NextGen Healthcare Inc (NXGN) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the fiscal 2010 second-quarter results for Quality Systems conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) As a reminder, this conference is being recorded today, Friday, October 30, 2009. I would now like to turn the conference over to Steven Plochocki, CEO. Please go ahead, sir.

Thank you, Mitch, and welcome to the Quality Systems fiscal 2010 second-quarter earnings call. With me today are Paul Holt, our CFO; Phil Kaplan, our newly appended appointed Chief Operating Officer. Great to have you here, Phil. 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 the team.

The Company posted record net revenues of $71.7 million in the second quarter, an increase of 22% from the $59 million generated during the same quarter of the prior year. The Company reported net income of $11.8 million, up 13% when compared to net income of $10.5 million earned in the comparable quarter of the prior year.

Fully diluted earnings per share was $0.41 in the quarter which was up 11% compared to $0.37 per earnings will recorded in the same quarter last year. For the quarter, the Company's NextGen Healthcare Services division posted revenue of $67.4 million, up 23% over the same quarter of the prior year; and operating income of $21.8 million, up 13% over the same quarter of the prior year.

It's been eight months since the stimulus bill was signed in February. Over that time, the market has been gaining continued heightened awareness of the nature of the bill and the requirements for the stimulus dollars beginning in 2011. We have been one of the principal educators of the healthcare community along the lines of our website, our webinars and our leadership conferences.

As the buying market for electronic health records becomes increasingly comfortable with what they are learning, we are starting to see the positive signs of buying movement as we see web hits, leads and pipeline continue to build in our Company. These all reflect favorably on our future and we are greatly encouraged.

We continue to make investments in sales, marketing, implementation, training and other areas of the business in preparation for anticipated volume, particularly post-finalization of the meaningful use regulations and certification which is earmarked for December 31. We are very bullish on the future and we're making all the right moves in state of preparedness for that future. Paul, please take us through the numbers.

Thanks, Steve. We gained momentum this quarter in system sales as our consolidated system sales grew 6% over the year ago quarter to a record $26.2 million compared to $24.8 million in the prior year. Our consolidated maintenance, EDI and other service revenue grew 33% compared to the year ago quarter at $45.5 million compared to $34.2 million a year ago.

Reflecting the continued growth of the customer base at NextGen, recurring services including maintenance, EDI and revenue cycle management accounted for approximately [63%] of total revenue this quarter versus 58% a year ago. Our consolidated gross profit margin this quarter came in at 61%, down from 64% a year ago. The decline in our gross margin over last year was due primarily to the inclusion of revenue cycle management, services revenue at lower margins, revenue cycle management services represented a little over 12% of our total revenue this quarter versus 8% a year ago.

Our total SG&A expense increased by approximately $2.1 million to $20.4 million this quarter compared to $18.3 million a year ago. The primary drivers of this increase included headcount additions and additional marketing and other expenses made to scale our capabilities in advance of the opportunities related to the stimulus plan as well as category expenses in the RCM portion of our business.

These were also offset however by a reduction in proxy related expenses as if you recall a year ago, we included a pretty good sized amount of expense related to a proxy contest. SG&A expense as a percentage of revenue this quarter was down to 28.5% versus 31% a year ago. And reflecting our increased investment being made in product development, our R&D expense grew 30% on a year-over-year basis to $4.3 million versus $3.3 million a year ago. Interest and other income this quarter declined to $59,000 compared to $340,000 and that was due primarily to lower interest rates earned on our cash investments.

Our effective income tax rate this quarter came in at 36.7%. That compared to 36.3% a year ago and the primary driver of that increase was that this quarter, we had a smaller amount of benefit related to incentive stock option exercises compared to a year ago.

Moving down to divisional performance, system sales in the NextGen division increased 6% to $25.3 million. This quarter compared to $23.9 million a year ago and again continued growth in the NextGen base of customers as well as our increases in our revenue cycle management business drove recurring revenue or -- I'm sorry -- drove maintenance EDI, RCM and other revenue grew 36% higher than last year at $42.1 million versus $31 million a year ago.

We continue to be encouraged by opportunities in revenue cycle management and believe we are well positioned to succeed in this space. The QSI dental division reported a year-over-year increase of 3%, reporting revenue of $4.3 million compared to $4.1 million a year ago. Operating income for the division was $901,000 compared to $952,000 a year ago.

