NextGen Healthcare Inc (NXGN) 2011 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Quality Systems 2011 first quarter results. During today's presentation all participants will be in the listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Friday, July 30, 2010. And now it is my pleasure to turn the conference over to our host, Mr. Steve Plochocki, CEO. Please go ahead, sir.

Thank you, Barbara. Welcome everyone to the Quality Systems fiscal 2011 first quarter call. With me this morning are Paul Holt our CFO, Pat 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 in the implementation of potential impacts of legal, regulatory or accounting requirements.

I will provide some opening comments and then turn it over to the team. The company reported record net revenues of $82.9 million for the fiscal 2011 first quarter, an increase of 24% from the $66.6 million in the same quarter last year. The company reported net income of $12.1 million, up 17% versus $10.3 million in net income for the comparable period a year ago.

Fully diluted earnings per share were $0.42 in the fiscal 2011 first quarter, an increase of 17% when compared with $0.36 fully diluted earnings per share in the first quarter of fiscal 2010. The fiscal 2011 first quarter results include amortization of approximately $0.8 million of acquired intangibles compared with approximately $0.4 million for the same quarter a year ago.

On July 13, CMS and the ONC announced the final rule on the definition and requirements regarding demonstrating meaningful use of EHR. The announcement served as a definitive guide on what providers have to do for the Medicare and Medicaid incentives under the HITECH Act for Stage 1 which includes years 2011 and 2012. Stages 2 and 3 will be clarified and further defined in the future.

The Stage 1 requirements allow for greater flexibility thus making it easier for providers to meet the meaningful use standards and collect incentive payments. Physicians and hospitals that have been hesitant in the past can now move forward with confidence.

On July 1 the government began accepting applications for the selection of certifying bodies to enact and execute the certification process. There were 41 requests for applications and six have already been fulfilled and applied. The government promised to act on the applications within 30 days. CCHIT was one of the first in line to apply for an application and it is our hope and desire that they will be cleared within the next 30 to 40 days.

And we hope to hear more information regarding the certifying bodies selected as well as the going forward process as, as you know, that is one of the most important components of completing the government's requirements so that the open market can determine who they want to go with and how to move forward. We view this as all good news. But it is still very early. Nonetheless, we are pleased with the progress that the government is making in terms of removing the uncertainties that our sector has been living with.

Healthcare providers will be moving through a sea-change over the next five years. As we often previously stated during the past several quarters we have been aggressively preparing for this transition to an electronic based healthcare system by continually investing in sales, marketing, implementation and training, enhancing our staff, structure, operations and technology. We are confident that NextGen Healthcare's novel technology, leading industry position and extensive educational offerings will prove beneficial to providers as they evaluate their options available in the marketplace and make their EHR selections.

All of our business units are posting record growth under the strong leadership teams that we put together over the last year. It has always been a hallmark of our company. I will leave it to them to tell you more and now turn it over to our CFO, Paul Holt.

Thanks, Steve and hello, everyone. As I typically do I'm going to bring my comments around our quarterly results and follow by a balance sheet recap. As Steve stated our consolidated first quarter revenue of $82.9 million represents a 24% increase over our prior year revenue of $66.7 million. Our NextGen Practice Solutions unit as well as our NextGen unit and our QSI unit all turned in very strong performances.

Breaking down our revenues performance by business unit NextGen was a record $65,830,000. That's up 26% over $52,430,000 a year ago. Our Practice Solutions unit was $11,745,000 and that is up 13% over the $10,352,000 reported a year ago. And our QSI unit was $5,353,000, that is up 39% over $3,856,000 that we reported a year ago. We are very encouraged by these revenue performances.

Our consolidated systems sales grew 36.9% over year-ago quarter to a record $29.1 million, compared to $21.2 million in the year-ago quarter. And our consolidated maintenance, RCM, EDI and other services revenue grew 19% to $53.9 million compared to $45.4 million a year ago. Revenue cycle management revenue was up 20% over the prior-year quarter at $10.8 million versus prior year $9.0 million and this reflects solid execution on our backlog within that unit.

Total recurring services revenue including maintenance, EDI, revenue cycle and other accounted for approximately 65% of total revenue this quarter, down slightly from the 68% a year ago. And our consolidated gross profit margin came in at 61.6%, that's up slightly from a year-ago quarter of 61.1%. We had -- a higher amount of hardware this quarter was offset by an improved margin in our EDI unit.

