NextGen Healthcare Inc (NXGN) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Quality Systems 2011 second-quarter results conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, October 29, 2010.

I'll turn the call over to Steven Plochocki. Please go ahead, sir.

Thank you, Chardonnay, and welcome, everyone, to the Quality Systems fiscal 2011 second-quarter results call. With me this morning are Paul Holt, our CFO; Patrick Cline, the President of Quality Systems; Scott Decker, our 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, perspectives, and strategies preliminary and projected, and capital equity initiatives and the implementation of potential impacts of legal, regulatory, or accounting requirements. I will provide some opening comments and then turn it over to Paul.

The Company reported net revenues of $81.5 million for the fiscal 2011 second quarter, an increase of 14% from $71.7 million in the same quarter last year. The Company reported net income of $13.4 million, up 14% versus $11.8 million in net income for the comparable period a year ago.

Fully diluted earnings per share were $0.46 in the second quarter, an increase of 12% when compared with $0.41 fully diluted earnings per share for the second quarter of fiscal 2010.

Quality Systems also announced that the Company's Board of Directors declared a cash dividend of $0.30 per share on the Company's outstanding shares of common stock payable to shareholders of record as of December 17, 2010, with an anticipated distribution date of January 5, 2011.

At the very end of the second quarter, in fact on September 30, 2010, the Certification Commission for Health Information Technology, CCHIT, announced that our EHR solution was certified as a complete EHR and 2011 and 2012 compliant, which came on the heels of the stage one Meaningful Use definition criteria revealed in July of 2010.

With the lifting of the many uncertainties that have been looming for quite some time and that we've talked about for quite some time, we believe we are now well positioned to aid physicians and hospitals with their EHR decisions as they prepare to make incentive-based decisions.

Now that we have met both Meaningful Use and CCHIT standards, our robust product and service offering that we have been building for the last 18 months will bode well for those physicians and hospitals seeking to transition to EHR and to help optimize shareholder value as we enter into year one of the five-year stimulus plan.

Our current pipeline includes 40 potential deals in the $400,000 plus range each with 15 of those deals seven figures plus. Our additional sales reps that we have been adding over the last several quarters are beginning to contribute to our pipeline and closure cycle and should continue to build with the momentum in the upcoming quarters.

With the number of large deals pushing into this quarter, our third quarter, our pipeline will continue to build now that the certification has created certainty for buyers and separation from non-certified competitors. Of course as you know, the stimulus payments will be beginning in just five short months from now.

I will now turn it over to Paul Holt, who will take you through more color and more granularity on our financials.

Thank you, Steve. Our consolidated second-quarter revenue of $81.5 million represents a 14% increase over prior-year revenue of $71.7 million. Breaking down our revenue by business unit, NextGen was $64.758 million, up 15% over $56.327 million a year ago. Rounding out our two other segments, NextGen Practice Solutions revenue was $12.053 million. That's up approximately 8% over $11.121 million a year ago.

And finally, our QSI unit was $4.645 million. That's up 9% over the $4.250 million we reported a year ago.

Our consolidated systems sales declined by 5.2% over the prior year quarter to $24.9 million compared to $26.2 million a year ago. Our results were impacted by a net $1.1 million in backordered hardware which reduced hardware revenue included in system sales.

We also had two large deals each worth over $1 million in contract value which we were unable to close prior to the end of the quarter but have since closed.

Finally, we recorded a record number of software as a service arrangements at 14 contracts. This was more than double from just last quarter and double the year ago figure.

Recurring revenue streams including maintenance RCM, EDI, and other services grew approximately 24% to $56.6 million compared to $45.5 million a year ago. Recurring services accounted for approximately 69.5% of total revenue this quarter, which is up compared to 63.4% a year ago and our recurring revenue growth reflected the continued addition of new customers to our Company. We are happy with that result.

RCM revenue was up 26% over the prior year quarter at $11.2 million versus prior year at $8.9 million. Again this reflects solid performance and fulfilling on the RCM backlog, which continues to be strong at approximately $8.3 million in annual run rate.

Our consolidated gross profit margin this quarter came in at 63%, up from 60.5% a year ago and the increase in our gross margin was due primarily to less hardware in our system sales this quarter as well as improvements in our EDI margins.

Total SG&A expense excluding amortization increased by approximately $4.8 million to $24.9 million compared to $20.1 million a year ago. The increase in our SG&A expense over last year is a result of significant investments that we have been making in sales and marketing and we have been making those in anticipation of the incentives included in the ARRA Act as well as the inclusion of SG&A expenses at Opus which is not included in last year's SG&A number.

Note that on a sequential basis, our SG&A expenses were lower by approximately $1.4 million. That's primarily the result of certain business integration costs which were included in last quarter as well as a slightly lower amount of advertising and tradeshow costs this quarter versus just the prior sequential quarter.

Finally, our net income for the quarter was a record $13.430 million. That's up 14% over $11.820 million reported a year ago.

Now moving on to our balance sheet, we had a strong quarter in terms of cash flow from operations resulting in our total cash and marketable securities increasing by approximately $6 million this quarter to $106.9 million or $3.67 per diluted share. That compares to $100.9 million or $3.47 at the end of the prior quarter.

We also note that as of September 30, our balance sheet no longer includes auction rate securities which we have completed liquidating with no loss of any principal.

Our DSOs net of amounts included in both accounts receivable and deferred revenue decreased seven days from a year ago and stands at 81 days versus 88 days a year ago. On a gross basis, our DSOs ended at 126 days. That's up slightly compared to 124 days a year ago. We also increased our DSO figure on a sequential basis by three days.

Deferred revenue increased to $66.5 million compared to $64.4 million just last quarter and again, this increase reflects primarily an increase in implementation and training services.

Finally, as I typically do, I'm going to break down some non-cash expenses for the quarter and some investments that we've made.

Total amortization of [cap] software, $1.8 million; amortization of intangible assets, $830,000; total depreciation expense approximately $1 million; stock option compensation approximately $799,000. And our investing activities were as follows, capitalized software development approximately $3.2 million; fixed assets $1.4 million; and we also collected the proceeds from the sale of our auction rate securities, which was about $7.7 million.