Moving onto our balance sheet, our total cash and marketable securities decreased by approximately $3.5 million this quarter to $82.9 million or $2.88 per share compared to $86.4 million or $3.02 at the end of the prior quarter. Our DSOs net of amounts included in both accounts receivable and deferred revenue which I'll refer to as our net DSOs were unchanged from a year ago at 88 days.

Our DSOs based on gross receivables declined by 16 days compared to the prior year at 124 days versus 140 days a year ago. On a sequential basis, our DSOs dropped by three days.

Our DSO drop versus last year was primarily attributable to the cumulative effect of an increase in revenue cycle management revenue, which generally turns over at a faster pace compared to other revenue streams. And our DSOs by division this quarter were 85 days for the QSI division and 126 days for the NextGen division.

Total deferred revenue grew to $49.2 million compared to $48.1 million at the start of our fiscal year. The primary driver of this increase was additional deferred implementation revenue.

And again as I normally do, I'm going to report our non-cash expenses for the quarter which break down as follows. Total amortization of capitalized software $951,000 at $57,000 for QSI and $899,000 for NextGen -- I'm sorry, $994,000 for NextGen.

Amortization of acquired intangibles $366,000, total depreciation expense $910,000. That's $99,000 per QSI and $811,000 for NextGen.

Stock option compensation this quarter was $857,000 and our investing activities for the quarter were as follows. Capitalized software $1,527,000. That's $118,000 for QSI and $1,408,000 for NextGen.

Fixed assets $1,399,000. That's $76,000 for QSI and $1,323,000 for NextGen. Again, I want to thank you all for being on this call and your interest in our Company and I'll now turn things over to our new Chief Operating Officer, Phil Kaplan.

Thank you, Paul; and good morning, everybody. I am pleased to join the winning team here at Quality Systems as the Company enters the five-year growth opportunity fed by the federal healthcare IT stimulus.

As the Company's first Chief Operating Officer, I am focusing on the continued refinement and profitable execution of our growth strategy. This is rightfully a time to invest in our future.

And as we do, we will also look for areas of increased operating efficiency, management of costs and better integration across the Company. It also means ensuring that our software and services combine to add increasing value to our customers' practices while also returning long-term value to our shareholders.

I would now like to turn the call over to Donn Neufeld, the Senior Vice President and General Manager of our QSI business unit.

Thank you, Phil. We continue to have success with federally funded entities purchasing the QSI electronic dental record along with the NextGen EPM and EMR. We had nine new joint sales this quarter, the most ever.

In Q2, our division saw the highest revenue and most new contracts in over two years. Our sales staff remains unchanged from last quarter and our pipeline is approximately $6.8 million. Our pipeline is defined as a sales situations where QSI is in the final three purchase choices and we believe that the sale will occur within 180 days. Wit that, I'll turn it over to Pat Cline, President of our NextGen division. Pat?

Thanks, Donn. Hi, everyone. During the quarter, NextGen executed over 60 new agreements and we saw our pipeline grow to about $100 million. Size of our sales force grew slightly to 72 people and we've hired a couple of people since the end of the quarter. So we're currently at about 74.

We think we are going to start to grow the sales force a little more aggressively from here on out, at least through the end of the fiscal year. I'll end my prepared comments by as usual thanking the NextGen employees for their contribution and our customers for the confidence that they continue to express continue in our Company. And, Mitch, we are ready for questions.

(Operator Instructions) Michael Cherny, Deutsche Bank.

So obviously you guys saw a nice quarter in your pipeline growth. Can you give us a little more color in terms of the type of customers you are seeing that are kind of signing up now versus the people who are still waiting for some of the definitions surrounding meaningful use and certification prior to making their decisions?

Sure, this is Pat. I can try. We see a little bit more activity and interest at the higher end and we think that is because it takes a larger organization or an organization purchasing for many, many medical practices longer to roll out all of the software to all of the practices. And I think they feel they need to move a little bit sooner and don't have as much time as an individual practice might have to achieve meaningful use to take advantage of the stimulus.

We're also encouraged that the pipeline grew during the season that it grew because during the summertime as you probably know, there aren't as many opportunities for trade shows and conventions and those kinds of things. So it's somewhat unusual to see this nice an uptick in the pipeline over the summer.