Total SG&A excluding amortization expense increased by approximately $6.1 million to $26.2 million this quarter. That compares to $20.1 million a year ago.

Primary drivers of the increase were salaries, commissions and related expenses due to headcount additions. We've got a certain amount of SG&A expenses tied to our Opus acquisition as well as the $0.8 million in certain business integration related costs that we had within our RCM unit this quarter. SG&A expense as a percentage of revenue this quarter was up to 31.6%, versus 30.2% a year ago.

Moving on to our balance sheet. Total cash and marketable securities increased by approximately $9.1 million this quarter. We reached the $100 million mark in cash at $100.9 million, that is equal to $3.47 per diluted share. That compares to $91.8 million or $3.17 at the end of the prior quarter.

DSOs net of amounts included in both accounts receivable and deferred revenue decreased by 8 days from a year ago where it now stands at 80 days. Our DSOs based on our gross receivables also decreased compared to the prior-year quarter at 123 days versus 127 days a year ago.

And for those of you who are tracking this, we are reporting total amortization of capitalized software at approximately $1.7 million. Amortization of identifiable assets related to our acquisitions at $765,000. Total depreciation expense, $962,000. Stock option compensation, $1.1 million. Capitalized software, approximately $2.5 million; and about $878,000 in fixed assets investments.

Again, I want to thank you all for being on our call. I'm going to turn things over to Pat Cline, President of Quality Systems.

Thank you Paul. Good morning everyone. Overall I'm very pleased with our progress in all areas of the business and I think we have made the right investments to position the company well.

I know there are questions about demand increasing based on the meaningful use rules and associated incentives; and while we have some of the same questions, we are starting to see demand pick up a little bit. Additionally, we are seeing increased demand from our current customer base of large customers for professional services as they accelerate their rollout schedules and we have been building out our services organization to meet that demand. We view that as positive news.

Further, for the last two months we have been focusing on cost containment initiatives which we believe can improve our operating results going forward. Essentially we are looking for SG&A to grow at a lesser rate than revenue going forward.

Our revenue cycle management business is beginning to show positive signs relative to margin expansion based on the integration and other activities we have been engaged in, in that area of the business. We remain optimistic about the market and about our company. And as I said, we are pretty well positioned, we think, to continue to capture market share going forward.

Thanks to our employees and to our customers as usual for their confidence in our company. Donn?

Thank you, Pat. Good morning, everyone. We continued to have success with federally funded entities purchasing the QSI electronic dental record integrated with the NextGen EPM and EMR. We had a record 15 new joint dental sales during the quarter. In Q1 the dental division had its highest revenue in over ten years.

NextGen EDI revenues were up 26% from a year ago and operating income up 40%. EDI revenue and operating income were also both records.

I would also like to thank our employees for a great quarter, our customers for their business and our shareholders for their support. I would now like to turn things over to Scott. Scott?

Thanks, Donn. Good morning, everybody. Just to give you a few statistics and comments on the market as we have every quarter. First off, I'm very pleased with the quarter we just had. As many of you know, fourth quarter of the year is often our strongest and so sometimes we will see a dip going into first quarter.

The team did a great job of pulling together and making sure that didn't happen, represented with our 26% year-over-year growth. Would not say it was an easy quarter but good activity, good transaction volume and was really pleased with the number we finally came in with.

I'm also very pleasantly surprised with the progress that our inpatient acquisitions have made. We have seen tremendous activity there, signing multiple new clients already in the first five months we've had them onboard. So I think we are on the right track with the answer of needing an inpatient and outpatient combined solution and real pleased with how that integration is going with those acquisitions.

Our pipeline as of yesterday sat at $129 million and looks very good, strengthening. Feel much better about its quality versus a quarter ago.

We also were up to 109 quota carrying reps now versus 105 that we reported last quarter. I would not anticipate that number to go up in the next quarter or two. In fact it may go down a little bit as we just sort through the significant number of hires over the last couple quarters.

With regards to certification of our products, we did receive preliminary certification of our ambulatory EHR product 5.6.1 by CCHIT last month. For all intents and purposes we believe it is essentially certified though there will still be some final regulations in process as Steve indicated that need to come out. We are also on track we believe from a development standpoint of having a certified product on the inpatient side. So by late this year, fall, early winter we should have certified EHR product both ambulatory and inpatient which we think will be a nice strategic advantage for us going into next year.

