interfaces and certain other ancillary modules.

Okay. I appreciate the color. Thank you.

Anthony Vendetti. Please state your company name, followed by your question.

Maxim Group. Since we are talking about pricing, maybe a follow-up on the RCM. The gross margin for that was a little bit lower, as you said, as you are ramping up that business. Can you talk about the pricing strategy for that and how you intend to get that gross margin back up over 30%?

The pricing structure tends to be a percentage of collections model. I would rather not disclose our strategy that is trending, whether we are going to be moving to a higher percentage or a lower percentage or those kinds of things. And the margin improvement we think comes, once again, from layering additional revenue on top of a lot of fixed expense, getting through initial implementation expenses on some of these large accounts that we have signed, realizing economies of scale, integrating acquisitions and some other things.

So the implementation fees associated with that, you are absorbing most of that cost or all of that cost for --?

When it comes to switching to NextGen platforms, the companies that we acquired used competitive software, so when we are changing customers from a competitor's product over to NextGen product, that is something that we bear the expense for. That is a multiyear process, not something we are going to get done or absorbed expensewise in any given quarter or two. But it is a longer-term thing.

Then certainly as you sign new large accounts there are some initial expenses. If you're charging on a percentage of collections basis, you need to get systems up and going, train customers, do their billing. And once the customer collects then you can invoice the customer and recognize revenues. So expense leads revenue in that market to an extent, even if you are charging for certain training in those kinds of services.

And on the guarantee front, I know you mentioned this last quarter, you said you signed up a couple of deals that provided a guarantee that you will meet meaningful use -- the meaningful use criteria when they finally do come out. Any follow up on that? Has that translated into more sales or are customers really not focused on that?

Customers are I think increasingly focused on it and so our consultants. We are seeing more consultants in the industry ask for it in customer contracts or ask about our policy. I think once again that has to do with the market becoming a little bit more educated. Not only have we made an announcement of our money back guarantee, but one or two of our competitors have done the same. And it is something that I think is becoming a little more commonplace, so more and more customers are interested in it. I think it has helped us make a couple of sales that we might have not otherwise made.

Okay. And lastly, on the distributor front, obviously Siemens and Perot, and there has been some discussion there. Do you think that it is necessary to increase that network? I know it is about 20% or a little less than 20% of sales. But in order to get access to the smaller physicians, do you think with your current distributor network and, let's say, you ramp up to a little over 80 salespeople, do you feel that that is enough, or you are actively looking for other VARs?

We are pursuing other relationships. We don't want to just add a sales channel of small companies to go out and sell into their community, but more of the strategic partnership type of nature. I would not characterize it as necessary based on the way you phrased your question. But it may be desirable based on terms and market coverage and those kinds of things, which is why we are pursuing those kinds of things.

The difficulty is achieving the right partnership with the right organization, somebody that not only has the feet on the street, so to speak, but is also quality oriented and will represent the product well and where the economics work and many other things work at the same time.

So maybe desirable, not necessary. We are optimistic relative to the future and our ability to sell into the market. We are happy with the way the interest is picking up. So I don't see it as a critical path item, but something that would -- I guess I would characterize as icing on the cake.

Okay. And just lastly, you talked about -- I think Steve talked about the meaningful use and the timeline for that. Can you just remind us, Steve, what you think the certification process is going to be and how that is going to differ from the meaningful use, and sort of the timing of that, whether it is going to be different bodies involved in that? What is your sense of how that is going to roll out?

Well, we had a meeting just yesterday with our government liaison personnel and it changes daily. The information I provided in terms of a macro view that meaningful use will be published for final comment by year end and will be fully adopted by April is probably going to occur. And then, of course, the certification process is going through a number of iterations.

One most recently is that there may be multiple certifying bodies, CCHIT being one of those and then others. But none of that has been defined yet.

At that very same meeting, one of Mr. Blumenthal's people spoke to ourselves and others and said, "We know we froze the market with the lack of clarification and lack of certainty; it was not our intention, but we are moving as quickly as possible."