And then just quickly, I know last quarter you started to talk about the traction you had seen with your SaS-based solution that you had launched at [HIMS]. Can you give us any update in terms of the penetration rates of that product and whether you're seeing increased interest there or if it's more kind of on the core product side?

Increased interest on both but I believe on the SaS side, we sold -- Paul correct me if I'm wrong. I think we sold twice as many SaS-based deals in the second quarter as the first (multiple speakers)

Charles Rhyee, Oppenheimer.

You know maybe, Pat, if you could talk about some of the deals. You talked about 60 agreements signed, maybe kind of similar to the earlier question, sort of the mix you are seeing there. Particularly interested in the small practices. You said obviously the larger practices are perhaps moving first. Can you talk about your efforts in trying to accelerate the education of the smaller practices and why they might want to -- have to move now versus having to wait?

I can try. NextGen has been focused frankly for the last few years on making our software easier to use and improving our content for the smaller practice on ways of implementing many small practices at a time. So ways that we can leverage for example finite resources across a much larger market.

So you may know that we have four training centers in the country and we a have world-class e-learning or computer-based training program. And all of those types of things and others we feel are positioning as well to take advantage of the smaller practice market as that market heats up.

And in terms of the -- obviously you had a nice sequential bump up in the revenues. And I think last quarter, you guys had talked about seeing some delays in purchasing. How much of this would you say was a catchup from last quarter? I guess the question is should we expect to see sort of a continue acceleration from this level as we move into the next couple of quarters and into next year?

That's a good question. Unfortunately it's not an exact science. So it's impossible for me to tell you how much might've been a catchup from last quarter, though it's reasonable to think that maybe a little bit of the bump was.

As far as the go-forward picture, we do see a bigger pipeline. We do see a slightly bigger forecast. Indications are that some of the stimulus freeze is beginning to thaw at the high end. But this quarter is also seasonally kind of tough because you've got the holidays and many buyers sort of check out during the holiday season or for a week or so as do their lawyers and purchasing committees and things. So it's a little bit tougher quarter in that respect. The hope overall or on balance is that we see an increasingly robust market going through next year.

Great, one last final question. On the revenue cycle management side, it looks like the revenues kind of ticked down. It was basically flat sequentially. Can you talk about what the business here is looking like in terms of adding new clients, maybe an update on how the integration into the core NextGen solutions is coming along?

Outside of the revenue; we're very, very pleased with what we are doing sales-wise. We are adding contracted revenue that won't as you know show up immediately when it is signed but will show up in the future.

We are delighted with the way new contract acquisition is going on the RCM side. And relative to the integration of the companies, there are certain provisions in the earnouts related to those deals that prevent a lot of the integration efforts from happening early on. But we are doing as good a job as we think we can do and we will do a better job in the future.

Great, thanks for the comments.

Constantine Davides, JMP Securities.

Hi, thanks. Good morning. Quick follow-up to that earlier question. I think last quarter, Pat, you quoted a backlog number for rev cycle. Just wondering if you can provide an update there.

I don't -- Paul, did you quote a rev cycle backlog number?

Yes, I did last quarter. It was $6 million, I believe is what I stated last quarter and the update to that were about $6.1 million but in contracted backlog. But behind that, there was a pipeline of prospects that we're engaged in lots of conversations with and I think very large opportunities, multimillion dollars worth of opportunities that we're very encouraged by.

As Pat said, I think there's -- we know there's a lot of opportunity and there's a lot of activity but that's not a business that translates instantly to increased revenues. There's a ramp-up period that takes place first. So you have to have a little bit more patience. It's not quite the same as selling a software license.

And is that backlog -- is that weighted towards any particular start date or would that just kind of layer in evenly throughout the balance of the year?

It's generally there's a ramp-up period. It takes several months before that fully ramped up. So I would say it's relatively even in terms of what the ramp-up period -- it just doesn't happen instantly.

And, Pat, you talked about the sales force number. Is that net of turnover? Did you hire but also lose some people in the quarter?

It's net of turnover and almost every quarter, there's hiring and termination.

Okay and you mentioned you wanted to get a little bit more aggressive there. Can you just give us a sense for where that goes by the end of the year?

Also not an exact science because as I've said on prior calls, we look at quality first. But if I were to just talk about quantity, I would love to see 100 people by the end of the fiscal year. I'd tell you that's an aggressive goal though.

