NextGen Healthcare Inc (NXGN) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Quality Systems, Inc. fiscal 2010 fourth-quarter and year-end results conference call. During today's presentation, all parties will be in a listen-only mode and following the presentation, the conference will be open for questions. (Operator Instructions). As a reminder, this conference is being recorded today, Friday, May 28, 2010.

Now I would like to turn the conference over to Mr. Steve Plochocki, CEO. Please go ahead, sir.

Thank you, Josh. Welcome, all of you, to the Quality Systems 2010 fourth-quarter and year-end call. Within this morning are Paul Holt, our CFO; Patrick Cline, the President of Quality Systems; Scott Decker, the President of NextGen Healthcare; and Donn Neufeld, the Executive Vice President of EDI and Dental.

Please note that the comments made on this call may include statements that are forward-looking within the meaning of securities laws including without limitation statements related to anticipated industry trends; the Company's plans, products, perspective, and strategies, preliminary and projected; and capital equity initiatives and the implantation of potential impacts of legal, regulatory, or accounting requirements. I will provide some opening comments and then turn it over to the team.

We posted record net revenues of $78.5 million in the fourth quarter, an increase of 19% from $65.8 million generated during the same quarter of the prior year. Net income for the quarter was $13.1 million, up 15% when compared to net income of $11.4 million for the comparable quarter last year. Fully diluted earnings per share were $0.45 in the quarter, an increase of 13% versus $0.40 fully diluted earnings per share reported in the same quarter last year.

Fourth-quarter results were negatively impacted by amortization of acquired intangibles and transaction costs related to the acquisition of Opus Healthcare Solutions, Inc. Also impacting the results were decreases in collections from the Company's revenue cycle management division due to record snowfall across the East Coast as well as seasonality.

Revenue for the fiscal year ended March 31, 2010 was $291.8 million, an increase of 19% when compared with fiscal year 2009 revenue of $245.5 million. Net income for fiscal year 2010 was $48.4 million, an increase of 5% from fiscal 2009 net income of $46.1 million. Fully diluted earnings per share increased to $1.68 in fiscal year 2010 from $1.62 earned during fiscal year 2009. That's up 4%.

The Company also announced the resignation of Chief Operating officer Philip N. Kaplan. Operationally, the responsibilities of the Company's business units have been moved -- have been moved to and assumed by Patrick Cline, the President of Quality Systems. Phil's contributions and efforts in preparing the infrastructure of the Company over -- for the five-year stimulus run have proved extremely beneficial to us and we thank him for his contribution and wish them extremely well.

One of the hallmarks of a company like ours historically and presently is the depth and strength of our management team. It is a testament to that when you consider the fact that there are five of us on this call with you this morning, not one, not two, five. Our Company's long-standing track record could not have been achieved without that. We will continue to execute on our plans and prepare the organization toward deliverables and not skip a beat along the way.

We are pleased with the results for the quarter, which represent our team's ability to grow the business to continued record levels. Time and again we have stated that the Company continues to make the necessary investments in its infrastructure to ensure that we remain in a state of preparedness as the stimulus plan takes effect. We are well positioned to garner additional market share and fuel future growth as the healthcare industry shifts to electronic-based medical records platforms. We will continue to capitalize on the significant business opportunities that lie ahead from the implementation of the ARRA.

It is also anticipated that the government will finally finalize the regulations for certification and meaningful use sometime this summer. And I can tell you we really look forward to that. Nonetheless, we are expecting continued strong benefits from an enhanced sales and marketing organization as we continue to experience growth in the leads and pipeline. We are expecting continued strong benefits in our investments in customer satisfaction to our implementation and training organization.

We are also expect strong benefits from the addition of an acute product through our acquisition of Opus in February of this year. We now have an acute and ambulatory capability, both CCHIT certified. Our Company is strong. Our management team is strong and our positioning that we have been working on for the last 3 1/2 quarters is extremely strong and prepared for the future.

As we close out one fiscal year and head into another, we and the management team would like to extend a hearty and sincere thanks to our 1600 brother and sister associates for their tireless dedication and efforts. Without them, none of us would be sitting here today talking to you about this great Company. All of us at Quality Systems would also like to thank our customers and shareholders for your continued support.

I would like to turn it over to Paul Holt now, our CFO.

Thanks, Steve, and hello, everyone. I'm going to begin my comment with an overview of our quarterly and total year results and then I will finish with a balance sheet reach out.

As Steve mentioned, our consolidated fourth-quarter revenue of $78.5 million represents a 19% increase over our prior year and our earnings per share of $0.45 was up 13% from a prior-year number. And as we noted in our income statement, our results for this quarter included approximately $682,000 in amortization of acquired intangibles versus $357,000 a year ago. Also our RCM results being impacted by the weather and seasonality that Steve mentioned and as a result on a sequential basis, RCM revenue and gross profit declined by $419,000 and $324,000 respectively.

Finally, we incurred approximately $200,000 in transaction costs related to the Opus acquisition, which was announced in February of 2010.

Our consolidated system sales grew 21% over a year ago quarter to a record $29 million compared to $24 million in the prior year quarter. Our consolidated maintenance, RCM, EDI, and other services revenue grew 18% to $49.5 million compared to $41.8 million a year ago.

In spite of the headwinds we talked about in the RCM, our RCM revenue was up 13% over the prior year quarter at $9.2 million versus $8.1 million a year ago. Those headwinds are now behind us and we're happy to report that our total contracted revenue not yet implemented is now up to $11.8 million versus $10.7 million reported just last quarter.

Reflecting the seasonality in our RCM business, recurring services including maintenance EDI and RCM accounted for approximately 63% of total revenue versus 64% a year ago. Our consolidated gross profit margin came in at 64%. That's up from 61.5% a year ago and again, a primary driver in our higher profitability was related to less hardware in our system sales this year versus a year ago as well as a slightly larger percentage of system sales as a percent of total revenue.