I will just close out by saying that the enthusiasm of both our clients and our employees has never been higher. Tremendous activity and creative thoughts around the market and where it needs to go. Very optimistic about the next couple quarters. Barbara, we will now take questions.

Thank you, sir. (Operator Instructions). Our first question comes from the line of Mike Cherny with Deutsche Bank. Please go ahead, sir.

Hi, guys. One quick housekeeping question. That $800,000 in integration expense, what line did that hit again on the income statement?

That hit the SG&A line.

Okay. Thanks. That's helpful. Then just quickly, I wanted to dive back into the gross margins for the quarter. I'm looking through the numbers and the one thing we think we saw a real spike in was the cost of software and hardware. I know you mentioned that hardware was higher this quarter. Was that the only moving piece or were there other factors that caused the significant spike in that line?

Well, yes, on that particular line the biggest variable there is the amount of hardware that we sell in any given quarter. So you are seeing an increase in hardware within the mix on that line.

So, I assume we should think that it is not repeatable given that it is so far above historical levels? Or is it kind of tough to tell?

Hardware is something that moves around. It is not something that we necessarily focus on, it is something that is asked of us from our customers and we are more than willing to offer those hardware types of monitors, servers, those kinds of things.

But it is not something that is very predictable and it moves up and down from quarter to quarter and it is not -- it is a very low margin type of thing so it can have a more pronounced impact on the margins on that from the system sales.

Okay. Thanks.

.

Thank you. And our next question comes from the line of Greg Bolan with Wells Fargo. Please go ahead, sir.

Thanks for taking the questions. Steve, based on where the pipeline sits and the level of leads that are coming in, do you feel like the sales, marketing, implementation infrastructure is close to being right sized? You had mentioned, or Pat had mentioned, for example, that SG&A would not grow as fast as revenues going forward and Scott had mentioned that quota carrying reps might be flattish over the next several quarters.

As you know, when the bill was signed a year ago February in 2009, we embarked upon a process to beef up our sales, marketing implementation and training organizations. We started that in the late spring of last year. And, of course, we did that in anticipation of the government fulfilling their timeline of achieving meaningful use and certification standards by the end of December of last year.

So we built the organization up. As you bring individuals in you have to put them through a training program. We have to give them an opportunity to build their own pipelines and then convert those pipelines into business. Right now we are in a position where we like where we are at in terms of the size of our organization in that area.

We think we are not too far away from them starting to really produce some real solid results for us. And the timing probably is ideal in the sense that it appears the government will finalize certification and certifying standards sometime by this fall.

So we think it is all coming together at the right time for us. And as Scott indicated, we are probably going to hold in terms of additional adds in the sales organization for a quarter or so to see if our timelines are now yet again well matched up with the government's.

That's great. Thanks. Thanks, Steve. And then obviously sitting on a healthy cash balance and I guess as you think about going forward just in terms of your R&D spend and what you are putting back in the organization, has there been any talk among -- within the board about potentially raising the dividend over the next year or so?

Well, we haven't talked about that at the board level. But, I imagine circumstances will dictate if the board takes that up as a subject matter in the future. I think as of right now we are probably going to sit where we are at.

Okay. That's great. And then my last question, Pat, could you just kind of describe -- I know Paul you had mentioned there was obviously an increasing mix of hardware and that was the primary reason for the reduction or the lower software gross margins year-over-year sequentially. But Pat, could you describe the pricing environment, you know, kind of starting at the low end and maybe moving up towards the enterprise physician practice arena? Is it more or less competitive or just about the same as what you guys have seen over the past year?

Sure. First a little bit of follow-on commentary on the hardware comment. I agree with Paul wholeheartedly that it is impossible to predict and it is lumpy and it will bump around from quarter to quarter.

But I would tell you that our internal expectation is that you are not seeing a trend there and we typically won't see that much hardware in the mix. I will just remind everybody that one very large hardware order can change that mix a little bit.

Now, on to rest of your --- to the other part of your question. We have seen our competitors as I have mentioned on the last couple of calls getting more aggressive with their price models and their pricing and their discount levels. So I would characterize the market as a little more price competitive.