Okay and, Paul, one quick housekeeping question. If you stripped out PMP, what would your organic growth have been in the quarter?

If you strip out PMP -- I don't have that sitting right in front of me. But I think why don't you stay tuned for the Q when we get that filed which will happen here shortly?

Bret Jones, Brean Murray, Carret & Co.

Thank you for taking the question. Good morning. I was wondering, how much of a benefit did you see from the federally qualified health centers in the quarter?

I don't have that number off the top of my head, but we did see reasonable benefit. We're as you know very well positioned in that market and we did make multiple sales into that market and we have got (multiple speakers) I'm sorry?

Go ahead, Pat. I've got something to add when you are done.

Go ahead.

We did sell quite a few. It was at least a dozen, the CHC deals this quarter. So I happen to have -- that's the number I happen to know. So it did have a positive impact on this quarter.

So would it be reasonable to assume somewhere in the 5 to $6 million range or is that too high, too low as a ballpark?

I'm not going to -- I don't think we're going to get into the actual dollars (multiple speakers)

Is there an expectation for more CHC type of deals in the future or have we already seen the activity that's going to occur?

There's an expectation for more. In fact, there have been -- since our last call, there have been hundreds of millions of dollars worth of additional grant opportunities made available to that marketplace that -- and we think many of them will take advantage of it and many of them because we're so well positioned with our software superiority in that area will turn around and direct those grant funds to NextGen software.

So dozen deals you announced, dozen or so deals that you announced, they were also tied to the grant funding? Is that correct?

I think it's safe to say many of them were.

Given the higher mix of software sales in the quarter, I was a little surprised by the sequential decline in gross margin. I guess is there anything you can say in terms of price discounting or anything going on in that?

Let me take that one first and then Pat may have something to add. We did have more hardware included in our system sales figure this quarter and that impacted margins on a sequential basis.

As far as discounting is concerned -- and I think the difference in the hardware portion was a little bit over $1 million to quantify that a little for you. On the discounting part of your question, there was no major change.

Okay, great. And then just finally on the RCM business, I know, Pat, when we talked to at MGMA last year, you were thinking this was going to be a $50 million business. By I think it was around the third quarter, I was wondering -- or maybe it was the fourth quarter. I was wondering where do you think that business ends up at the end of the year on a run rate basis? Is there still a $50 million ballpark business by the end of the year?

I think that's entirely possible.

Okay and then in terms of gross margins on the RCM business, they declined pretty dramatically sequentially and you talked about some investments you had to make. Is that additional personnel or are these the automation that you talked about, the automation and integration investments?

I don't believe it's personnel but we are making investments to move customers over, for example to the NextGen platform. And there is a cost associated with that and some of the other things that we're doing relative to the integration require some investments and some things that we have done.

For example with the sales force and sales compensation plans and things require our taking a little bit of investment. But the good news is I think you'll see margin expansion going into the future. I can't really look at it for you on a quarter-to-quarter basis but the long-term trend should be solid margin expansion in the RCM area.

Atif Rahim, JPMorgan.

Stephen, you mentioned the web hits etc., the interest that you're seeing in the product increasing. Could you quantify what percentage of those are developing into signed contracts these days?

Well it's difficult to assess the signed contract quotient but I will tell you that as we stated previously, the quarters prior to the stimulus, we were averaging about 100,000 web hits a quarter. The two quarters post the stimulus, we were averaging about 150,000 web hits and this quarter that we are announcing today, about 173,000 web hits.

So we continue to see more and more activity funnel into our web and those as you know translate into leads that are funneled into our sales organization. So our leads as we stated before have more than doubled since the stimulus and as past cited, those things are filling into the pipeline and all of that provides a nice directional view of future growth and future deals.

Got it. Which kind of leads me to the next question about the pipeline. Any way to break out what you're including in the pipeline from the [CATs] versus kind of other regular business?

We typically have not done that. I don't have that information in front of me. I think since it's not my call as to how much guidance we give or don't give, it's a discussion item that I think we should have internally that you can stay tuned for.

Okay, got it and then (multiple speakers)

I think it's safe to say sort of objectively that the pipeline over a period of quarters has seen a higher percentage of federally qualified health centers, CHC, [Indian] health etc.