Our total SG&A expense excluding amortization increased by approximately $7.2 million to $25.2 million compared to $18 million a year ago. Primary drivers of the increase were $1.8 million increase in corporate expenses, $3.6 million in headcount increases of acquisition-related operating expenses, and $1.8 million in additional sales, marketing, and other expenses made to scale our capabilities in advance of the opportunities related to the stimulus plan. SG&A expense as a percentage of revenue this quarter was 32.1% versus 27.3% a year ago.

Our effective tax rate this quarter came in at 35.2% versus 38.2% a year ago. The primary driver of that improved rate or the lower rate was a comparatively lower state effective income tax rate as well as an increase in the benefit we received from the qualified domestic production activities deduction. I would also note that the R&D tax credit has expired as of December 31, 2009 and has not been extended or reenacted by Congress yet. So we will have to stay tuned on what happens there.

Turning to our year-end results, as Steve mentioned, our total fiscal 2010 revenue of $291.8 million represented a 19% increase over the prior year and our earnings per share of $1.68 was up 4% compared to prior year. And as noted in our income statement, results for this year included approximately $1.8 million in amortization of acquired intangibles versus approximately $1 million a year ago.

Consolidated system sales grew 5% to a record $104.1 million compared to $98.8 million in the prior year and our consolidated maintenance, RCM, EDI, and other services revenue grew 28% to $187.7 million compared to $146.8 million a year ago. Part of this growth was driven by RCM revenue, which was up 72% over the prior year at $36.7 million versus $21.4 million a year ago. Now part of that increase was related to having a full year of results in the acquisitions of PMP and HSI in 2010 versus a partial year in fiscal 2009.

Reflecting the continued growth in the customer base at NextGen and our RCM business, our total recurring revenue in fiscal 2010 was approximately 64% of total revenue versus 60% a year ago. And our gross profit margin for the year came in at 62% versus 63.8% in the prior year. This is primarily the result of a bigger portion of our revenues coming from the RCM business, which carries inherently lower gross profit margins.

Total SG&A expense for the year excluding amortization charges increased approximately $17.6 million to $87 million versus $69.4 million a year ago. Again, the primary drivers of this increase is related to corporate expenses, headcount additions, and additional spending in marketing sales and other SG&A type expenses.

Reflecting our increase in investments being made in our products, our R&D expense was $16.5 million for the year versus $13.8 million a year ago. That's a 20% increase.

Moving onto our balance sheet, total cash and marketable securities increased by approximately $5.2 million in the quarter to $91.8 million versus $86.6 million at the end of the prior quarter. Our total cash represents $3.17 per diluted share as of March 31, 2010.

DSOs net of amounts included in both accounts receivable and deferred revenue increased slightly from a year ago, and it currently stands at 84 days. Our DSOs based on a gross receivables basis stayed flat compared to the prior year quarter at 125 days.

Total deferred revenue grew to $64.6 million compared to $[48.1] million at the start of the fiscal year and $56.1 million last quarter. The increase in deferred revenue was primarily derived from increases in deferred maintenance and implementation services.

And finally, for those of you who are tracking this, our non-cash expenses for the quarter break down as follows. Total amortization of capitalized software, $1.606 million; amortization of acquired intangibles $682,000; total depreciation expense, $946,000; stock option compensation $624,000.

I would like to thank you all for being on our call and your interest in our Company and I will turn things over to Pat Cline.

Thank you, Paul. Good morning, everyone. First let me say that I'm delighted to assume responsibility for the operation of our business units and that I will be dedicated to focusing on revenue growth, improved profitability, and as always, customer satisfaction.

I will make a few general comments and then I will turn things over to Don and then Scott will cover NextGen Healthcare and QSI's Dental business unit and the EDI.

As you saw in our recent press release, we are happy to have Monte Sandler now leading our RCM business unit and NextGen practice solutions. Mr. Sandler came to our Company through the acquisition of HSI, a Company he cofounded 14 years ago after serving in the audit practice of KPMG. Monte is beginning to integrate the operations of both HSI and PMP, both of which are coming our their earn out periods. This business unit also announced last quarter in agreement with Wayne State University Physicians Group, a 540 provider multi-specialty practice.

Donn Neufeld was also recently promoted to also manage our EDI business unit. You are all likely familiar with Donn since he has been a leader within QSI's Dental business for many years.

On another note, and as you know, we recently expanded our addressable market significantly to include small community and critical access hospitals through the acquisition of Opus Healthcare Solutions, together with the acquisition of the inpatient financial platform last year and the integration of the ambulatory EHR. We will offer an integrated and modern platform within this market segment. So far we are very pleased with the progress we are making in this important area of our business.

We remain very atomistic about the market and our ability to take more than our fair share of it both on the ambulatory side and in the small hospital market.

And before turning things over to Don, I will close as Steve did by thanking our terrific employees for their contribution to our success and thanks also to our customers and our partners for their -- for the confidence you express in our Company. Donn?

Thank you, Pat. In our Dental unit, we continue to have success with federally funded entities purchasing the QSI electronic dental record along with the NextGen EPM and EMR. We had seven new joint sales during the quarter and 32 for the year. In Q4, the dental division saw the highest revenue in over 10 years.

The pipeline is approximately $6.3 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.

Now I would like to turn things over to Scott. Scott?

Thanks, Donn, and good morning, everyone. I am especially pleased with the performance that the NextGen division the last quarter where we saw 20% plus growth across revenue, gross margin, and operating income, certainly our strongest quarter ever and a testament to the market conditions. We signed 60 new clients in the quarter, more than a handful of those in the $1 million plus range and then the rest just good transaction flow across the board in all sizes and all specialties.

Since our last call, our pipeline is now up to about $126 million approximately versus $113 million in our last reporting period. We've also increased the sales force now to 105 quota-carrying reps in the market, and that is versus 72 November 1 of 2009. So those reps realistically just be coming online with the learning curve about six months. We expect to see good productivity out of them in the coming quarters.