We, in the quarter that we are reporting, actually did not see a bigger discount level overall, average discount with our systems, but I'm not sure that is going to hold either.

We have been talking about new pricing models internally, pricing models that we think will get us into the hunt in more cases on the lower end as the demand picks up, but not pricing models that we feel will cause a hit to our revenue or our profitability. It is more of a modularization, allowing practices to get in at a slightly lower rate and then add modules as they move forward. In fact it may be that the price per medical provider over time actually increases.

But the reason we are talking about those things is this increase in price competitiveness.

That's helpful. Thanks so much for the color.

Thank you. And our next question comes from the line of Sean Wieland with Piper Jaffray. Please go ahead sir.

Did you break out the license sales and maintenance and operating margin for NextGen? If you did, I missed it.

No, I did not. It will be all over the 10-Q document which we expect to get filed here either today or Monday.

Okay. Because that is something you usually give on the call, right?

Well, here. Let me give it out, you ready?

I'm ready.

QSI $1,591,000. I'm giving you operating income. NextGen division $22,789,000.

I'm sorry, 22 million?

$22,789,000. Practice Solutions division, $187,000. Corporate expense of $5,540,000.

Okay. Thanks. That's helpful. And the system sales in the quarter that you saw, is this a -- the new reps that you hired, the kind of bolus of reps that were added in the December quarter, have they been starting to kick into gear yet? Or is this still business from the reps that were there before that?

This is Pat and then I will turn it over to Scott maybe for some follow-on commentary. Our training program lasts approximately four months. So if somebody is hired in December they are coming out of training in the March time frame and then they are beginning to build a pipeline at that point.

And looking at average sales cycle, depending on whether it is a small account or a large account type of sales rep, that sales cycle can be anywhere from three to six to nine months. So I would say the June quarter is a little bit soon to see the benefit of sales reps hired late last year. But in the current quarter we ought to be able to see some pickup from them.

The bulk of the sales reps, and I don't have a percentage for you, that were hired in that time frame, were in preparation for the uptake at the lower end. So you shouldn't -- it is tough to model out X number of quota carrying reps against prior sales and extrapolate that forward. But hopefully that will give you a little bit of idea as to when and what we expect from those adds.

And as Scott mentioned in his prepared comments the -- well, you know what, let me turn it over to Scott and have him just follow on.

I think Pat summarized it pretty well. I have a similar view that we will start to see the uptake from the reps this coming quarter. I think you also are seeing the strengthening of the pipeline which is probably where you would right now be seeing the most representative reflection of the reps coming in as we look further back in our pipeline.

Okay. That's helpful. One last question. What do you think the impact of the Eclipsys Allscripts merger will have on your business going forward?

This is Pat. We don't think it will have a significant impact in the near term. I think strategically if we are a company that got into the inpatient space many months ago it would be hard for me to argue their strategy; but in the short-term we don't see a significant impact. There may be a couple of Eclipsys based hospitals that might look a little bit harder at the Allscripts ambulatory product or that sort of thing. But we are not seeing a lot of that at this point.

Okay. Thank you very much.

Thank you. Our next question comes from the line of George Hill with Leerink. Please go ahead sir.

Thanks for taking the question, guys. Pat and Scott, maybe can you talk a little bit more about the hospital market? Like you announced private customer wins in the last quarter. What types of hospitals are you guys pitching to? Who are you seeing in the competitive process?

What do you expect the win rate to look like? And I guess how should we think about how that position evolves going forward?

I'll make some general comments. This is Scott. Just to refresh everybody's memory, we bought two companies over the last year, Opus and Sphere to really put together an integrated financial and clinical solution. Our target market for that is the 100 bed and smaller hospitals. These are a lot of the rural community health center type facilities across the country. So, competition in that space is with folks like CPSI, Healthland, those folks.

As far as predicting the market I think all we want to say at this point is we are pleasantly pleased with the progress and the number of transactions we are seeing out of the group. It is really very early for us to do any kind of predicting on it because it is a relatively small group for us. It will be a little bit lumpy. We don't know how much backlog demand there was prior to the acquisition.

But certainly as we get through the next couple quarters we hope it becomes material. And as we start to see predictable trends we will certainly let you guys know.

Okay. And maybe a brief follow-up. The NextGen product on the (technical difficulty) sales [look] pretty low from a practice size perspective. What are the big differences between the Opus product and the NextGen product from a functionality perspective?