Okay and then finally on the headcount, there was a slight increase this quarter. But going forward, what is your source of salespeople that you're targeting? Would it be from competitors' kind of seasoned reps or are you doing kind of right out of college hiring?

It's a combination of seasoned reps within our industry and seasoned salespeople outside of our industry. We don't do a lot of hiring right out of college.

Before we move to the next question, I want to state something for Constantine who asked a question earlier. So for his benefit and everyone else's benefit, he asked about organic growth without PMP.

PMP contributed $4.5 million in revenue this quarter. So that backs into about 14% year over year revenue growth without PMP. So I just wanted to add that. So, operator, go ahead and move to the next question.

Jamie Stockton, Morgan Keegan.

Pat, with the electronic health record incentives, a lot of the vendors that I talked to have said that they feel like one of the most challenging parts of this program may be the quality data reporting. And I was just curious to get your thoughts about is that an area being able to extract the quality of data points that you have been focusing on from a development standpoint? Do you think that NextGen could play a role in reporting that quality data to CMS eventually?

Terrific question and the answer is yes on all counts. We -- I think we're far ahead of our competition relative to quality reporting because of the nature of our template-based flexible software that maintains all of its data in discrete data fields within -- or data elements within the database, therefore making it easier to report whereas text-based or document-based systems where physicians go through documents and apply some intelligence to grab discrete data or to create discrete reporting are find it far more difficult. So we have done some development but we were positioned I think ahead of the pack with no close second and we think we will continue to be ahead of the pack in that regard.

My other question was talking about smaller physician practices. That's obviously where the vast majority of physicians in the US are today. Very low penetration rates (inaudible) software.

You guys have a SaS-based solution now which I would think would be more advantageous to go into those practices. Is there some sort of distribution strategy that you are working on maybe using the regional extension centers and trying to develop strong relationships there or some other method of getting into those small practices other than just your direct sales force?

Without going into the particular initiatives, let me just answer the question with an absolutely. I think NextGen and all of our competitors are looking very strongly at the regional extension centers and creating relationships and other relationships that can increase distribution.

I will say though that when we talk about the large deals and the high end deals, very typically, in fact almost always they are comprised of many, many small practices. So that is one such distribution avenue for us.

With an IPA or something like that?

And even the hospitals. Every quarter we tend to do multiple sales to hospitals who are purchasing our software to roll out to their both owned physicians and community physicians. So for example, you saw on the Virtua press release that came out recently that there are 23 locations. Those are essentially 23 practices.

Greg Bolan, Wells Fargo.

Pat, following up on a previous question, relative to say the past several quarters, can you describe the competitive landscape in terms of pricing for NextGen products say across the small through large physician practices?

There continues to be a lot of pricing pressure at all sides of the market. We do have as I have mentioned I think in the last few calls, we see more discounting by our competition. We try to hold the line as much as we can. As I mentioned earlier, there's no material change to our discount percentages.

That's helpful, thanks. And then, Pat or Paul, would you characterize demand for NextGen products as being fairly constant over the quarter or would you say that momentum really picked up towards the latter half of the quarter and continues to grow stronger?

I would characterize it as the latter. But I again want to caution that it's tough to look at quarter over quarter. I think we could bounce up against this stimulus freeze for a little while. But the long-term trend as I mentioned I think is an increasingly robust market and that's what we saw in the quarter that we're reporting.

Thanks, that's helpful.

The stimulus -- the meaningful use definition is still not out. We see signs and I think the industry sees signs that that may be further delayed and the certification process is still not -- has still not been solidified although there are GAAP certifications starting and there's more clarity around all of those things. So I think once again sort of at the high end, the more sophisticated organizations feel comfortable enough to move to forward but by and large, there still is a drag on the market.

Newton Juhng, BB&T Capital Markets.

Thank you very much. I guess I'll be the first person to ask [a solo] question. You're going to be on board now a month in your new role. I'm just kind of curious, you joined a company that has grown so quickly here over the last few years. I'm just wondering if there's any particular areas that you felt are in need of additional investments sooner rather than later? Just getting your first look assessment.

Thank you for the question. I think that the areas that I mentioned were areas as we make investment in the growth opportunity that we all believe in, we are looking at places where we can generate again more -- call it more revenue per capita. There's areas -- without getting into specific departments and things like that -- there are definitely we believe opportunities to do that.