I'd close by saying we are also very pleased that we brought to general release this past quarter, 5.6 of our EHR software and just recently in the last week announced the availability of 7.9 KBM. These are key to get getting us to the path to certified use. We'll have one more minor release once final regulations are announced to the market, but we certainly expect to have our certified meaningful use product in market assuming the government lines up late summer.

With that, I will turn it back to Josh for questions.

(Operator Instructions) Charles Ryhee, Oppenheimer.

Thanks for taking the question here. You know, Steve or Pat, maybe you can just -- can you give us a little more sense on what was Phil sort of in charge of? If I recall correctly, he kind of came on board in the fall of last year. What were his responsibilities during the time? What exactly were his duties? And maybe you can give a sense on sort of the circumstances around his departure.

Charles, this is Steve. In our prepared remarks, I think we covered what we are willing to cover on that. I mean, he has resigned. He is no longer with the organization. He is pursuing other opportunities, and we wish him extremely well. His responsibilities included all the operating units of the organization as chief operating officer and managing them, organizing them, and taking them towards deliverables.

And as I stated earlier, it's a hallmark of our organization that we are fortunate enough to have the type of depth that we have to be able to easily adjust to any changes like this when they occur. Everything that we have done to build the organization, to prepare it for the three- to five-year stimulus run is on track. It's executing precisely as we had wanted it to and we have every component of the business in very strong, capable hands today.

Pat, do you want to add anything to that?

No, I will essentially summarize by saying that when I moved out of the role of NextGen Healthcare President, I moved into a role that did not have direct operational responsibility for that or any other business unit and carried out a role relative to Company strategy, helped out in the sales arena a little bit, and largely moved to taking a look at potential strategic acquisitions and moved a little bit more to the M&A side. Phil was responsible for the operation of all of the business units including NextGen Healthcare with Scott Decker, promoted into to president.

So that hopefully answers your question as to what Phil's role was and what my role moved to be, and at this point as the press release indicates, I will be assuming operational responsibility with an able team reporting to me, which would include Monte Sandler and the RCM business and Donn Neufeld and of course Scott Decker.

Okay, that is helpful, thanks. Maybe just getting to the operations here, it looks a nice big jump in the number of reps in the NextGen division. You know, when I look at -- did I hear you correctly, Paul, when you said about $1.8 in the increase in the SG&A is related to getting ready for stimulus? Can I equate that a lot to the increase in the number of reps and so that's sort of a go forward number into the base?

Well part of that is -- that's partly true. That is certainly part of the story, but there's other investments being made in areas such as marketing and trade show appearances during the March quarter when we have the HIMSS trade show. But that's -- we have trade shows fairly regularly, but that happens to be the biggest one during the year.

Okay, that makes sense. Thanks a lot.

Michael Cherny, Deutsche Bank.

Just one quick housekeeping question. I may have missed and I kind [scoured] my notes anyway. Did you give the actual number for NextGen versus QSI revenue?

We did not, but you will see that -- we're going to file or K here very shortly, so just stay tuned for that and you'll see all that in there.

Okay, thanks. And just to follow up a bit on Charles's question regarding the sales and marketing and SG&A increases, obviously you guys were very vocal about the need to plan ahead of time and ramp your sales force, which you have very clearly done. As we go into 2011, I know you guys don't provide formal guidance, but can you give us some sense of how you see the trajectory of the SG&A line moving and is there continued further investment that you plan on making kind of above and beyond where you currently stand? Or are we going to see it move back to more historical levels percent of revenue?

We've been actively discussing that internally. We think and we hope you'll see that move toward -- perhaps not to -- but back toward historical levels. As Steve has mentioned and I think as I have mentioned on prior calls, we have been making investments across the board in the Company in infrastructure and processes and systems and implementations, people, obviously the salesforce that Scott mentioned. And the salespeople aren't productive the day they are hired typically because you are building pipeline and training them. We have approximately a four-month training program for salespeople.

So there is -- it is an investment that has been made as you pointed out and as Paul pointed out, and is seen in those numbers. But the ramp on the sales rep side and the ramp we think in many other areas of the Company especially as the government continues the delays, we think has about come to an end.

So as I mentioned in my prepared comments, I will be focusing on not only increasing revenue but taking some costs or containing some costs at least.

Great, thanks.

George Hill, Leerink.

Thanks, guys. Good morning. Thanks for taking the questions. Pat, I guess with respect to Phil's departure, recognizing how long you've been with the Company and how long you have been in a senior position, has anything meaningfully changed with what you do with respect to Phil's departure on a day-to-day basis? Do you feel like that you are personally bandwidth-constrained? Or I guess kind of I want to dig deeper on the earlier question. What does this actually operationally mean for you guys?

I am not sure I have a lot to add. Again, I used to be responsible for the largest business unit, NextGen Healthcare. Scott Decker is now operationally responsible for that unit. I have taken responsibility now based on Phil's departure for the operation from the QSI level for that business unit and the NextGen practice solutions business unit as well as dental and EDI.

So essentially the business units as they are structured moving from the role that I was recently in, which had more to do with M&A and strategy and those types of things, so sort of returned more to an operational role is the best way I can characterize that for you.

Okay, I guess I am trying to think about things in a broader perspective. You pretty much had an operational role for north of five years. You moved into an M&A role for we will call it somewhere between six to nine months, which is not a long period of time in that setting. And now you are back to more of an operational role. I mean, investors probably shouldn't expect the NextGen division to skip much of a beat, should they? Or should there be any transitional issues we should be concerned with?

None that would be negative.

Just one quick housekeeping question. I missed the rep number. Can I get the rep number again ending this quarter and ending last quarter?

I'm sorry, the number of sales reps?

And sorry, I just didn't get it.

The rep number I reported for -- it's currently at 105. I gave the number for November 1 of '09 was at 72. I don't recall what the exact number was the end of last quarter.