I guess when you are looking at hospitals that small, I guess is there much different in the functionality of the Opus product that you are not getting in the NextGen product?

This is Pat. There are material differences between an inpatient system and the ambulatory system both with respect to billing and financial and reporting as well as on the clinical side on the inpatient sides -- well, let me leave it at that. There are many more components to the inpatient, medication administration, reconciliation and nursing orders and those types of things.

On the outpatient side you've got much more in the way of specialty content, so they are two different kinds of systems that we are on an ongoing basis integrating at the core level.

Okay, thank you.

Thank you. Our next question from the line of Atif Rahim with JPMorgan. Please go ahead.

Hi thanks. Scott, could you go over the pipeline numbers? I think you said it was $129 million. Is that just NextGen or combined?

And I think last quarter it was $126 million. So if that is correct the rate of increase appears to have slowed. So any reason for that?

The pipeline includes NextGen which includes ambulatory inpatient; also any RCM deals that would be in the pipeline would be reflected there. I did report $129 million versus $125 million or $126 million last quarter. You do need to note that last quarter we reported much later into the quarter.

So just to give you a little visibility into how the pipeline works for us, if I would report pipeline the day after the quarter closes that would be a slow point. It will continually increase as the quarter goes on. So this quarter we are reporting one month into the quarter; it is going to be a little lower than last quarter where we were reporting almost at the end of a quarter.

Got it, okay. And then lastly on the software gross margin line. Is there something else within the systems there? You said hardware was something that affected that gross margin. But is there anything that affects software gross margin on a quarter to quarter basis?

This is Paul. We have amortization of capitalized software that goes into that as a cost of software in that. But that number it has been moving up on a gradual basis but it doesn't swing all that much. So your real big moving part in there is your hardware, amount of hardware that you've got.

Got it. Okay, then one last follow-up is just around the timeline for certification. Once the certifying bodies get their approval how far off that do you think you will have a certified system on the market?

This is Steve. Our best guess on that, in talking to our people who work very closely with CMS, is that once the certifying bodies are selected it will be some where between a 30 and 60 day period by which we believe we will have an opportunity to be certified. So, if the government sticks to their timeline of turning applications within 30 days, which would take us into early August, and then selecting their certifying bodies and if it takes another 60 days from there, we are talking about somewhere around Halloween.

Okay. Understood. Thanks very much.

You bet, thank you.

Thank you. Our next question comes from the line of Anthony Venditti with Maxim Group. Pleas go ahead, sir.

Thanks. Just to follow up a little bit on the hardware. I know hardware was higher this quarter than last quarter. On an order of magnitude, that was the difference in the gross margin, is that right?

Another way to ask it is, has there been any pricing pressure with some of the either smaller competitors or what are you seeing out there in the competitive landscape?

As I mentioned earlier, this is Pat, there is more pricing pressure; but we are reacting to it and our discount levels are holding very well. The hardware, as Paul mentioned, is truly the bulk of the margin issue.

When you say the discounts are holding well, what is the average discount that you are offering right now?

We don't want to go into the average discount level; but on relative terms the average discount in the quarter that we are reporting did not increase.

Did not increase, okay. And then in terms of the sales force for QSI, is that still approximately four for the dental division? And then can you talk about any joint sales that you have going on?

This is Donn. Yeah, the sales staffing is unchanged at four. And as I mentioned, we had a record number of joint sales that we are working very closely with the NextGen sales team including our dental record with their EPM and EMR.

Okay. And in terms of the actual number of NextGen deals, I know you gave the pipeline, but do you have an actual number of deals that were signed this quarter versus last quarter?

Last quarter we had I think it was 7, this quarter we had 15. That we were involved with, that were NextGen customers.

Were you asking -- this is Pat. Were you asking about the number of NextGen deals or the QSI joint deals that were done with NextGen?

I was asking about the number of NextGen; but I got the number of combined deals, right?

That was just ones where dental was included.

Where dental was included. How about just the pure number of NextGens?

67 would be the number for the quarter we are reporting.

67 versus what last quarter?

Paul, do you have that?

I don't have it off the top of my head.

I think it was the same range. Somewhere around 64 or 65.

I think the takeaway is that it was about the same.

Okay.