I want to again thank you all for being on this call and your interest in our Company. Look forward to speaking with many of you at the upcoming analyst day in New York. And I will turn this call to Pat Cline, President of Quality Systems.

Thank you, Paul. Good morning, everyone. As Paul mentioned, we did have a couple of large deals that weren't bookable in time for the quarter close. Those deals have now been closed and will fall into the current quarter.

Also as Paul mentioned, we sold twice as many deals on our software-as-a-service model in last quarter. As you know, SaaS deals don't help our near-term revenue but they will help in many future quarters.

As I mentioned on the last call, we also focused on certain cost containment initiatives, so when we see significant revenue growth, we also should see significant profit growth.

I also mentioned on the last call that our revenue cycle business was showing positive signs relative to growth and margin expansion and we saw that in the second-quarter results. We also signed millions of dollars worth of new RCM business recently that will come online in the future.

We continue to win against our competition and we continue to feel very strongly that we are well positioned.

I'm going to turn things over to Scott Decker for more color on NextGen.

Thanks, Pat. Good morning, everyone. I'll just add a little bit of color to some of the comments you have already heard. As mentioned, we had a decent quarter on a year-over-year basis with about 15% growth in the NextGen division, but obviously influenced by the push of the transactions, several large ones.

I'd note we signed 79 new clients this quarter, which is actually an increase of about 25% over two quarters ago. Overall, I feel like the market continues to be very strong and we are very well-positioned as a company to meet the requirements out there.

As Steve mentioned, one of our biggest goals for this quarter was to make sure we had a certified product going into the end of the year and certainly going forward and I'm very pleased that our 5.6.1, ambulatory product was certified for Meaningful Use and will be in general availability by the end of the year.

I'm also very pleased to note that our NextGen inpatient solution just yesterday got CCHIT certification, 2011 certification, and is now one of only three products in the market on the inpatient side with that certification. They are also tracking to have their Meaningful Use certification done by the end of the year.

Further on the inpatient side, continue to have good contraction by that division as we continue to ramp it up. They had some good additional sales this last quarter and the pipeline continues to grow nicely.

Specifically the pipeline now sits at $145 million versus $129 million from last quarter. And as Steve mentioned, we have a good number, 10 plus seven-figure deals sitting high in Cat 1, Cat 2, which is the top of our pipeline.

Number of reps as of September 30 was 109 versus 107 a quarter ago. However, that is down probably approximately five since the end of the quarter as we have started to weed out based on quarterly performance. My expectation would be on the rep count that you will see basically in this same range over the next 90 to 180 days.

I'd also mention as I did in the last call a quarter ago, I would still expect to see increased productivity with the ramp-up in reps we've had as they get closer and closer to having a year of experience in our territories.

Last quarter there was quite a few questions on RECs, so I thought I would give a little bit of color from our perspective on the RED market. Right now we are tracking about 62 RECs across the country and at least by our records, 31 have made decisions. Of those 31, 26 was named the preferred vendor partner or qualified vendor in 26 of those 31, as I noted. And then 11 of those 26 NextGen was selected as the short list of preferred products.

So I would say are hit rate has been good. There's quite a few more decisions coming down in the near-term and we feel very well-positioned there.

I will just close out by noting that we have the NextGen user conference coming up starting November 7. At this point, we have 3300 registered attendees for that conference, which I think is a testament to the excitement in the market and our client base.

With that, I'm going to pass it over to Donn Neufeld.

Thank you, Scott. We continued to have success selling FQHCs to QSI Electronic Dental Record integrated with the NextGen EPM and EHR. We added nine new joint deals during the quarter. Including our strong Q1, QSI Dental is on pace for a record year.

NextGen EDI revenue was up 19% from last year and operating income up 24%. NextGen EDI revenue and operating income were both records.

Thanks to everyone on the call for their support and interest in our Company. Chardonnay, our operator, we are now ready to accept questions.

(Operator Instructions) Charles Rhyee, Oppenheimer.

Thanks for taking the question, guys. I'm sorry, I think I didn't hear it, but did you give the pipeline numbers for NextGen and for QSI?

I gave a NextGen pipeline number of $145 million as of right now versus $129 million that we reported last quarter.

Okay, great.

This is Donn Neufeld. $8.1 million, I did not give it for Dental. $8.1 million.

Okay, great. Thanks. If I could ask about these deals that slipped in the quarter, you know, I think, Scott, you mentioned that about these 10 large seven-figure deals that are sitting in the pipeline currently sort of at the top. Can you talk about how that -- those number of deals looked in the current -- in this last quarter? And so sort of your expectations on how quickly some of these deals will move out of the pipeline and into the numbers?

As I noted and I think we've probably commented on seven-figure deals the last several quarters, I would say two to three quarters ago we had a really good pipeline of seven-figure deals and that resulted in a good quarter. I think we reported it looked soft two quarters ago. I reported a quarter ago it's been growing and I would characterize it as this is the best it's looked from a seven-figure deal perspective in probably the two to three quarter range.

From that point, I'd like to say it's an exact science, but it really is just getting those to mature and get them over the line, end of quarter being a testament of even though we thought we were on track to get at least a couple of them done, they didn't get done. They did flip into the very beginning of this month.

We have the next [vet] who is continuing to mature through the pipeline and we are, as you might guess, hopeful as anything that we will get them over but I can't 100% predict that. But overall, I'd characterize it as it's strengthening and probably looks as good as it has in a while from a seven-figure standpoint.

Certainly, and if those two deals were to have been recognized -- signed in the current quarter, would we have seen all the revenues or would have sort of been split over two quarters?

This is Pat. Most of the revenue had those deal signed, would have been booked last quarter in the quarter that we are reporting and had in fact just one of those deals signed, it would have been on the order of a couple cents a share.