I believe the rep number at the end of December was 92 and then now there's a 105 mark at the end of March.

Okay, that's great. And then just, I want to jump back in on Charles's question about SG&A. With respect to the durability of the spend, you talk about maybe the ability for cost containment or to drive it back down to lower levels. $1.8 million of it being focused on going after the stimulus opportunity. I guess one of the things I am trying to think is are you seeing increased marketing spend from all of your competitors as well? How much of the increase in SG&A is an answer to that? I guess how durable and persistent do you feel like the SG&A spend will need to be?

This is Pat again. I need to admit that I don't pay a lot of attention to our competitors and their marketing spend, so I can't size ours up against theirs. But as Paul pointed out, the March quarter is sort of an expensive quarter from a marketing perspective. We have stepped up our marketing, but you have also seen or we have seen an SG&A increase based on spending in various other areas of the company. We talked about sales. We talked about implementation.

Provided those salespeople are productive, they will be productive we feel for many, many years. Of course not all of them will be productive. Some of them we will need to turn over and replace. We think that's a pretty good size for our salesforce. You may recall on prior calls we said we were targeting about 100 by the end of the fiscal year and we hit that target.

We are very hopeful again on the implementation and training side we've got the resources that we feel will be necessary as that salesforce becomes productive to deliver on those systems. That is help practices implement and help them to become meaningful users.

Right. Last thing, and then I will quiet. Paul, can you tell us exactly when Opus closed and what was the contribution in the quarter?

We announced the date. That closed about February 11 and we haven't gotten into the details there on Opus's contribution, but I think because it's still awfully early in that -- for that discussion. But moving forward, I think the other thing to mention here on this call is that we have -- we now have three business unit segments and going forward from here, we are going to be having segments described as a practice solutions, NextGen, and a QSI Dental.

All right, thank you.

Bret Jones, Brean Murray.

I wanted to touch on the pipeline and the dramatic increase in pipeline over the last year and how that's translating into NextGen software sales. The pipeline looks like it's up about 50% year-over-year and an NextGen for the full year on the software side, it looks to be less than 10% growth. I'm just curious, are we seeing deals lengthen out of is there more of a deferral or why aren't the two a little more closely linked I would guess?

There is two things I would mention just right off hand. One, we actually changed our pipeline reporting methodology reporting last quarter so it is not a 100% apples-to-apples comparison. It's relatively close but there may be a little bit of variability there. The last quarter and this quarter you'd probably see consistency.

I would also say that our systems sales, you are starting to see an increase, so if I just look at quarter-over-quarter system sale increase, it's more in the 25% range year-over-year growth. And so I think that's an element of full pipeline versus that.

So I would characterize the situation a little differently than you did and I think we have seen market increase and there is more deals out there.

Okay, and in terms of the definition of pipeline, is it still 50% chance of winning and expect to sign over six months?

We've got a model that we use and we pull straight out of our CRM system. You can generally characterize as looking at the pipeline over the next six months with a weighted factoring it in depending on the maturity of the deals.

Okay, if I could ask you a question on the recent financing alternative that you guys announced a couple days ago, I was expecting -- I must say I was expecting larger NextGen software systems sales in this current quarter. I'm wondering if you talk about the need to establish that financing? You guys are not the first ones to defer payments, but does your percentage [rate] for two years is a little bit of a new wrinkle. I am just wondering why do you think it is so difficult to drive EMR adoption at this point? Is this going to be what pushes people over or do you expect there to be further discounting going forward? What's going to cause physicians to finally purchase?

I will start and I think Pat probably has some thoughts too. There's still just uncertainty in the market so while we are seeing increased activity certainly and the pipeline reflects that. There's still a tremendous number of people who are waiting to see and finally hear exactly what is a certified product, exactly what am I going to have to do? What is the certifying body?

There's a group that is just going to wait and say I'm going to wait until I see the guy down the street -- I've heard this comment multiple times -- I'm going to wait till I see the guy down the street get his check in the mail from the government and then I will believe meaningful use really exists. So I think we are suffering from that uncertainty in the market that's really been there now for the last year.

The financing plan we announced, we are just trying to remove every stopper we can. So there's a group of physicians who -- the final straw to get them over the hurdle is aligning their payments to what they perceive their meaningful use recovery is going to be.

So I wouldn't say it's the end-all. We continue to try to implement product and services and financing offerings that make it as easy as possible for physicians to buy. I don't think that's the silver bullet. Pat, do you have any thoughts?

I will add a couple of things. One is I've heard there was one article and there's been a couple on the topic but that roughly 30% of the small to midsized market, mostly the smaller market is waiting for the finalization of the things that Scott talked about.

The other thing I will add is that there's a little bit of a headwind in place for our market relative to the -- the potential 21% cut in Medicare. So practices that are very heavy Medicare, cardiology would be one example, ophthalmology might be another example -- have a sort of a wait-and-see posture. And so far the current administration has continued to punt that ball, but if they don't continue to punt and they actually do implement the cuts, we think that will tighten up the market both on the -- we think it will adversely affect the top line in the RCM business and probably continue to be a little bit of a headwind or wait-and-see in the systems sales business.

So I think all of those factors are out there and obviously there are many offsetting very positive drivers going on, as you well know, with the stimulus as well. So I think Scott characterized it very well when he said that we are just trying to remove all the stoppers we can.

Okay, great. One last question if I could. In terms of the new financing agreement, is there a cost to Quality Systems for providing -- I know U.S. Bank is providing the financing. I'm just wondering is there -- are you guys subsidizing the financings in lieu of a discount or how does that work?

We do, and it's something I would characterize as immaterial.

Okay. All right, thank you very much.

Constantine Davides, JMP Securities.

Thanks. Pat, just on meaningful use and certification, you guys are obviously pretty close to this. What is sort of the latest color on the government either relaxing the timing or the standards? What's your expectation there as of this date?

Scott has been a little closer to that more recently so I'm going to ask Scott to take that one.