And then there's some areas where management of costs that you can see again over several quarters, the idea is to of course with the kind of growth we've been experiencing first not do any harm. In other words, if we save a few dollars here or there but we missed out on what is truly a unique one-time opportunity for our Company, we're not going to do that.

We're really as we have always done, managing the Company for long-term growth. But that includes long-term growth with profit returned to the shareholders. That is my focus.

Okay, okay. Pat, I was just wondering, some of the other competitors have been talking about shortening implementation times, particularly in the smaller market. Now you mentioned kind of some of the tools you have at your disposal in terms of [web based] and so on. I'm just kind of curious if you feel an overwhelming need to try to do that as well or whether or not you're pretty happy with where you are at in terms of implementation times, particularly at that smaller end?

Great questions. Yes, we do feel the need; and yes, we have been working on it very actively for quite some time and we continue to work on it. I think it benefits not only the practice, but the vendor as well.

Richard Close, Jefferies.

Thank you. A lot of your competition is known for putting out a good deal of press releases, let's just say. You guys aren't really known for that. Can you talk a little bit about your success on the enterprise side, maybe of the contracts you signed in the quarter, the average number of doctors per contract, something to get a feel for?

I don't have the average number of docs per contract, though I think it would stand to reason that in the quarter that we're reporting, that number would be a bit higher. We are doing very, very well. Without quantifying it for you in the large enterprises, our software is highly scalable.

Our implementations tend to be successful and we have got a number of terrific references at the very high end that are some of the largest health systems in the country and in fact, national systems that enjoy the use of our software. It's one thing to put out a press release claiming to be the market leader, it's another to see that in reality and I think NextGen sees that.

Okay, then maybe if you could give us an update or maybe additional detail on how your relationship with [Pirot] is going? I think you started something with them a couple quarters ago, if I'm not mistaken?

Yes, it was a number of quarters ago. The relationship today is very, very strong; stronger than it ever has been. [Pirot] has a liking and in fact a commitment to NextGen and NextGen software and they are finding that when they deploy NextGen software, they come in ahead of schedule and under budget. And they found with other competitors of ours, they came in behind schedule and over budget. So as long as we continue with that performance, we think the relationship will stay strong.

Just I guess a question for Paul here. Just to be sure, you gave revenue cycle number for 12% and 8% last year. Is that, just to be sure, total revenue; correct?

Yes, that's total revenue cycle management. That's the revenue cycle management portion of total revenue.

Corey Tobin, William Blair & Co.

Just a couple quick ones if I could. Paul, we talked a little bit about margin pressure due to hardware. Could you just give us the hardware/software split in the quarter?

Yes, well it's going to come -- this is going to be out in the Q but I have -- we had about $2.5 million in hardware that was included in system sales this quarter versus about $1.3 million in the last quarter. I'm talking sequentially.

The last quarter being June?

Is that what you were looking for?

Yes, perfect. And then circling back to an earlier question on the revenue cycle management margins, we have seen a pretty steady decline in the gross margins in that business here over the last few quarters. While I understand part of that is implementation and shifting over to the new software and I appreciate your comments, Pat, that we should see it going higher; just trying to get a little bit more feeling in terms of the magnitude of where it's going to go and how it should respond back.

Are you at the peak of what you would consider the crossover or the conversion with respect to the systems and the companies you purchased to the NextGen system? Or is there additional dollars that really need to be put to work there?

I think as far as the sort of the percentages are concerned, we are close to peak and should see improvement. There are still dollars to be spent but I don't think as a percentage of revenue, you will see them increase wildly.

Great, similar question on the margins and implementation. The implementation margins were down a little bit as well, the implementation and training. Any thoughts on what is going on there?

I don't think anything is going on there. Again, it's like a lot of things. It's really tough to look at on a quarter-over-quarter basis. I think the long-term trend is we're within a reasonable band.

Corey, I'll just add something there as well. We have been adding to the headcounts in that area as we're trying to gear up for what we expected to be happening here over the next couple years. And so, when you first start to train somebody in that area, they're not billable and that will put a drag on our margin in that arena initially. So we've got some of that as we are scaling up our capabilities there that's having some drag on our margins.

Great, last one if I could. I guess this is probably more for Paul or maybe Pat. Any thoughts on the [grassy letter] and just specifically in contracting practices that you might use that are referenced in that letter or I should say you may or may not use that are referenced in that letter? Any thoughts on your approach to the response? Thanks.