Okay, great. Then sort of last question, more generally and maybe, Steve, you can also address this is well, now we've gotten certification. How really important is certification? Because you know, you talked to hospitals and maybe it's just a difference of the customer base, but it seems like hospitals don't really worry as much about certification, sort of generally assuming all the major vendors will be certified. And I would characterize NextGen as a major system vendor where most people would expect NextGen to be certified regardless given the product itself.

So how much of that is really do you think having an effect on decision-making here?

I can offer our view here and, Pat, you could add some color if you'd like, but our bread-and-butter historically and presently is in the physician marketplace. We have a very new product offering in the inpatient area, which as you heard earlier has just become certified along with our ambulatory product.

But there has been an awful lot of competition amongst many small competitors in the physician marketplace that we have long felt weren't going to meet certification. And we've had to combat lowballing and give away tactics that these people were employing in the market simply to get an installed base. We needed this separation. The idea of having certification and separating ourselves and many other quality competitors away from some of these lowballers and giveaway tactic players is extremely important.

It's extremely significant and we are very pleased that we're past that point now, that that point of separation took place with the announcement of certification earlier this month. And we think we are entering into an entirely new period now of quality players to deal with and quality competitors to compete against, separating ourselves from many of these other smaller groups.

Great, thanks a lot for the comments.

Michael Cherny, Deutsche Bank.

I just want to dig into these larger deals a little bit. Kind of as you sign these up and as they change especially versus the transition of some of the SAS-based deals you have, could you just talk about pricing metrics in terms of how pricing looks on larger sized deals and contrast that versus where you see pricing going on more the SAS deals which you obviously had a nice quarter with?

This is Pat. Our software for the EHR and practice management component has carried a retail price of $15,000 per provider and for an enterprise server license that starts at about, well, a couple hundred thousand. So that might help you with respect to the size of some of these larger deals and what a $1 million or $2 million deal might mean in terms of numbers of providers.

And then typically there is some amount of discounting that comes off of that. Interestingly we didn't see more in the way of discounting in the quarter we are reporting over prior quarters. Though we did see a little bit more in the way of pressure on pricing from certain of our competitors. We were able to hold the line in general but the market is getting more aggressive on pricing especially at the lower end.

So we we've been exploring new pricing models at the lower end and relative to some of the RECs and some of the partnerships and those kinds of things doing a little bit of unbundling of the software with some of the software features. Does that help?

No, that's definitely helpful. Then with the trajectory on the selling and marketing line, obviously you guys were focused and ramping that up ahead of the bolus of stimulus orders. I think you know that you cut five sales reps in the quarter. On a go forward basis, how do we think about that line in terms of growing with respect to sales growth?

I'm not sure I understood the question. Were you talking about the number of sales reps?

I was talking just more about just total selling and marketing expense and how much you plan on growing. I know you guys have stepped that up versus where you view historical levels as a percent of revenue.

We see that flattening out. We don't see a tremendous increase in the sales or marketing expense. Some of the sales expense is the last (inaudible) growth to revenue based on commissions paid, but outside of that line item, we don't see significant further growth in the salesforce, nor do we see significant additional expenses on the marketing side. We are pretty comfortable with where we are at this point.

Great, thanks.

Constantine Davides, JMP Securities.

Paul, I think I missed your comments on the hardware. It sounded like there was a reversal. Can you just describe what happened there? And then I was wondering if you could provide a hardware sales number for the quarter?

Yes, okay. What happened there is that -- and this happens from time to time depending upon the timing of when a contract comes in, if it's got a lot of hardware in it and it comes in rather late and there's just not enough time to be able to get that, the product out the door, that becomes a backordered item. So we have a particularly large amount of that occur this quarter to the tune of $1.1 million.

So that -- the good news is that that's relatively easy revenue to pick up the following quarter. You just have to get the product out the door, but it certainly had an impact on our top line this quarter.

And the total hardware number?

Yes, total hardware number, it's going to be in our Q. Just give me a second here and I will see if I can pull it up.

Maybe while you do that, Pat, I was just wondering, you guys have certification behind you as of the last day of the last quarter and obviously you called out those two deals that closed. But in terms of I guess broad-based activity in the first three or four weeks following certification, how does that -- how would you describe it maybe relative to other quarters, the start of other quarters in the recent year [or two]?

Let me ask Scott to take that one.

I would say our activity is very high for the first month of a quarter. I'm not sure if I would characterize it maybe as you were depicting that it's necessarily because of Meaningful Use, though I think certainly every time we knock down another barrier or uncertainty it helps the market. But I guess I would just characterize it as overall the market is active right now and we have a lot going on.

Thank you.

That hardware figure is $2.2 million.

Thanks, Paul.

And you will have all that broken out in the Q.

Greg Bolan, Wells Fargo.

Thanks, guys. So Scott, just thinking about -- I know you kind of talked about it earlier, but just thinking about where the NextGen infrastructure stands. Obviously you're thinking about back to last quarter SG&A grew twice as fast as NextGen revenues, organic revenue growth. Is it possible in the next year or so as you guys start to settle down on that front where it could reverse course? Is that something you could possibly comment directionally?

I will comment and maybe some other folks would also. I don't know that you would see expense reverse course. I think we have a great opportunity for margin expansion right now because I think we have built up infrastructure and that's going to allow us to grow without having to, as I think both Pat and I said, increase the salesforce in the short term.

I don't necessarily feel like we need to increase marketing, so I think there's some things we can keep relatively flat or fairly dramatically change their growth rate for the next few quarters while hopefully we continue to see nice and/or expanding topline growth, which should just allow us to drop a bit more to the bottom line.

My caveat on this whole thing is there's some sense of optimism that maybe the market will grow faster, in which case we would certainly not want to get behind the curve either.

Sure, that makes sense. Thanks, Scott. I guess with regards to -- just thinking back to the September quarter of last year, obviously added about 37 quota carrying reps. Those folks are it sounds like becoming more productive. But as you think about the I guess pipeline per rep kind of turning around the $1.2 million area, is it fair to say that those 37 for the most part are maybe producing half that versus maybe the legacy salesforce? Or can you comment on that all?