So we think those timelines are correct. We think that it will be as we have said since February that rolling into 2010 there will be certainty and clarity, and thereby, the buying market will no longer have any reasons not to move ahead. That is really what we are looking for. The five years of the stimulus plan where the government wants the remaining 80% of the market to become electronic -- when if you look at back it took eight years to get the first 20% done -- the opportunities for us are just enormous, and that is why we are making the investments we are making today, and we will make further investments to make sure that we get more than our fair share of that market growth.

Bret Jones.

Brean Murray. Pat, I was just wondering when you were referring to this difference between the SaaS deals or the preference for SaaS deals versus license deals, I was wondering which model you guys prefer and which one you're pushing for clients to adopt?

We don't have a strong preference either way. I think I could tell you that if all of the interest came in one month or one quarter on the SaaS model, we would deal with that. We would cope with it, and we would need to communicate with the people that follow the Company and write on the Company accordingly.

But we, as I have mentioned on prior calls, have strategically felt that we want to increase the Company's recurring visible revenue and profit over time. So a SaaS model is something that we don't shy away from.

On the other hand, relative to near-term revenue expectations, near-term profitability and carrying costs and those types of things, we still have our license model as our primary model. We try not in other words to go out and shift somebody who is interested in one model over to the other model, but kind of take it as it comes, hopefully having our sales reflect what the market wants and hopefully doing what is right for the customer.

Okay. I guess when I heard you talking about the ROI, it sounded almost as if you were trying to educate the market in terms of which one is a better economic deal for the provider. And obviously the flip side of that, if it's a better economic deal for the provider, it's a worse economic deal for you.

Yes, I would say it is more of a defensive posture and an education process. That is the customers as they are purchasing or just prior to purchasing very often usually ask us, hey, what would it look like this way? What would it look like that way? And they will ask us to spreadsheet it for them and help them with their modeling and things, and that is something our salespeople are trained to do.

Certainly in the very long term, the SaaS model is better for our Company. It is a model that has our customers essentially paying us forever on a monthly basis rather than a one-time license fee recognition and maintenance. So again, what is better for the Company really depends on whether you take a near-term view or a long-term view.

Okay. Yes, I know, I was just trying to figure out which view you guys are approaching it from. But it sounds balanced.

We think so.

Okay. Just one more question then on the stimulus and how you view that relative to Stark, whether it supersedes the impact of Stark. I would imagine it would.

And relative to that, what does that say about your partnership with Siemens? Does that sort of diminish the relevance of that partnership with Siemens if Stark-related deals are losing importance in the market as physician practices are just utilizing the stimulus package to buy EMRs for themselves?

To the first part of the question, I do think that the stimulus package has, as you put it, superseded to some extent the Stark relaxation and the positive impact to our business based upon the relaxation of Stark. And that is, as I think I may have mentioned on the prior call, some folks say, well, gee, if the government is going to be paying people to use these systems, why should we? And we have seen some of our hospital accounts that we are purchasing for their community practice based on the Stark relaxation. Ratchet that back either entirely or on a percentage basis.

To the second part of your question, that is relative to Siemens, no, we don't think it minimizes the importance or quality of the relationship and the outcomes. Siemens is in many, many hospitals, as you know, nationally and internationally, and there are communities of physicians surrounding those hospitals that will be seeing stimulus dollars, and those physicians are still needing to achieve in their communities interoperability, and that very often can start with interoperability, not only amongst themselves but with hospitals and other constituents. And Siemens' customers do come to Siemens looking for advice in that area. So I don't think that the Siemens business has or will fallen or will fall off.

Frank Sparacino.

First Analysis. Just one question, Steve or Pat. Just following up, I think, Steve, you had made a comment around the policy committee meeting a few weeks back. Is it fair to say that there is more decision at this time and it's a tougher selling environment if we exclude what is happening from a community health center marketplace? Is that a fair conclusion as to the state of the market and maybe short-term expectations around sales?

Well, I think the way to look at it is that people entering the market around the stimulus dollars clearly want to make sure that beginning in 2011 that they are going to have an electronic medical record that is meaningful and certified. And until there is absolute clarity and certainty on that, this is the hesitancy we are talking about. I mean there's many deals that we are a vendor of choice on, but people are waiting for these final determinations to take place. So that is the situation we are caught up in.