One subtlety if it means something is nine of the 15 were already existing NextGen customers and 6 were brand new sales for both of us. There's a subtlety to that number.

Okay. Great. That's great. Thanks, guys.

Thank you. Our next question comes from the line of Richard Close with Jefferies & Company. Please go ahead, sir.

Great. Thank you. Scott, I think you said something with respect to you are pleased with the strength or the improvement in the quality of the pipeline. And if you could just talk a little bit about that, what makes you look at that more favorably this quarter?

Obviously it is a subjective comment to a large extent. But I would say, you know, a couple of things we look at. One is when I report pipeline, I don't tell you the degree that the pipeline is. So we have cat one and cat two and cat three which is varying levels of confidence. That is on a positive upswing.

The other thing I watch fairly closely is just the size of transactions. So I can tell you this last quarter we didn't have nearly as many of the seven figure type transactions as we had had some of the previous. And that looks like it is back up on the upswing.

We had several of those type deals that pushed into this quarter; and obviously if you have a few of those seven figure deals floating around it makes the numbers a lot easier. So those are probably a few of the leading indicators.

The other thing is obviously the meaningful use clarification that came in the last month. And once again, a very subjective comment but we have certainly seen an uptake in the term meaningful use and hey, we need to get our systems in so we get our money increasing even in the last two to three weeks.

Just to be clear, you said the average size of the deals in the pipeline has increased?

Yes. But that is a little bit subjective. A more accurate comment would be to say that our average deal size last quarter was not nearly as high as it was the previous quarter and my guess would be that this quarter we will see it back up again.

Okay. With respect to Siemens obviously they are going to have new management there. Can you give us an update I guess on the relationship with Siemens and where we stand in that relationship?

No real change to the relationship. It continues to be a positive relationship. We also see the same kind of increase in demand from the Siemens client base. That is some of the Siemens hospitals are seeing more demand in their communities from physicians and therefore asking for additional either licenses or rollout services.

Now, Siemens inventories licenses to an extent, so that may or may not directly translate in any particular or over a set of quarters. But the demand from the Siemens base continues and from our perspective it is still a very positive relationship that we value as a company.

Okay. And then I was wondering if you guys could just explain to us analysts and I guess investors what a typical Opus contract may look like in terms of hardware, the service, license and support or implementation. Just, you know, what is the -- I guess typical look of one of those contracts or maybe it's an inpatient contract versus a NextGen typical contract?

I can just kind of give you a swag on what a community hospital, 100 bed deal might look like. It is probably about a $500,000 transaction, you know, close to half of that would be software. Probably the balance of it, the remainder is services work. You know, there is obviously a hardware element to it.

There are a lot of revenue reporting issues with it. We are doing a lot of those, at [Vasfields] for one. Also there's just credit worthiness issues which sometimes results in us doing a cash basis of recognizing revenues. But in general to answer your question I would say the ballpark deal we are look at right now is about a half million dollar deal. Half of that software, the rest services.

Okay. So when we think about this on a go-forward basis, let's say you really ramp up the inpatient side, that is not any indication that we might see higher levels of hardware coming through the income statement, that is not necessarily the driver of what happened here in this first quarter?

No. No. I don't think that had any impact. It is probably less hardware if anything, just because we are more likely to host those clients.

Okay. All right. That's it for me. Thanks.

I should also just note that when we reported the number of transactions for the quarter that was just ambulatory deals, not inpatient.

Thank you. Our next question comes from the line of Corey Tobin with William Blair & Company. Please go ahead, sir.

Hi, good morning. A couple of things. One, can we talk a little bit about this other services revenue line? It is showing kind of a nice sequential increase here over the last five quarters or so. I'm just curious, what is in that line item and what is driving its growth?

Corey, this is Paul. That line includes -- the biggest piece of that line is, we call manual licenses and they are third-party products that typically you are selling an annual license to maybe like a database, patient database or some other kind of ancillary add-on product that we will sell it, we will defer it, sell a year of it, we'll recognize it over the course of a year. And we continue to see some growth in that area as we are selling new customers; and the more customers that continue to renew on those products results in some growth in that area.

You also see that line also includes some add-on services that we are performing initial, customers that are already live on the software that may come and ask for us to come in and do some additional training or other types of perhaps consulting type services after the fact.

So, those are the two biggest pieces of what goes into that bucket and we are happy to see that revenue line moving in the right direction.