I will comment in general again because I don't have the specific numbers. I do think we are seeing an uptick in the number of transactions, which I would probably relate to the increase of reps. As we've mentioned, a lot of them are what we would call the smaller territory reps. We are calling on the one to 10 doctor side of the market and so you see the uptick but not necessarily all the additional revenue production as if it was all topline reps.

The other things I would note are while it's up 37 reps from September a year ago, that was spread somewhat ratably over a six-month period of hiring. And I still kind of use the metric of they need to get through training and be out in the territory for a couple quarters, so I don't expect full productivity until probably a year afterwards from hiring.

So I think we still have some upside on productivity here and that they will contribute more and more to the pipeline. However, we need to temper that a little bit with, as I said, it's reps on the lower end of the market rather than necessarily big elephant hunters.

That's wonderful, thanks. Great color, Scott. Then Steve, I guess since October 1, can you kind of characterize the market now that we've gotten these uncertainties out of the way? Have we seen somewhat of a I guess an additional tailwind just in terms of decisions being made by these physician practices to go forward with vendor selection?

When you do consider the fact that the certification began October 1 with about the announcement of 19 of us and I think now it's up to about 49 including hospital certifications, it is the very first month of what I like to think of it as the first month of the five-year stimulus.

Five months from now, physicians can start collecting their money and we have just finalized all the uncertainties with this last piece, with certification. I think when Scott talks about $145 million pipeline that we anticipate is going to continue to grow. As I said, if you are a buyer of the product, you know who to buy from now and you have no reason to hesitate unless you are not going to go forward at all. And having been involved with a lot of the deals out here with our Western sales organization, there's a handful of deals that decisions have been made now that certification has been established, where there was a lot of questions prior to certification when you are going up against people who are using giveaway tactics and lowballing tactics simply to get an installed base.

So I think you're going to see a new environment going forward competitively and we will be competing against quality organizations who I believe won't be using these same types of tactics and will have a very strong capability to win a large percentage of these deals.

That's great, very nice color. Thanks, guys.

Anthony Vendetti, Maxim Group.

Thanks, in terms of what you are seeing in terms of the sales cycle, you mentioned that there's been some pricing pressure. Has that caused the sales cycle to elongate in any way? And are there -- are you seeing additional competition from some of the bigger players that have ambulatory offerings like Cerner or Epic? Any additional -- ?

This is Pat. We don't think there has been any material change in the length of the sales cycle. Yes, we are seeing a little more competition from the players that you mentioned and other players but I would characterize it as minimal additional competition. It's probably just characteristic of the larger pipeline and more people [not] as more potential buyers in the market looking at all the potential options. So nothing real material.

Any one particular player or players that are -- you are finding or cutting price to gain market share?

No, not in particular. Though in general, the lower end players seem to be cutting the price or there are some new players that have entered the market, smaller startup or regional or local companies that are the way many startups do giving systems away. Some of them are providing free software or close to free and selling at levels that are not sustainable after -- in our opinion and we've been doing this for quite a long time. And we have seen a lot of these players come and go who believe that they can jump into a market and do a good job for their customers at $79 per doctor per month or those kinds of things.

They generally wind up ultimately going out of business because you can't provide quality service for those kinds of models and they create a little bit of pressure and hassle for us in the short term but nothing in the core market.

Okay and just lastly on the deals, the number of deals greater than one million that you have in the pipeline, did you say 14? Was that the number I heard?

Steve gave that number. I think it was --

Yes, in looking at our recent report, we had about I think as of the other day, about 40 deals in the $400,000 plus price range and about 15 of those were in the seven-figure range. I think a couple of those have been closed already.

Okay, great. Thanks very much.

Newton Juhng, FBR Capital Markets.

Thank you. First, I'd like to ask Pat about his comments on the unbundling of a NextGen solution. With trying to move to maybe like a more modular type of model, how difficult is it to make that happen? How much time would it take for you to be able to bring that to market? Is it something that you are seriously looking at pushing forward in the near term?

It's relatively easy for us to do. We have got a few fairly sophisticated features and features that competition doesn't have that we are looking at unbundling. There is a big investment to be made in software R&D to get there. Interestingly, we have found in some of our tests that when practices buy without certain of those modules, they almost always come back and add those modules on later. So in the long term, we don't think the unbundling is a detriment.

Got you, and then one question for Steve here. Your comments around kind of some of the competitive aspects of the marketplace, do you think that this could eventually drive a consolidation trend within the number of providers that are out there in the ambulatory space, specifically in that lower end of the market?

Would you be interested in acquiring or would you be more interested in kind of waiting it out and looking for the second round of sales cycle when some of these guys are exiting the market?

Our goal and objective today is to stay the course. We've done a lot of work in the last two years to add revenue cycle management and now in inpatient capability where that inpatient capability has matched certification with our ambulatory capability. And we've done a lot of work to prep ourselves for this five-year run. We have always been an acquirer. We have made in that period of two years the five acquisitions, self-funded, and that's pretty much the course we're on right now.

Now if you're asking me if I think consolidation is going to be commonplace in our sector, I think it's pretty well documented already that it is. And not just in our sector but in the provider sector, the healthcare services sector, the physician marketplace, etc.

So I think we are heading into a five-year period of consolidation in healthcare at all levels but we like the way we've positioned ourselves going into the front-end of the stimulus. We like the fact that we are certified in the two principle areas of inpatient and ambulatory. And we like the fact that we have $145 million pipeline with a nice bevy of seven-figure deals. And like I said, we are five months away from the first healthcare group starting to get some incentive checks from the government.

So this whole game is just starting. It's just starting now and we like the way we are positioned.

Got you. Thanks, Steve.

Atif Rahim, JPMorgan.

Thanks for taking the questions. I guess on the revenues that got -- the deals that slipped out this quarter, I think Pat, you mentioned might have helped the quarter by about $0.02 or maybe the top line, I just calculate it to about $2 million. But that still implies revenues from software would be down sequentially even if you back out the hardware, the software/hardware line that you report.