Well, what we are hearing and obviously we are very active in this is we are still expecting final definition to come out in July, hopefully early July. The certification process we are expecting to follow closely on to that. While we hear there may be some relaxation of the initial requirements, I can't say that we have heard that there will be anything substantial or dramatically different than what was originally put forth. But who knows when we finally see it? And we haven't heard anything that would indicate that timelines are going to be relaxed at this point.

I'd just conclude with the same comments I had with the comments in our software release. We think we are positioned as well as anybody in the industry to take advantage of it and as soon as things get locked down, we will be going through the certification process.

Okay. Thanks, Scott. Paul, you didn't disclose Opus there but I think in your recent presentations you have sort of said that is around a $14 million topline. So is it safe to assume that that was around $1.5 million, $2 million in the quarter?

That was a run rate number, but I really wouldn't try to read anything into -- calculating some kind of a run rate impact on our quarter. So we would rather -- give us a little bit of time here to with that business before we start getting into sort of trying to talk about how much is this and how much is that. If that's okay.

Yes, that's fine. Could you maybe just say where it actually get reported? Is that in the systems sales line or the other line?

A combination of both. Some systems sales, some maintenance and other categories.

Okay, and then lastly, just on the tax rate, Paul, is this the right run rate to think about for fiscal '11? Thanks.

Yes. There's a caveat there that I wanted to mention and that is the R&D tax credit. Any Company like ours that benefits from the R&D tax credit unfortunately has to live with Congress that occasionally or regularly allows it to lapse and then at some uncertain point in time comes back and puts it back in again. So as soon as that thing lapse we can't -- the benefit that we get stops, and then whenever -- if they reenact it then they typically will reenact it retroactive to the date that it expired, and then we get a little bit of a whipsaw effect on our tax rate.

So I can't predict what's going to happen there. We do benefit -- last year we took a benefit equal to about a 1% rate off the R&D tax credit and if they don't put it back in, we are not going to see that benefit this year until that happens. So outside of that, everything else probably is going to stay pretty consistent.

But again, I've got to be -- some of this stuff gets in the tax law and I want to be careful not to give guidance on the rate. But I think probably the biggest moving part in there is going to be the R&D tax rate.

We do have times as I talked about some amount of fluctuation in our state effective tax rate. And that just gets into different states have different rates of tax. And there's no -- I am not going to be able to predict how much of our business or how much of our sales are going to be in any given state. So consequently you get some amount of variability in that that's kind of unpredictable. But hopefully I've given you some color there to chew on.

Thank you.

Greg Bolan, Wells Fargo.

Thanks for taking the questions. It looks to me that the majority of regional extension centers are still receiving proposals and will look to make decisions on preferred vendors over the next several months. Can you give us a sense of the traction that NextGen is getting with the decision-makers at these recs and could you give us a sense of how many quota carrying reps you have directly going after these recs?

I can comment on that a little bit. I think to your point, there will eventually be about 70 recs. As far as I know, only two or three have made decisions. In fact off the top of my head, I can only think of two and we were named in the short list on one of those and in the long list in the other. So pretty good traction. It is definitely a key focus area for us is working literally all 70 of those.

To do that we have a few people dedicated to that full time I would say in the handful range. And then it really is part of all the reps, the 105. They all know what recs are in their regions and so part of their regional responsibility is to make sure they are working on those local efforts.

As you indicated, we think that will play out over the next three to six months, most of them going through their selection process. So we have geared up to follow through with the field reps. And also to be honest, it is just a lot of RFP work also as they all put out their own individual RFPs.

That's helpful, thanks. Scott, can you share with us your goal for quota-carrying rep hires through fiscal 2011? Should we expect the same 50%-ish increase in reps by the end of this fiscal year?

I would say right now that I would not set that expectation. I think we will be a little more conservative on increasing the sales force as we see how pipeline and activity picks up. I think we are in the ballpark and we will certainly continue to grow. We will also just have some churn. As you brought on 50 new reps in the last six months, there will be a little more churn than there was early on. So I would expect to see that line grow, but not nearly as fast as the last year unless we really see pickup in the later quarters of the year.

Okay, that's helpful. So then my follow-up is guidance related, but can you share any thoughts around your revenue goals for fiscal 2011? Maybe one way to ask the question might be using consensus as a benchmark. Right now consensus is calling for about 21% revenue growth in fiscal 2011. Does that -- Steve, does that seem reasonable to you?

Well, you are correct, we do not provide guidance, but -- there's so many variables. If you remember that bill was signed February 17 of last year, the government indicated by December 31 of last year they would have regs finalized and they should have been coming out of comment period and being operable right now as we are speaking. The government is at least two quarters behind, maybe more in terms of finalizing the regs. And you have to remember when the regs are finalized, then there's a process that has to take place and a timing attached to that process for companies like us to get certified.

So with that being an unknown and still being a variable element, we are -- it's very difficult for us to tell when that 30% of the market that's sitting on the sidelines that Pat talked about a minute ago is going to be able to jump back in once they understand what the regs mean and when they are concluded.

When you talk about a 20% revenue growth, well, we grew 20% this past year during a real choppy year. As you know, there was a lot of uncertainty in the market. There was a lot of hesitation early in the year once the bill was signed. So it's probably not an unrealistic expectation that that is a reasonable range, but there's so many outstanding variables and they sit unfortunately in the hands of the government.

Sure. Thanks, Steve. My last question and I will go silent myself. But Paul, I know we will see the exact numbers in the K, but can you say if NextGen numbers were up or down on a sequential basis?

They were up.

Great and good luck on your new fiscal year.

Atif Rahim, JPMorgan.

Thanks, I know you don't want to talk too much in detail about Opus but if you can answer a few questions, that would be great. The first is on transaction costs. Are we done with the [200,000] or so that we had so far, anything coming forward?