But we know that that will be remedied. We know that there are timelines set to remedy that and that the upside beginning in 2010 and beyond is enormous for our Company and for the sector.

Just a follow-on -- this is Pat -- I think it is somewhat balanced. I think that the market is a little bit tougher in some respects and that competition is reducing pricing a little bit more. There are more competitors coming into the market. There is more money being spent, not only by us but by our competitors. The freeze that we have talked about or the slowdown that we talked about, all of those things create headwinds. However, as we have also discussed, there are tons of -- there is a lot of tailwinds here as well. And once again, it really becomes a timing issue.

Leo Carpio.

Caris & Company. I have a couple of quick questions. First, regarding the difference in the EPS, could you quantify how much of that EPS was for these preparation costs or the staff buildups and sales?

This is Paul. Yes, if you look at our total SG&A compared to last quarter, you will see it is up about $2.1 million, and not all of that is related to this buildup but a good portion of it is. And that translates into around $0.03 to $0.04.

Okay. And then turning over to the pause in sales, is any of it influenced by the potential Obama health care reform? Or is it just strictly all on the concerns over the certification process and meaningful use?

We don't think there is a lot of stall coming from the recent health care reform discussion. We think overall the healthcare reform situation will be positive for the Company. We think physician reimbursement will increasingly be based on quality and reporting quality and clinical metrics, and in order to do that effectively, physicians need systems, and part of the healthcare reform discussion in Washington has been penetration of electronic health records by the year 2012 more than doubling current adoption and those kinds of discussions. So we don't think there is a lot of bad news in the discussion or stall coming out of the discussion. But, of course, nobody knows exactly what healthcare reform means or will be. So it is very difficult to say ultimately whether it is going to help us or hurt us.

Okay. So if I'm understanding it correctly, at this moment it is just mostly meaningful use, certification and then a little bit of the economy that is causing the physicians to hesitate a little bit on putting their orders in?

I think that is basically the case.

Okay. And then lastly, in terms of competition, you mentioned that you are seeing more competitors. Anyone in particular that has emerged as a new competitor, or is it just smaller mom-and-pop shops that are still fighting on, or is it just the established players?

No, we are seeing more competitors come into this space. It seems like we are hearing about a new company or a new competitor every couple of days. The smaller mom-and-pop shops -- I heard about another one yesterday, a company that I had never heard of before. I would not call them real competitors at this point, but there is just kind of more noise in the marketplace. Existing competitors, no big change there.

And then lastly, sorry to beat the dead horse on meaningful use, the committee has met a couple of times and they seem to be progressively lowering the bar on the requirements. Is there any threshold or bar at which point you think it is just way too low?

Yes. Those of us with very powerful feature-rich systems want to set the bar pretty high. We think we lead the market relative to interoperability and clinical and metric reporting and paper performance and many other areas. So our goal is to help the government to understand that the bar ought to be pretty high. And obviously the mom-and-pop shops we just talked about, new entrants in the market, their goal is to lower the bar and lower the certification criteria and say, well, gee, if I only do e-prescribing, can I call that an electronic health record and can we get certification just for that? Or if I only do certain clinical reporting, can we get certification for that? And I think we have to -- as a nation kind of take a step back and look at what are we trying to achieve here and what helps us with these huge healthcare cost burdens that this country has and what helps us to truly improve quality. And that is a more comprehensive certification and setting the bar relative to meaningful use pretty high.

Okay. And I think you raised the point -- I think one of the proposals on certification is a potential certification on modules like, for example, an e-prescribing module and so forth. How would that impact you if they decided to embrace that approach?

Well, I don't think that it will impact us a heckuva lot. I see it as more of a nuisance and more -- because I don't believe that the government will put out the maximum stimulus dollars for a physician that is just doing e-prescribing and ignoring interoperability and ignoring quality reporting and paying for performance. Again, reimbursement we think is going to be increasingly based on quality and achieving certain quality metrics starting with reporting but then achieving. And e-prescribing, while it is terrific and does help and can help reduce errors, is not the end game. And I believe physicians see that and will see through it, and all these companies that say, hey, start with e-prescribing and by the time you are ready for more, we will build it, I don't think are going to do very well in our marketplace.