And trying to figure out what the reason for that might be. Is it just -- were there more than just those large deals that slipped? Was there anything else, a number of smaller deals that also slipped?

No, I think on the smaller side what you saw was as we mentioned, twice as many SaaS deals as the prior quarter and the prior year quarter So if you take the few things that have been mentioned, the couple of deals that pushed the conversion of some of the software deals to SaaS deals and the hardware backorder, I think that will probably more than answer your question.

Got it, okay, okay. Then on the pipeline, are there a number of Opus or inpatient deals in that pipeline number that you have, especially on the seven-figure side?

The answer to that question is yes, I do include inpatient in the pipeline, but note, it is still not a significant amount of our overall business for the NextGen division. There are a couple seven-figure deals in the inpatient group. Those are not included in the number that Steve provided.

Okay, thanks. And lastly, any update on the RECs? Any early orders from the ones you have been qualified and/or selected in as vendor so far?

There's not necessarily 100% accuracy in saying that, but our REC group does feel that there has probably been $0.5 million worth of business that has come out of the RECs where we have been named.

Got it. Thanks very much.

Bret Jones, Brean Murray.

Thank you for taking the questions. The first question is on the pipeline. I believe the NextGen pipeline is defined as having a 50% chance of winning the deal. I was just wondering if you could talk about whether that 50% win rate of deals within the pipeline has held true lately or where that stands?

It's quite a bit more complicated than just that to get the overall pipeline number. But I would say I think maybe your question and you can come back if it's not correct is has our close rate changed at all? And I would say not materially.

Okay, but you do define it as a 50% chance of winning it. That's one of the components, I believe. Is that correct?

That's correct. There's a whole model into it, depends on where in the tier of the overall pipeline it is and how we weight that, so --

Have you gone back in time to evaluate whether you are actually winning 50% of the deals within the pipeline?

We do watch and categorize each of the categories within the pipeline and track to see what close rate is, yes. And as I said, we haven't seen any material change in that.

Okay, great. Then just another question. On the customer base, I have always thought of your customer base as fairly sophisticated. You guys talked about the number of seven-figure deals, so I'm surprised a little bit about the commentary about the low-end players having such a disruptive effect on the market. Is that disruptive effect -- are you seeing that in some of your larger deals or is that only at the low end of the market?

We are seeing it more at the low-end of the market, but as you can imagine with what's gone on and going on relative to the stimulus, there are I would say more uninitiated buyers in the marketplace as well. So there are buyers that perhaps aren't aware of the usual suspects and the certified players versus maybe not certified players and players that have enterprise capability and many other things that the larger customers, both larger clinics and small hospitals need. So they may in the early stages involve one or two of these small startup vendors but in almost all cases get weeded out but still put pressure on pricing.

Okay, great. And then just lastly, I was wondering about the $2 million plus contracts that have slipped. Were these customers waiting on certification? Was that the primary driver as to why they slipped out of the quarter?

No, they were not waiting on certification. They were in contract negotiations with us and frankly if we were only concerned about goosing revenue in a particular quarter or earnings per share in a particular quarter, we might have gone to those people and been able to drop our price $0.5 million let's say and get them to sign up more quickly. But in the long term, that's not the right thing to do for the Company or for our shareholders.

So we elected to not push that hard. That's not to say we weren't pushing hard, but we have to draw the line somewhere and we are as we mentioned happy to have them -- happy to have that business in the current quarter.

Okay, great. Thank you very much.

Richard Close, Jefferies & Co.

Thank you, just a clarification on the hardware reversal. When was that booked originally as revenue if you are reversing it?

That wouldn't be reversed. That was just sold but not delivered, so we can't recognize revenue if we haven't actually delivered the product. So it's a -- that's all it really was.

Okay, I thought you had reversal; I'm sorry. Then Pat made some comments, I believe about 15,000 per provider on average, and then you mentioned a $200,000 number. Could you just go over that again? What was the $200,000?

I was talking about the retail price of our software with larger deals. We have a server-side license, and then on top of that a provider license or price. For small practices, they don't require this large enterprise license. That has a lot of enterprise functionality built in, enterprise reporting and different data structures and models and various other things. But the large organizations, typically the seven-figure deals, do require this server-side enterprise license.

So on those types of deals, they are starting around the $200,000 mark before provider one, and then adding providers on top of that. So if it's a 100-doctor organization, you can add the $15,000 per doc plus the couple hundred thousand dollar server side if it's multiple practices that comprise that 100. Did that help?

Yes, yes. So when you say we had a couple million plus deals slip, when we think about that, the component that gets recognized pretty much immediately. Some of that $1 million obviously is tied to implementation services that would be recognized over a period time, correct?

If it were a $1 million total sale, yes, that's correct, implementation services are booked as rendered. In a couple million dollar sale, obviously you would have a certain component that would be software and a certain component that would be implementation services. And then there are other things that will play into it like third-party software, interfaces, hardware if that's part of the deal, and those things.

Okay. When we take a step back, it will be coming up on a year here shortly, I guess, from the Opus transaction and the other hospital or inpatient acquisition that you guys have made. How have you or how would you describe what the cross-selling success you've had now that you've had those hospital offerings?

First let me say that we are very excited about the inpatient offerings and the acquisitions that now comprise NextGen inpatient solutions. We think we are real gems and that we are well-positioned in that market.

Now to the specific part of the question relative to cross-selling, there has been some and we think there will be more as the size of those transactions starts to increase.

Okay, thank you.

Sean Weiland, Piper Jaffray.

I'm sorry, operator, we are not picking up anything here.

Steve Halper, Stifel Nicolaus.

-- where topic. You said it was $1.1 million of a deal that signed but you couldn't recognize the hardware revenue. Is that all from one deal?

This is Paul. No, it was not. It was a handful of deals that have hardware in them. As you know, some deals have hardware, some don't. It's not -- some people like to buy the hardware from us. Some people will buy it from somebody else. Some people don't need hardware. So that fluctuates from quarter-to-quarter and this quarter we had that issue come up.