And then secondly, what has been the earlier reception from the Opus clients? Are they looking to perhaps buy any of the NextGen products or the reception from NextGen customers? Anything that you could cross-sell or upsell into the hospitals they might be affiliated with? And then lastly, anything in the pipeline that you've included from Opus?

I can take the first piece of that in terms of the transaction costs. No, we are done. The old days under the old accounting rules, those kinds of things would be capitalized as part of the cost of the acquisition, but that's changed now. Any kind of cost such as legal costs and to diligence costs and those kinds of things have to be expensed as incurred. So that's part one. And I will leave it to Pat and Scott on two and three.

So I will go ahead and tackle. From the activity standpoint, I would also just help you recall there was two pieces we picked up. One was Opus and one was a company called Sphere, Sphere being the financial piece of the inpatient solution and Opus being the clinical. Where we have actually seen the most traction is being able to cross-sell between those two, so each of them had a relatively small client base but certainly that client base is looking forward to total integrated solution. And so we have really good activity just working back and forth across that.

The second part of that has obviously been how do we gain traction with our traditional install base? And to be honest, we've just really gotten now through the first phase of training for our sales force to where they are learning what the products are and how to position them. So we've seen some good early indicators and some good early interest from our clients, but it's a little too early to say there's really momentum around that.

From a pipeline standpoint, I am reflecting now Opus transactions in the pipeline. Once again, though, I would say it is not really a material number at this point.

Okay, and finally Scott, if I could just ask on the quota-carrying reps you talked about, it looks like the 33 compared to the November 1 number that you had, 33 adds, those are all going to be selling beginning sometime around this point. So what's the quota you have for a sales person, if you could share that? Or what should be looking for in terms of incremental revenue from these adds?

I would probably throw that into the category of guidance and just really aren't going to put any numbers out on that right now.

Got it. All right, thanks.

Steven Halper, Thomas Weisel Partners.

Sure, two questions. Number one on Opus, was there any previously deferred revenue from Opus that you won't be able to recognize going forward?

Previously deferred revenue that we won't be able to recognize going forward? There are some -- I'm trying to understand the question. There are some -- certainly there's deferred revenue that came over with the acquisition, but I don't see any reason -- but that's not revenue that would -- that is going to be recognized at some point in time.

Oh, because I though you sort of lose that on the purchase, right? Even though it's still a cash benefit to you.

There may be a slight difference in the purchase accounting between the book value of that deferred revenue as it stood before they were acquired versus what we would put on our books, because we have purchasing accounting, so we have to -- there's various assets and fair value numbers that we have to put on. So it's not -- I guess in answer to your question, there is a small amount but it was not very significant.

Okay, so then continuing on Opus, going forward do you have a kind of a distinct salesforce for that set of products with Sphere?

So the way we are running sales right now is we do have a centralized salesforce that covers all of our product lines with the exception of Dental has their own independent reps. But everything else works off a centralized group and then there are specialty reps for each of the more discrete business lines. So we will have some specialty reps who cover inpatient I would categorize it, which would be a combination of inpatient or Opus and Sphere, just like we have specialty reps who really focus on practice solutions, revenue cycle type deals. So that's the model we basically have set up.

And lastly, you talked about breaking out the three business unit segments between practice solutions, NextGen, and Dental. When are you going to start doing that?

You are going to see in our disclosure in the K, you are going to see three segments and going forward in the June quarter, we will be speaking to those three segments, being NextGen, practice solutions, and QSI. So we had some organizational changes that occurred right around the months of April that indicated that it was time to move to three business segments from a financial reporting point of view.

Right, okay. Thanks.

Anthony Vendetti, the Maxim Group.

Thank. As a follow-up to the regional expansion centers, of those 65 or 70 that are out there, do you expect to be bidding on all of them? Then on the two that were on the short list or the long list for, has a decision been made? Are you going to be -- have you been selected to be one of those or is that process still ongoing?

So the first part, yes, I would generically say we would probably compete for all 65 or 70. I mean, there may be exceptions to that but certainly that's our mindset. On the two that have been selected, it is sometimes hard to know exactly what selection process they are going for? I'd characterize the one that I said on the short list is yes, we were named as one of the vendors. The second one, we are on the long list, it's a little tougher to understand exactly what process they are going through. So I would leave it with that.

If you were to -- what would you think would be your fair share of these regional extension centers, what would that -- have you guys quantified that revenue opportunity, approximately what that would be?

We think having them all would be fair. We have some internal models on the lower end of the market but nothing we can present to you at this time.

Okay, and how many SaaS agreements did you sign this quarter, the dollar amount and how was that in terms of magnitude versus the third quarter?

I can take that. It was about five or six if I'm remembering right, so it is still a fairly small number in terms of percentages.

Is it increasing versus the third quarter?

It is approximately flat for the last few quarters.

Okay and lastly on the seasonality that you mentioned, what was the dollar -- have you quantified the dollar percent impact that had in the quarter?

I don't. We don't have a quantification of that exactly. But what I did state there was -- you saw the sequential drop in revenue on gross profit that came out of RCM. And clearly we know what was driving that. Two factors, the record snowfall that occurred that essentially shut down large sections of the country for a period of time. And when people can't get to the doctor for their visits because they can't physically do it, that does have an impact on the RCM business.

And lastly on the SG&A, there was -- you mentioned the amortization costs. Did I miss the actual (technical difficulty) transaction costs that went in SG&A this quarter?

Yes, it was about $200,000.

Okay, good. Thanks, guys.

Sean Wieland, Piper Jaffray.

My question has to do with sales rep productivity, namely the 20 reps that you added in the December quarter. I assume that they didn't contribute meaningfully to the March quarter. Have they begun contributing to the June quarter and when do you expect these guys to start producing?

Right, so generally what we consider is -- they go through a four-month training process, which I would say is little to no productivity. And then coming out of that, they are still getting their feet wet in building pipeline, which they are doing while they are going through training also. But realistically we don't really see them getting any ramp in productivity for kind of that four to six-month timeframe and I would say a rep gets fully productive after probably a year in territory.