Sorry, just to clarify on the first point. Annual licenses, so these are licenses that someone is buying on a term basis that expire in 12 months? Is that what you are saying?

Yeah, and they are third-party products. They are not products -- we are going out and buying them from a third party and in essence reselling them.

Is there any non third-party software revenue going through that line item?

No.

Okay. So it is all either third-party licenses or service, add-on services.

Yes.

Okay. Got it. And the margin in that line item looks like it has ramped up. Is that from the services piece or are you going to get margin on the third-party revenue?

Both. We are getting better margins in both those areas. To some degree some of those pieces our costs are relatively fixed; and if we can continue to ramp up the sales there our costs don't necessarily always follow the same degree. So we are getting some economies going on.

Got it. Great. The second question, if I could. Any count on the organic growth in the quarter? What would the growth have been if we strip out the recent acquisitions?

You are talking about the Opus acquisition?

Well, there is Opus and I guess we can back into the rev cycle numbers but primarily Opus.

This quarter we recorded Opus contributed approximately $3 million in revenue related to Opus.

Great. And that is primarily through the software, primarily the systems line or is there some in maintenance, too?

No, I would say it is about two-thirds of that more on the service line, maintenance and services.

Got it. Okay. Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Bret Jones with Brean Murray. Please go ahead.

Thanks for taking the question. If we could circle back to I believe it was George's question on Opus and sort of aligning it. The way I'm thinking of the two products, Opus is a small hospital product, under 100 beds. And NextGen's sweet spot in the physician practice I have always thought of as the multi specialty groups.

I don't necessarily see how the two line up. Can you talk about what are you doing to better position the NextGen product for the small doc practices?

Sure, this is Pat. As I've mentioned in the past we've have done many things with both the product and the sales model and training model for that matter to position the company for success at the low end. The computer based training and E-learning tools that we deployed, the work that we have done to the product on the user interface, and what we have undertaken relative to the sales force and our marketing efforts -- all were to expand our focus, again, not shift our focus necessarily but to expand our focus to the lower end of the market.

And small hospitals also have physician's offices attached to them. And the hundred bed -- and in some cases the Opus customer base includes hospitals that are larger than a hundred beds -- is nice fertile territory for ambulatory sales we believe.

All right. Thank you. And then if we could just go back to the pipeline for just a second. Obviously I think everybody is a little bit surprised at the lack of growth and Scott, you touched on it a little bit. I just wanted to make sure I understood.

It sounded like you said RCM is definitely not in the $129 million number. I just wanted to make sure of that off the top. Is that, correct?

Yes. This is Paul. That is not in that number.

Okay. So the $129 million just represents NextGen's pipeline and Opus, is that, correct?

Yes.

And can you talk about the Opus contribution to pipeline?

I don't think we are breaking that out.

Okay. All right, well, thank you very much. Thank you.

Thank you. Our next question comes from the line of Leo Carpio with Caris & Company.

Quick question regarding the competitive environment. Have you seen much shifting or changes in the last few months? Are you seeing more of the smaller private players becoming a greater impact on the space or just the main usual characters competing for the deals?

This is Scott; I will start on it and then some others might have comment. I would say in general it is the same playing field we have been facing for the last few quarters. I haven't really seen any increased activity by small players that you might indicate.

So when we get to the competitive deals it is the same folks we have always been facing.

Okay. And turning to the Regional Extension Center market. I haven't seen much wins for you so far. But how targeted are you in terms of catering to that market in terms of pitching and how much sales force resource have you dedicated to that effort?

We have a substantial amount of effort allocated to it. So we have an internal team allocated to full-time working on that. And then we also have divided across our entire sales force there is approximately 60, 70 RECs in process. So in their local territory that is certainly part of the responsibility is working with our national team on it.

As far as not winning or losing I don't know that there have been that many awards determined at this point, and I think we are doing a pretty good job and a fair share of those. Pat might have a little more detail.

We have seen activity as a company in about three-quarters of the Regional Extension Centers or with three-quarters of the RECs. We have responded to requests for information or requests for proposal from about half of them. We think we are faring pretty well. And while you haven't seen a heck of a lot of wins you have certainly seen some relative to preferred vendor status in various states.

We have achieved that status in a state or two that has not been announced and we are confident we will achieve that status going forward.