So just the follow-up question, but was the software component recognized as revenue from those deals?

Yes.

Okay, that's what I wanted to know. Thank you.

Corey Tobin, William Blair & Co.

A couple of quick questions here, one on the pipeline. Can you just -- given the ambiguity in prior quarters over this metric, can you just define for us what date is the pipeline as of?

The date of is essentially as of within the last two days of the report, whatever the report is that we are getting.

Okay, great. And then you noticed or you mentioned a couple of times these large deals that were signed post quarter. I am assuming those large deals are not in the pipeline then, right?

I do include the deals that have closed in the pipeline for this quarter since its net from the last quarter.

I'm sorry, can you just clarify? So there were like two or three large deals that you said slipped into this quarter that have been signed.

That is correct and (multiple speakers)

Those are included in the pipeline even though the pipeline is as of the last couple days?

Yes.

So does that imply they were signed like yesterday?

Within the last -- what I do is I take any deals that have closed from the close of the quarter to the point of the reporting and that's part of the overall pipeline. As I am just trying to do it net from the last reporting period, and that has been consistent quarter-to-quarter.

Okay, and then let me shift gears for a second if I could to ask you about the salesforce. You mentioned that you felt it was a pretty good level now and now you're going back and sort of selectively making changes if necessary. Given the opportunity that's coming on, and Steve, you talked extensively about what we should expect to see in terms of a ramp of the next five years, does it make sense to keep adding to the salesforce?

And if so, why the pause as you are sort of indicating we might see here over the next six months?

Well, just a little color on the sales group. We have to go back to February of 2009 when the government announced the stimulus bill. They indicated all these regs that we have been talking about as recently as today would have been completed by December of 2009. Well, the government missed that target by 10 months. They just finalized certification, the last piece, this month.

So we built our sales organization and tried to get it prepared for the movement of the market at some point this past summer. But by the government being delayed by 10 months in finalizing the regs, we decided to put a bit of a hold on our sales organization and to try to let the regulations finalize and then get the pipeline growing and converted into revenue before we add more salespeople.

I think it has been commented on earlier by either Pat or Scott that we will do the appropriate things to adjust our organization not just in sales but in implementation and training as the market dictates.

Got it. Okay. Thank you.

USB.

Thanks, it is actually UBS. Thanks for taking my question, gentlemen. First question is I guess while I understand the sales and marketing dynamic, I was wondering where you guys stand on the training and implementation side? Do you currently have any implication in training capacity on the sideline so to say? Or kind of given the building pipeline, do you think you will need to add some people or headcount there? What's the potential timing for doing that?

This is Pat and Scott might follow on. We don't have implementation capacity on the sideline. We try to grow that as [fast] based and the business that we see and make advance hiring. We do advance hiring based on pipeline and our assessment of what's coming down the road, but we try not to have excess in that department. We do have some third-party implementation firms and partners that are certified to implement NextGen that we will use selectively rather than staffing for peaks.

So we don't have a backlog of customer implementation hours that we are just unable to get to. We always have a backlog but I guess the best way to put it is customers aren't upset over not being able to access trainers or implementation specialists.

And I might just -- I can probably give a little just additional color. So we've been growing on average 20%, 15% to 20%. We have the capacity -- because as you obviously as you sell, you are also implementing and getting people trained, so at an ongoing 15% to 20% growth rate, we are probably staffed appropriately. If you would tick up from that, we would need to increase the capacity and vice versa.

Okay, that's helpful. Switching gears a little bit, I was hoping to get some color as to what you are seeing in the RCM business. How would you characterize the RCM demand I guess in light of the near-term focus on EHR at both the I guess physician and hospital level?

Demand has been solid both on the physician side and at the hospital level. We haven't seen a slowdown in demand on the RCM side as you might expect with the Meaningful Use and the focus on EHR.

There are many, many practices out there who are not doing a good job on their own of billing and collecting and reporting on and demand has been pretty solid.

A quick follow-up if I could just sneak one more in. On the I guess physician side, are they looking to make kind of bundled purchases of RCM and EHR at the same time or is kind of it's being considered separately?

We have seen a little bit of that. I think that the strength of our EHR product does help us on the RCM side.

Fair enough, thank you.

Frank Sparacino, First Analysis.

I just wanted to go back to your comments around the RECs. I am not sure I followed all the sequencing there in terms of how many RECs have selected NextGen or how many you are in play with. But if you could just go over that real quick again.

Sure, we believe that there's about 62 RECs in the country and we believe about 31 of those have made decisions. We are in play in 26 of the 31 that have made decisions. Of the 31 who have not made decisions, we are still in the running in all of those, so we don't have any reason to believe our percentage of success would be any different with the remaining 31. Does that help?

Yes, it does, and then just one quick follow-up on the sort of SaaS-based activity. Obviously one would assume that type of demand is going to continue going forward and I think most of the vendors serving the small physician segment would acknowledge a significant pickup there. With that change in sort of delivery model, do you think that helps or hurts you from a competitive standpoint? Obviously there are a lot of products in the market which have come to market the last few years and you could argue have the more modern architecture. So I'm curious your thoughts around that.

In general, I would characterize the market by function, not necessarily technology. So I think we remain really confident that our functionality is great and it competes on any model. So the SaaS model just gives us another delivery mechanism that we didn't have maybe 24 months ago. So it should increase market share.

Now with that said, we are also not blind to the fact that we have a very robust product and that there's things we need to do to make it easy for the smaller practices to absorb that. So we have all kinds of initiatives on how we can prepackage it and make it more turnkey and more rapid implementation and Web-based training.

So there are things we are going to adjust, but I think at the end of the day, we feel real good that rich functionality is going to win the day many times over what particular technology platform you are on. It almost becomes secondary on the SaaS platform, people have no idea what platform you are on.

Edward Hemmelgarn, Shaker Investments.