Okay, so I know you don't want to give us quota levels for fiscal year '11, but should we think about -- you've increased the size of your salesforce by almost 50% in the past six months. Are quota levels, given the territory size, assuming that you have been reduced, are quota levels staying flat or are they going down or are they going up?

Roughly -- this is Pat. Roughly speaking the quota levels are consistent with other or prior quota levels of other reps. Territories are smaller, but we do see, as we pointed out, a more robust market and we have done more in the way of marketing to make sure that we are still generating on a per rep basis as many leads as we can.

Okay, got it. Thank you very much.

Frank Sparacino, First Analysis.

Paul, can you tell me how many people you added through Opus?

About 100, a little under 100.

Okay, and then just to confirm, from an expense standpoint run rate going forward, absent the 200,000 this quarter, what you have sort of exiting -- that's basically a baseline for expenses going forward then?

It's a bit more variable than that. I wouldn't just assume that I can take $200,000 off and that will be my number next quarter. I would caution you on that because there is various things in play. We have various trade shows that occur. We have various marketing programs that we are running. We have some of that stuff is variable. Commissions expense certainly is a function of how much our sales reps can sell and how productive they are against their quota. So you have got -- there's some variability in there and I would like to give you more, but as you know, we are pretty conservative when it comes to giving out guidance.

Leo Carpio, Caris & Company.

Good morning, gentlemen. I have a couple -- three quick questions. The first question regarding the revenue cycle management business, is it fair to say that we are going to expect a return to kind of normal levels in terms of margins next quarter now that we have passed the winter season and the snow -- billings behind the snow storm related are all behind us?

Without giving you anything specific, I think that expectation would be a reasonable one.

Okay, and then secondly regarding the Federal Qualified Health Clinic market, we talked about this back in August when you started winning some contracts there. How is that market developing? Has it fully been awarded in terms of -- have these clinics already used their money or is there still money there available in terms of possible new contracts?

It definitely has not all been spent at this point. So a tremendous amount of activity continues to be a great segment for us.

Okay and then lastly in terms of the sales traction from the Obama HIT programs, all of them, it sounds like what you are telling us is it's all being pent up because of all of these regs and the Cash for Clunkers phenomenon. It sounds like even if the regs to change, there still may be some temporal lag. Is that kind is the right way to look at it?

Yes, I would say -- it's two parts. There was a earlier question on pipeline, which is increasing, and I think that's where you see the benefit of stimulus is. It has dramatically increased the interest level and people thinking about do I need to get ready for an EHR? I think a lack of definition is the reverse, which is a headwind. So we are seeing an increase in interest and an increase in people having trouble making a decision.

Than sorry, one more question on the pipeline. In terms the pipeline, what are you seeing in terms of interest from physicians? Is it more combination deals, that is doctors looking at electronic medical records and also looking at RCM at the same time versus what you would've seen in the past?

We certainly see more of that than we traditionally have just because we now have the revenue cycle business. So there is an element of that. I would not say that I see a characteristic change in the market that RCM is picking up increased percent of market share versus people just wanting to go with a straight system purchase.

All right, thank you.

Eugene Goldinberg BB&T Capital Markets.

Most of my questions have already been answered. I've just got one follow-up for you guys. With the cash balance continuing to grow nicely, is there any change in the capital I guess deployment strategy or is M&A still a priority? I know with Pat kind of taking a step back from that role, I was just wondering what were you thinking there?

There aren't any strategies that we would want to talk about on the call and let me just say that my stepping back from the M&A activity to a point should not be construed to mean that there won't be any M&A activity going forward.

Thanks for taking the question.

Corey Tobin, William Blair & Company.

I wanted to come back to the margins in the RCM segment for a second. I think this is Leo's question from earlier. This quarter I think marks a low point since you've really gotten into that business. I'm just curious when can we expect this to trend back up to the 30% or so level they saw in 2009? Is this something that can bounce back pretty quickly or is this something that we wouldn't expect to see trend back to that level until sort of 2012?

We think it can start trending back relatively quickly. We think through the integration that I mentioned in my prepared comments between the PMP and HSI businesses as we move further down that road now that the earnouts are behind us, we can take expenses down. Of course as Paul has addressed a couple of times, the record snowfall isn't something that you will see this quarter and what the snowfall does is it doesn't completely -- people don't cancel their appointments. Some are canceled, but many, many patients reschedule appointments and so there is a little bit of snap back effect hopefully in this quarter, not that all that revenue will come back, but I guess you characterize it as an advantage.

Okay, great. What would you think the target margins -- again, without necessarily putting a timeframe on it, but what should we think about the margins being in this business on a long term basis?

Well, I don't want to guide you on margins or tell you what our internal targets are, but I can tell you that our targets are -- represent significant improvements over what you are seeing at this point.

Okay, great. Thank you.

Gene Mannheimer, Auriga.

Yes, thank you. Following up on the revenue cycle piece, we have heard from other companies that the revenue cycle reporting their March quarters and they haven't really cited the weather phenomenon as affecting their business. So is it that you have especially large concentration of customers in the Northeast? Is that what helped drive some of that impact?

Yes, PMP you may recall is in the Baltimore area and by and large all -- with few exceptions, all of their customers are in that corridor.

Okay, that makes sense. Then just switching over to Dental briefly, I thought I heard the comment that it was the highest revenue in 10 years or so. Are you able to disclose the revenue for Dental or did I miss that?

Yes, $[4.652] million was the revenue figure for QSI and it was the highest number we have seen in a long, long time.

Great, thanks very much.

Just, Gene, to get back on the weather issue at RCM. First, the weather affected two quarters. It affected the December end quarter as well as a March end quarter. And then, two, as Pat cited, PMP is Baltimore-based but HSI is St. Louis-based. You consider the upper Midwest through the East Coast, I think I read there was like 86 major cities in the United States that had all-time record snowfalls during that two-quarter period. So it had a compounding effect based on the geography where we are affixed with these two operating units. Just wanted to bring more color to that.