There are many, many states as you know, or many, many RECs I should say that have not announced selection or preferred vendors or those types of things. Some are still going through the decision process. I think probably between 10% and maybe 15% of the RECs out there have actually made an announced decision.

Okay, then last question. Turning quickly over to Opus. Since the final meaningful user rule has been issued and there has been a revision that is favorable to critical access hospitals how are you targeting that segment? And how confident are you that you can capture your share of that piece of the market especially when you have -- facing some major incumbents in that area?

I mean as you indicated there are some big incumbents. So right now, you know, we are using a combination of really putting the NextGen marketing resources behind a company that in the past had fairly limited. So we are doing a lot of things from the awareness standpoint.

Obviously the other benefit we have is the hundred reps out on the street and we have -- the whole sales force has incentive to tee up opportunity there.

But, you know, as you said, we do have a little bit of work to do just to get our name out there. We are doing really well in head-to-head deals and just, you know, talking to the team within the last couple days, certainly the reference ability of now getting a little momentum. Once one community health system makes the selection that network is pretty tight and so I think that will be favorable for us as we gain momentum.

This is Pat. I'll follow on the incumbent comment. Yes, there are incumbents established in that marketplace. However, I will remind you that most of the technology employed in that marketplace is very old proprietary legacy systems and our products compare very favorably from a technology perspective. We are offering is a multi-tier fully web-based front-end product with software-as-a-service based offerings as well.

And the incumbent systems also are not as strong in the clinical area. They are relatively built out on the financial side but we don't believe they are nearly as strong as our offerings on the clinical side; and that is where the demand is coming from right now.

And finally, they don't have the robust ambulatory offerings that we are presenting and the road map to show the integration between the inpatient and the outpatient side. So when we are getting into the hunt, and that is our challenge right now, we are faring, as Scott said, very well.

Okay. Thank you.

Thank you. Our next question comes from the line of Sandy Draper with Raymond James. Please go ahead.

Thanks so much. Most of my questions have been asked. One thing I may have missed, I know two people asked around it, did you give, either Scott or Paul or Pat, you gave the $129 million pipeline for NextGen. Historically you have given an actual QSI and RCM pipeline or backlog. Do you have those numbers?

Yes, the RCM backlog is about $8.7 million.

USI pipeline is $5.4 million.

Okay. Thanks. On the RCM side, it looks like you had a nice sequential increase there, picked up although it looks like the backlog is down a little bit. Sounds like you now have had the ability or are fully integrated. I know there was an issue that because of earn outs you couldn't really fully integrate one or maybe both of the RCM divisions.

Can you just talk about where you are? Is that done? And what changes do you expect now that you are going to be able to fully run those and not have to sort of stay on the sidelines? Thanks.

This is Pat. I wouldn't characterize the integration as being done but I would say that it is much farther along. We have made improvements in integrations relative to sales. We are seeing margin improvement based on what we have done with those integration efforts.

We are seeing continued demand but there will be further integration activities and efforts going forward.

Are there going to be similar levels of cost going forward or have you got the majority of costs behind you or sort of one-time costs?

We believe that we have the majority of the one-time cost -- in fact, hopefully all of the one-time costs behind us.

Okay. Great. Thanks. Those are all my questions.

Operator, we will take one more call.

Our next question comes from the line of Frank Sparacino with First Analysis. Please go ahead,

I will make it easy. You already answered my last question so that's it.

All set? Okay. Well, just in summary, hopefully you gained from this call several important issues. One, we have a growing pipeline. Two, we have a maturing sales organization that is now starting to dig their teeth into that pipeline at 109 sales individuals strong.

The government is nearing completion of all the stimulus qualifying regulations. We hope and desire that is done by sometime late October.

The Regional Extension Centers which were surfaced by Leo, and Pat and Scott commented on, there is 60 of those centers that the government wants to set up and 48 of them right now are actively soliciting providers. So, we are hopeful that in the next 60 to 70 days that process will be done.

So as you see, as we are starting to approach the period of time when uncertainty is being lifted, Regional Centers will be completed, certification will be completed, we believe that we have prepared the company well for the front end of this five year stimulus and we believe the best is yet to come. Thank you for all your support and thank you for joining us today.

Ladies and gentlemen, this does conclude our conference call for today. Thank you for your participation and you may now disconnect.