I just have a couple of questions. First is, what was your -- I missed it, I think you said -- what was the NextGen Practice Solutions revenue a year ago?

Practice Solutions revenue a year ago was $11.121 million.

Okay, then you talked more about your software as a service. Where does that show up or what revenue line is that in?

Software-as-a-Service is part of systems sales.

Okay, about how much is -- or what's the level of that running at now in terms of your total or on a quarterly run rate now? How is that growing?

Two comments there. It is growing, but it's growing off of a very small number. So the way SaaS works is more like a freight train. It takes a while to generate some speed but once you've got that speed up and running, it's not going to slow down. So we are running it in approximately $100,000 a quarter at the moment, but the number is growing and the backlog of SaaS revenue that we have is growing as well.

Okay, I guess I was just trying to get -- you mentioned that that was -- there was a number of small deals that turned out to be Software-as-a-Service, but realistically that probably wasn't that big of a number given that you're quarterly run rate for Software-as-a-Service is still around 100.

The SaaS deals that were sold during the quarter wouldn't be reflected in that number. They will be coming online in future quarters and I think it's safe to say that had we had a similar quarter to the either prior quarter or the year ago quarter, that is had we only done six or seven SaaS deals, our EPS would have been increased by somewhere between $0.01 and $0.02 in the quarter that we are reporting. That is if those extra seven deals purchased on a license model.

Okay. All right, that's helpful. And then lastly, are you getting any sense that the momentum or willingness for your customers to sign deals now is picking up? Because clearly over the last six months or so, it kind of slowed to really no growth. Is that beginning to change now? Do you expect it to be a fairly rapid change or are we going to be waiting for a couple more quarters before this really begins to take off?

I'm not sure I would agree with the characterization that we haven't grown, but to answer the question, yes, we do, as we've said, feel that we are very well-positioned going forward. Paul.

This is Steve. I can't stress enough the impact of the government not meeting their timelines of finalizing the regs as they had stated in December of 2009. When you announced in February of 2009 this incredible stimulus and all the components wrapped around it and you take until October of 2010 to finalize the requirements for how one will qualify to become eligible for the stimulus money, you have opened up a large period of time in there which, as we cited earlier, created opportunities for many companies that are not on any of these certification lists to start creating and wreaking havoc in the marketplace particularly at the physician levels. And the longer that that dragged out, the more complicated it became in terms of getting deals done.

So we see this period now, October going forward where we have two product lines, ambulatory and inpatient, certified. And we know now going on a forward basis we will only be competing against other certified players. We think we will see more of a normalization in the way business is done in the marketplace and more importantly, we think that the buyers of products and services will no longer be entertaining the great sales pitches and incentives that lowballers and giveaway tactic artists have been proposing.

So we are confident and actually quite pleased that this is now all behind us so that we can bring normalization back to the selling process and actually move into more predictability and consistency on a quarterly basis.

I was not questioning -- I realize that the lack of regs clearly had to slow things down. So I guess what I'm trying to get at now is do you expect now that you've got regs, do you expect this to be a pretty near-term think like on the order of this quarter when you start to see a reacceleration or do you expect that it will take several quarters to really begin to get people and practices to sign deals in a more accelerated mode?

I think based on our pipeline, we will start seeing improvement now. But I've long said that it will take a couple of quarters once certification has been established to really determine rate and pace of adoption. And actually I'm stealing words from the Senate Finance Committee because they also want to understand what rate and pace of adoption will look like post-certification.

But I think you can tell by the pipeline and the number seven-figure deals we have and I think the opportunities now to compete against legitimate companies is going to give us an opportunity to grow certainly in a steady, methodical manner.

Okay, thanks.

Sandy Draper, Raymond James.

I think pretty much all my questions have been asked and answered. There may be one. Did you given RCM backlog question -- I mean answer? I may have missed that. If I did, I apologize.

No problem. $8.3 million, that's an annualized run rate.

Okay, that was my only question. Thanks.

Brian Delaney, EnTrust Capital.

Thank you for taking the questions. The software components of the deals where you were not able to shift the hardware, what was the revenue dollar amount included in the $20 million revenue?

You're getting into a level of detail that we just don't get into. You're asking me to describe to you that the small number of deals they had, an element of hardware that was backordered and we just -- we generally just don't do that.

Can I use historical mix numbers then? If you said it is multimillion dollars worth of hardware, I can make assumptions on what the dollar amount of the revenue really as a software would be. Is that a good historical mix? Is it fair to use that?

You know, that's going to vary from time to time, so I'm not sure what you're -- let me just ask where are you trying to get to? What's your --?

Well, the question is that the software component carries obviously much better margins, so I'm trying to figure out the margin lift we are seeing, is that -- when I think about the pipeline going forward, is the margin that we are seeing right now a good indicator for the pipeline going forward seeing how it sounds like there's a disproportionate amount of hardware then in the pipeline since we've accelerated some of the software revenue recognition.

Okay, so you can count on at least the one piece it's relatively safe is the $1.1 million in hardware that we will see most likely next quarter. Outside of that, the amount of hardware in any given deal, it's a relatively small percentage of deals that have hardware. If they do, if it's got hardware, hardware may be a fairly significant element in terms of dollars in the deal. But if it doesn't -- but that's a relatively small number and that is a very tricky thing to try to forecast.

As I've said many times, it's a number -- it's a very squirrelly number, the amount of hardware that we have in any given quarter because it's a really subject to facts and circumstances around each customer that's buying from us if they have existing hardware or if they are using somebody else to source the hardware, hardware is not really an emphasis for us. It's really more of a convenience to our customers.

So I think beyond the $1.1 million worth of hardware, I don't -- I think what you are trying to do is -- would be even difficult for us to do -- (multiple speakers)

I am just trying to figure out what is the criteria (multiple speakers) I am just trying to figure the criteria if we didn't meet the revenue recognition criteria for the hardware, what is the criteria for being able to recognize revenue around the software component, which is a little bit better margin?

Once again, I'm just trying to figure out what the pipeline, the margin profile of the pipeline looks like.