Thank you, Steve.

Glenn Garmont, Thinkequity.

Thanks, good morning. As we think about the 30% of the market that you alluded to earlier, the smaller end of the market that are still on the sidelines, I'm wondering how do you think about NextGen's competitive positioning? There are some pretty good competitors out there that have offerings at certainly a much lower price point particularly on the SaaS side. I'm wondering do you feel a need to maybe come up with a skinnier or lighter version of the software to attack that end of the market?

And then related to that, Pat, I know on previous calls you sort of provided us an update with on any discussions you are having with potential reseller partners to help you attack that end of the market. Any update there?

This is Scott. I'll tackle the first part and then turn it over to Pat. I guess I would agree with part of your concept, which is do we need a good SaaS offering out in the market, competitively priced? I would agree yes, I think that's a key component to participating in the lower end of the market and I think you will see even in the course of this quarter us continue to ramp up our competitiveness both from our ability to host those kind of solutions and the price point on them.

The second part I think we are competitively positioned very well and I don't know that we necessarily need a skinnied down product as much as we need a preconfigured product. Certainly one of our strengths in how we build the creditability of the market is just the (inaudible) across our client base. Those clients who have been with us a long time would say it is the depth of our product they really differentiate us.

So we don't want to lose that capability, but I think we have some ideas on how we can simplify to get started and delivery of that and certainly moving to a SaaS model for that market is a key part of that strategy. Pat, I think you can tackle the channel part.

On the channels part, we do have certain strategies as we've talked about briefly to leverage partners and resellers and also hospitals. Many of these small practices look to hospitals in their community, whether it's through start related subsidies or otherwise to help them with these decisions. And we do have strategies. We are leveraging these and we are executing on those strategies.

Okay, I appreciate the commentary.

Richard Close, Jefferies & Co.

This is [Dana Handley] in for Richard. Just on the pipeline, pretty good sequential jump there. Last quarter you had talked about the number of seven-figure deals being at a record level. Could you just talk about the pipeline, size of the deals and maybe the win rate within the pipeline? Thanks.

I don't think I will talk to the win rate. I would characterize the pipeline as very similar to last quarter, so there's probably a similar number of our seven-figure deals in it and then balance out with just normal transactions. So not characteristically different than last quarter, just growing momentum I think as meaningful use gets closer and closer, we are just seeing that pent-up demand increase.

Great, thank you.

I can probably give you a little bit of texture on the win rate. The win rate varies based on market segment. I would say in our core, that is midrange to high-end of the market, our win rate is very, very strong, a little bit lower in recent history within the Misys customer base, as you might imagine. And at the lower end, our win rate is weaker and we are doing things that were already discussed to address that.

Okay, I appreciate that.

(Operator Instructions). Jamie Stockton, Morgan Keegan.

Thanks, guys, for taking my questions. I guess the first one is I think you talked historically about with the maintenance revenue line, it's been creeping up a little more than I had expected here lately even though your system sales have been strong. Have you been seeing some customers going for kind of a gold level of maintenance contract or trading up for a higher level of support, given the government requirements and the ramping that they are going to need on that front?

No, we really have not had any change in our maintenance model, so it really is just reflective of the increase in sales.

Okay, and then --

If I could just add also -- not quantifying things, but directionally there is some maintenance revenue that from the Opus acquisition that's included in that sequential increase.

Okay, that kind of leads into my next question, Paul, which is when we think about the Opus business, as UHS transitions away from Opus, should -- is that going to create a headwind for that business maybe for the next year or so?

Well, the expectation there, our expectation is that that process is going to take awhile, so it is clearly a long-term headwind. But the expectation and certainly what we are working towards is for is to not see that headwind in the short term. But we do know it's something that a long-term issue to deal with and Pat and Scott may have some other color on that as well.

This is Pat. I would say that we believe that revenue will be coming out over a period of more like three to four years. And we feel strongly that we can more than make up for it.

Okay, and guess my last question is you have had a couple of quarters where the hardware revenue has been pretty light. Is the color there that you are just seeing more practices choose to remote host? Or is there some other dynamic that's going on?

We did have in the quarter more hardware orders than we were able to book. We had some hardware orders come in pretty late in the quarter, so we've got a little bit of backlog there. Again, I don't want to quantify it, but that was a little part of it. I think the number of customers remotely hosting is trending up slowly over time, but I don't think this quarter or last quarter or the slight trend down that you are seeing has a heck of a lot to do with that.

The other thing that I will point out is on the hardware side of the business, the margins are pretty darn low, so you would see a little bit of topline impact. You might have seen an extra $1 million or something like that, but you wouldn't see a big impact to bottom line.

Okay, thank you.

(Operator Instructions). I am showing no further questions in the queue. I will hand it back to management for any further remarks.

Great. Thank you very much, Josh. Thank you all for participating. We had a lot of great questions. But the general themes remain the same for us. You know, we have been preparing and building our preparatory elements for this stimulus plan for some time now and we like the position that we are in. The government hasn't met their timelines, but it's not a matter of if. It's just when. And we anticipate that they will get everything in order and finalized sometime by mid-to-late summer and we will still realize a lot of the benefits of this stimulus in our upcoming fiscal year.

But directionally things are up. Our pipeline is up. Our reps will start producing over the next two to three quarters as they get more indoctrinated into the system and we, like everyone, are anticipating and expecting continued movement in a positive direction as the government moves towards getting all of healthcare electronic in the next five years.

So again, thank you for your support and look forward to seeing you in my travels. Take care.

Ladies and gentlemen, that does conclude the Quality Systems, Inc. fiscal 2010 fourth-quarter and year-end results conference call. If you would like to access a replay of today's conference, you may dial 303-590-3030 or 1-800-406-7325 and enter the access code of 4305314. ATT would like to thank you for your participation. You may now disconnect.