Okay. Well, thank you for answering my questions.

Jamie Stockton.

Morgan Keegan. Pat, when you look at physicians that have already rolled out some of your EHR functionality and you look at the criteria for meaningful use that have been outlined thus far, what do you think the incremental potential with those existing EHR customers looks like?

A great question. Almost impossible to quantify. I think there is a little bit of opportunity there, but our systems as they are delivered are pretty darn comprehensive. So there are additional products that those customers may be interested in to make the achievement of meaningful use a little bit easier on them or adding components to, for example, be able to better communicate and exchange data with their patients electronically. We have those offerings that are not very well penetrated into our customer base. By and large, most of our customers have what they need to achieve meaningful use.

But most of them have a patient portal or these are some of the things that look like they are going to fall more into the third year of adoption with something like a patient portal, something like having that lab interface in place?

I think those are the kinds of things that our customers will perhaps add on in the future. But it is once again tough for me to quantify not knowing exactly what the criteria will be and what the definition will be whether it is simply a portal or whether that portal will have to have the ability to securely communicate certain types of forms or gather certain information, self history and other clinical metrics related to treatment.

So, for example, if a patient is diabetic, will the clinical portal be responsible for taking glucose levels and certain daily readings based on some disease state or issues, or is it just sort of a secure e-mail type of portal?

But all of those things can be achieved. We have got product for all of those things, and we will just have to wait and see again what meaningful use and what the certification criteria turns up.

Yes, and my only other question was somewhat along those lines, and it is with your community health solutions. That is a product that does not look like a lot of your competitors have. You know, having physicians be a part of a health information exchange what the net community looks like is something that is going to be required probably in the third year of adoption. Have you seen more interest in that product lately?

We have. We have seen tremendous interest in the product. It is a significant competitive advantage for us at this point. But, however, as you pointed out, if that type of interoperability is not required for a number of years, realistically our competitors will work hard to develop those kinds of things. A lot of them are out there telling prospects that they have them today, which is somewhat interesting to me.

But yes, right now there is a tremendous amount of interest. We are very proud of the product and what our customers are doing with the product. But in the long term, I think some of our competitors will work hard to catch up.

How many communities are you in today with that roughly?

I don't know the exact answer, but I'm going to give you a guess that it is between 40 to 50.

[Mohan Madoo].

Piper Jaffray. I was wondering if I can get a little more clarity on new hires, the 31 FTEs there were hired in this quarter.

No, that would be 37 FTEs. They were pretty well spread amongst all the areas that we mentioned -- marketing, sales and marketing, implementation and development, those types of things. Pat may be able to add a little bit of color on that, too.

Yes, as I mentioned on the implementation and service and support sides, it takes six months or more to train people to a level of effectiveness. So if you anticipate business coming six or nine months from now, you want to start hiring those people about now and getting them up to speed.

We've talked about a couple of salespeople. Steve talked about the marketing people. On the software side, as I mentioned, if you think about our product roadmap and what we are doing relative to interoperability, paper performance, quality metric reporting to keep our products ahead of our competition, once again you can see that we are hiring in just about every area of the Company. And when you hire, of course, software developers, you also need to test your software and document your software, so it is not just hiring a software developer. There are other areas of the Company that you need to build up as well.

Gene Mannheimer.

Auriga. Two things. First, Pat, you mentioned a $90 million pipeline. Could you just remind us how that compares with the last couple of quarters?

Yes, it is up I think about -- I don't have the number in front of me from the last call, but I think I recall it is about $85 million. So that was a pickup, I think, a slight pickup over the prior quarter. So I think it is a meaningful update in interest.

Okay. So given the stimulus, you would expect it might trend up over the next couple of quarters. You mentioned six to nine months, you know, citing an increase in demand. Is that the way we should think about it?