Let me see if I can help. We don't see a big quarter-over-quarter swing between the reporting, the quarter we are reporting and the current quarter in margins due to hardware or due to the $1.2 million worth of backordered hardware. That could change if there's a huge hardware order between now and the end of the quarter, but again, we don't anticipate that in (inaudible).

Okay, great. As a broader question, the deals that we are seeing that right now -- what relative to the margin profile, you made some comments around pricing. Should I think that the margin profile for the pipeline, though, is as robust as it has been in the past or because of the competitive pricing pressures that you keep mentioning, should I think that there might be some pressure there?

Again, we don't see a big swing in margin quarter-over-quarter for that reason either. It's possible that that changes and I want to stop short of giving you particular guidance. But our margin, I think if you look at where it has been over a longer period of time and the band that it's been in, that might give you some direction or guidance going forward.

Okay, thank you very much.

Gene Mannheimer, Auriga.

Good morning, thank you. Just a couple of quick ones. Back to the SaaS trend there, one of your competitors talks about 25% to 30% bookings as SaaS. Can you give us an indication of what that metric looks like for NextGen? And secondly, roughly what percent of your bookings are to practices with fewer than 10 doctors?

Our SaaS deals in our pipeline and the SaaS deals that we have sold to date is a far smaller number than 25% of our deals. Now, in the quarter that we just closed, given the total number of contracts and the numbers essayist SaaS deals, you are seeing is coming up to get to somewhere near that level. But we don't necessarily see that as a big trend.

I think I want to stop short of going into the number of small deals versus the number of large deals. But I will say that our core market is still the midsize and large enterprises and the large enterprises typically that purchase our software turn around and put that software into by and large many of the smaller practices.

Very good, thanks. And just one follow-up. Clearly the revenue cycle business growing at a nice clip. What are your strategies for improving the margin in that business? Is it a function of greater automation of claims? Is it simply a matter of scaling the business? Thanks.

It is both of those things. It's both of those things and watching the expense side as we layer on that revenue. And I think we've lately been doing a far better job of that.

Good, thank you.

David Larsen, Leerink Swann.

I think you had mentioned, I don't know if heard this correctly or not, but there was turnover of about five sales people who were sort of weeded out. Did any of those salespeople have more than five years of experience working for NextGen?

Yes, I don't know the exact answer to that. I don't believe that that would be the case.

Okay, and to your knowledge, has there been any change in the management of the salesforce or sales incentives like commissions that are paid or anything like that, any change in structure like that?

Nothing materially different than the last several years.

Okay, so there hasn't been any sort of change in the structure of the salesforce. Okay.

And then as far as the overall EMR penetration rate in sort of large academic medical practices, I am thinking to myself, if I am a large academic medical center with fairly sophisticated, very intelligent people and Meaningful Use is right around the corner, maybe the penetration in that market is very high. Do you want to -- can you put some numbers just broadly speaking around what you think the penetration rate is right now of that market?

This is Pat. I haven't heard a number lately. Anecdotally we think there's still a lot of greenfield even around the large enterprises that have been I think in our pipeline. But many of our customers are also coming to us, asking for our help in penetrating the individual practices in their communities and getting those practices tied into the hospital with our HIE offering.

So anything I would give you on a penetration would be a guess and I'd rather not make that guess at this point.

Okay, the last number I had seen published was like around 50%. Okay, I understand you don't put a number on there. That's great, thank you very much.

I don't have any reason to dispute that.

Glenn Garmont, ThinkEquity.

Thanks for taking the questions. Just a couple of follow-ups here. I guess Scott or Pat, can you remind us, what's the retail pricing on the SaaS product?

Well, it depends on the options that are selected, and again, there has been some unbundling going on, but I will try to frame it for you. It's somewhere in the neighborhood of between $500 and $1000 per provider per month is typical based on the options that we are seeing selected.

Okay, and then on the RECs side, you guys are obviously having -- you are being very successful there. Are RECs endorsing or supporting the SaaS version of the software or the license or do they not specify?

I would characterize -- you see all of those options. There is probably a predisposition to the SaaS offering because, as you probably are knowledgeable, the RECs are really targeted at the small physician practices. So just like the rest of the market, there's definitely a propensity towards the SaaS product.

Okay, and then last question. I know it's early and SaaS is growing off a small base here, but did you see any of the activity in the quarter resulting from your AMA agreement or is it just simply too early for that?

Yes, much too early for that.

Okay. Thanks, guys.

Thank you. And I will now turn it back to management for any closing remarks.

Well, this is Steve. We want to thank everyone who's been on the call. I just wanted to summarize a few points. One, as we sit here in late October, this is the first month since February 2009 that certainty has been established. We are proud of the fact that we have an ambulatory system that has met the certification standards and now an inpatient product as well.

Our infrastructure that we have been preparing for the front-end of the stimulus is in place in terms of sales personnel and implementation and training personnel. We have the product and service offering to go with that.

Three, the RECs. We anticipate that the RECs will have all their determinations made hopefully in the next 30 to 45 days so that by year-end, calendar year-end, the RECs will be in place and we will have a very dominant presence in the RECs system.

Then four, we are now moving into a period where we are going to be competing against certified-only systems. Our $145 million pipeline is a pipeline that has been the largest we have had, the largest number of $400,000 plus deals that we have ever had. And we are very happy that we have now been separated from many of the players out there that we have been competing against over the last 18 months now that we've reached certification.

So we are five months away from the healthcare community receiving their first monies from the government. We are well prepared going into the first year of this five-year stimulus and we have started to separate ourselves through certification from competitors that won't be around.

So we like the position we are in and we are going into a quarter and a first-year period of the stimulus well prepared with the right types of offerings and the right positioning.

So again, thank you all for your support. I look forward to seeing you in our future meetings and I know that we have our analyst day November 16 in New York where I'm sure we will see most of you. Thank you very much.

Thank you, sir. Ladies and gentlemen, that does conclude the Quality Systems 2011 second-quarter results conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 and enter in the access code 4375400.

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