To our knowledge, we haven't received a letter. We did see the letter and saw the companies that received the letter but we don't think NextGen falls into that. Although that wouldn't preclude us from receiving one today certainly.

The more important thing is we think we are very well positioned not only with our contracts, but more importantly with our processes and procedures. We have formal and published procedures for tracking errors, escalating potential patient safety issues, client warning systems that are in place, tested and frankly that we have used in the past. So we think we are positioned well and certainly if we were to get a letter, we would be happy with our responses.

Anthony Vendetti, Maxim Group.

Most of my questions have been answered. Just had a quick question. Just in terms of the competitive landscape, when you actually are out there with NextGen and you win, what is the major reason when it's a competitive situation that a customer gives? And conversely, if you lose to a competitor, what is the reason they typically give in that case?

Our wins tend to be with customers that look at return on investment and value and they're looking for systems that are of high quality, fewer bugs, more scalable; very, very feature rich systems that they feel they can take advantage of.

They tend to be customers that are very quality conscious and like the quality reporting and quality indicators and the things that they can achieve, not only relative to their return financially, but their return with respect to quality. When we lose, it's most often a price situation that hurts us.

In terms of the pricing, what would you say is the premium that you would have to pay for NextGen versus some of your competitors? Is it 10%, 20%?

: I'm going to give you a guess at 30% or higher for a NextGen system but it will vary wildly at various parts of the market. We routinely go into sales competitions where the customer has narrowed the field down to NextGen and a vendor that's one-third our price.

Sean Wieland, Piper Jaffray.

Can you talk about the mix of enterprise business coming in versus kind of traditional group practice in this quarter versus say last year at this time?

Paul, do you have anything quantifiable on that? My gut tells me that there's more on the enterprise side, the average sales size was up. But I don't know what Paul might have in front of him.

I'm not going to quantify anything. But qualitatively, we have enterprise deals, larger size enterprise deals typically in most every quarter. But just directionally, I think we have a little more of a mix on the larger size enterprise side this quarter versus year ago I think. Although I'm doing a little bit of -- giving you an estimate there because I don't have numbers in front of me but I think that's generally the case this quarter versus year ago.

Operator, we will take one more question if there are any left.

Frank Sparacino, First Analysis.

I just wanted to go to back to the revenue cycle business for a second from a revenue standpoint and wondering if you could just provide some more color around the business being flat sequentially. Was that related to churn, perhaps sort of claims volumes at collections, a lack of new clients being implemented? I assume there are other factors, but that would be helpful.

This is Pat. Again, we don't see the quarter over quarter flat revenue as much as an issue as you may given the pipeline and given the deals that we have actually executed where we have contracted revenue and as we implement them, we will be coming up.

We're pretty pleased with where we're headed directionally revenue-wise. Not sure I can give you much more than that.

The only other thing I would add is there is a small amount, there is some seasonality in the RCM business during the summer months. You've got some folks who are on vacation, out and about or whatever. So I think you see -- that's certainly one part of what you're seeing there. But I would add to what Pat is saying is that in terms of our backlog and pipeline, we are very encouraged by what's going on in that space.

And just so I think about contrasted backlog in the right way, when you sign a new client, when does that actually hit contracted backlog? Is it immediately of is there some lag period in there?

Donn Neufeld Well the backlog that I'm talking about is contracted revenue. It's already been sold. It's just a matter of implementing and ramping up. That's sort of in the bag, so to speak, and then the pipeline is more of a traditional you're in discussions, you're vendor of choice, you're working on negotiating contracts, that sort of thing.

And to answer the other part of your question, there is a multi-month lag from contract to seeing any revenue.

Okay? Well we want to thank everyone for joining us today. I think you are starting to see as we are the signs of the progress that we have been talking about. We know we have a three to five year stimulus on the horizon but I think we are turning the corner in terms of the critical mass filling the pipeline and our continued performance to be in a very positive manner. Again, we thank you for your support and we look forward to speaking with you in the future. Take care.

Ladies and gentlemen, this concludes the fiscal 2010 second quarter results for Quality Systems conference call. If you'd like to listen to a replay of today's conference, please dial 800-406-7325 or 303-590-3030, passcode 417-7638. ACT would like to thank you for your participation and you may now disconnect.