Well I'm hesitant to guide you one place or another on pipeline. We may very well see a big uptick now and then something that gets flat. But at the same time, we might see an increase in the closure rate. So stay tuned, I just don't know how to give you guidance on that. I wish I did.

No problem. This is I guess for Steve or Pat. Steve, actually your comment on multiple accreditation agencies beyond CCHIT, clearly NextGen is CCHIT certified. So there's an obvious expectation that you will also need the HHS certification when that is defined. But is there some type of GAAP certification measure that you will first need to satisfy to fill any potential holes in CCHIT? Hopefully I'm clear on that.

Well, we are CCHIT accredited. So we -- if there's any holes there, we have filled them obviously. They key is going to be how in depth are the 22 objectives for meaningful use going to go? And the push and pull that is going on right now in terms of -- that has led to the discussion about multiple certification bodies.

As Pat stated earlier, we, of course, want the standard tie because we have a robust feature-rich system that can satisfy it. But there are many groups out in Washington that don't have the same types of capabilities. So they obviously want the standard set lower.

So this push and pull is going on right now, and at some point according to I think what we said earlier in our prepared statement, at some point in August they are going to have to pick some kind of certification process and then, of course, in the fall roll out the proposals in terms of meeting those.

So we don't know yet. This information we learned was just yesterday, and it came out of some of the more recent discussions.

Richard Close.

Jefferies & Co. I was just curious with respect to 37 individuals that you did hire in the quarter. It sounds as though from a sales standpoint, systems sales and the pipeline, that you don't necessarily expect much improvement in closing deals for the remainder of this calendar year. But I'm trying to get a feel of whether the 37 people are enough currently, or did you expect to add from here on top of that 37 over the remaining months of this year?

I think the hope is that we will see an increase in system sales in the coming quarters. Once again, I want to be careful not to give you guidance in that area, but we are hopeful. We hope that as we see clarity with some of the things that we have talked about, that the close rate does increase.

Now on the 37, as I mentioned, we have added a couple of salespeople. We think we are about to add maybe a couple additional salespeople, and I think you will see us continue to make investments across other areas of the Company. But I think I can say that the rate of our doing should slow here in the next quarter or two.

Okay. And then the people that you're bringing in, I would assume that there is going to be greater competition for quality people based on the expected increased level and demand. How would you characterize the people that you are seeing and interviewing and hiring? Are they new to healthcare? Will they require more training, more education, any feedback on that front? And maybe thoughts on building the bench on a go-forward basis, how much effort is it going to cost you guys, time and effort, to get those people up to where they need to be?

I do think it stands to reason that as the market heats up and as the stimulus dollars begin to flow and as competitors ramp that there will be more competition for good quality people. But NextGen is a very well respected company. We've got great products, a good service quality and things. So we are company that a lot of people would like to work for. So we still see a stream of resumes of experienced good quality people and to date have not experienced an issue with wanting to go out and hire and not being able to find good people.

To the part of the question relative to our effort or expenditures to get our people up to speed or additional education or those kind of things, no, I don't think we will see any swing.

Okay. And then final question with respect to the pipeline. I think in past quarters, Pat, you have talked about not wanting the pipeline to get too big, that that was somewhat of a negative or maybe not necessarily a negative, but you would like it much more manageable. Maybe thoughts in and around where the pipeline is today versus where it was, you know, several quarters ago and -- where do you see the pipeline wanting it to max out?

Well, I don't think I want to see the pipeline maxed out. I think one of the ways I like to look at it is pipeline per sales rep. So if I added five sales reps, I would like to see a proportional percentage increase in the pipeline.

Now with that said, if next quarter we close the entirety of the pipeline, I would not be complaining, you know, reporting $90 million in systems sales and having a very small pipeline either. I would be throwing a lot of marketing efforts to replenish the pipeline.

But I think where I've commented in the past that I would like to see that pipeline come down a little bit was relative to closing a lot more business in the pipeline. So to the extent we can close more successfully those deals that are in the pipeline, I don't mind seeing it come down a little while.

Okay. And then just a follow-up to that, so the increase in pipeline that we have seen over the last couple of quarters, would you characterize that as those deals have not closed or a higher level of interest?

I think it is a higher level of interest. I think it is directly proportional to maybe a little bit less than the number of Web lead hits that we are seeing, Web leads that are coming in. Interest from whether it is trade shows or other marketing campaigns. The tracking that we routinely do shows us that the interest level is up, and I think that initial interest level is just translating into real pipeline, which it is deals that we think we've got a 50% or better shot of closing in the relatively near-term 120-day period.

We will take one more question, operator.

Atif Rahim.

JPMorgan. A question on the fairly qualified health centers. Donn, I think you mentioned there were five joint sales, two (inaudible). Could you perhaps provide some detail on what the average deal size or the range of deal size was there? And then I have a follow-up related to that.

Yes, actually these were joint sales, so they included both the EPM, EMR and the QSI dental record for that. So the dental portion tends to be probably in the order of 10% to 15% of those sales. And by memory here, they ranged from around -- maybe around $100,000 up to several hundred thousand. I forget exactly the numbers, but the ones we were involved in ranged in that range.

Okay. And then as we look out to the opportunity going forward with FQHCs, is that kind of a good -- that $100,000 to several hundred thousand -- is that a good proxy to be using for the opportunity that is out there? I'm just trying to see if the funds that they are getting are they thinking of allocating similar amount towards healthcare IT, or do you think the amounts would be different? (multiple speakers)

This is Steve. The federally qualified system -- just to do a little background on it -- about 1200 operating units. They have put their grant requests in by June 2. They are now learning in July what amounts of money will be allocated towards them. We are not clear yet what percentage of them are receiving the full allocation of their request. But we are learning that it is going to operate in somewhat of a debit account, and they will have up to two years to utilize the money.

So right now in July, as they are receiving this information, we are starting to learn about who is getting what and how they are going to allocate the money to the market in terms of how they will use it. So we are in such the early stages of this when you consider the fact they have two years to use it and they are just now learning what amounts they are receiving. So it is a mixed bag. It is a mixed bag.

Okay. And then just to be clear, the five that did sine contracts during the June quarter, that was not part of a stimulus related grant, was it?

This is Pat. I think a), we executed more agreements in the federally qualified health space than five. Five was the number of combination medical and dental deals, though I don't off the top of my head know exactly the number community health clinic deals signed. It's a higher number than that. I'm sorry, repeat the question.

No, that was the question. I guess what -- you know, what the potential opportunity was around that. And I guess if I was to ask a different question related to that, in your pipeline as you look out to the $90 million, is there anyway you could elaborate on how much of that is related to the FQHCs?

No, unfortunately I cannot. We try not to split that out on these calls, and I don't have the information in front of me anyway. I recalled part of your question. You wanted to know if any of the deals that we did sign last quarter were funded based on the stimulus.

That is right.

I think there were a couple of people -- a couple of customers executed because they had just been notified that they were going to be the recipients of a certain amount of money. But the notifications just started to come out the last day or two of the quarter. I think most of the clinics started to get their notifications in the current quarter.

Okay. Just in closing, one, we wanted to make sure that this Company is properly prepared for what is going to be a three to five year run as the market moves towards 100% accountability and paperless electronic methods. We are making the right investments to prepare for that. We realize that there is going to be a lot of competition and a lot of work to do in a going forward basis. We want everyone to understand and feel comfortable with the fact that we are making the right moves, the right adjustments in preparation for that.

The solutions to the definitions and certification will be concluded within the next couple of quarters as attested to by Mr. Blumenthal and as has been signed into law that they have to have done by December 31. The run that starts from December 31 forward will be unprecedented in this sector and may be unprecedented in terms of American business when you consider the amounts of money that are allocated towards this movement.

So we are excited. We are bullish. We are preparing properly, and we want you to feel very comfortable with the fact that we are going to be an enormous -- we are going to have an enormous impact from this next three to five year run.

So we thank you all for your support, and we look forward to speaking to you again in the future. Thank you.

Ladies and gentlemen, this concludes the 2010 first-quarter results conference call. Thank you for participating. You may now disconnect.