NextGen Healthcare Inc (NXGN) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quality Systems Inc. fiscal 2011 third-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, Friday, January 28th of 2011.

And I would now like to turn the conference over to Steve Plochocki, Chief Executive Officer. Please go ahead, Sir.

Thank you, Britney, welcome, everyone, to the Quality Systems' fiscal 2011 third-quarter results call. With me this morning are Paul Holt, our CFO; Pat Cline, the President of Quality Systems; Scott Decker, the President of NextGen Healthcare; Donn Neufeld, the Executive Vice President of EDI and Dental; and Steve Puckett, the Executive Vice President of our newly-formed NextGen Inpatient Solutions.

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'll provide some opening comments at this time and then I'll turn it over to Paul.

The Company reported net revenues of $91.9 million for the fiscal 2011 third quarter, an increase of 23% from the $75 million reported in the same period a year ago. The Company reported net income of $17.5 million, up 33%, versus net income of $13.2 million for the comparable period last year. Fully diluted earnings per share were $0.60 in the fiscal 2011 third quarter, rising 33% when compared with $0.46 fully diluted earnings per share for the third quarter of fiscal 2010.

The Company's Board of Directors increased the cash dividend by $0.05 or 17% to $0.35 per share on the Company's outstanding shares of common stock, payable to shareholders of record as of March 17, 2011, with an anticipated distribution date of April 5, 2011. The $0.35 per share cash dividend is pursuant to the Company's current policy to pay a regular quarterly dividend of the Company's outstanding shares of common stock, subject to further Board review and approval, and the establishment of record and distribution dates by Board prior to the declaration and payment of such quarterly dividend.

We're very pleased with the Company's third-quarter performance. Our entire organization has worked extremely hard to put our Company in the position it's in presently. As we've said for the past 22 months since the bill was first introduced, there were levels of uncertainty and speculation, but one certification was announced in October 2010, and the regulations for Stage 1 meaningful use were finalized, the path became very clear. We're in a very positive position to take advantage of the benefits stemming from the first year of the stimulus incentives.

Additionally, the Board's declaration to increase our quarterly dividend is indicative of the Company's strength in the market place and their optimism about the future. We remain very encouraged by the industry opportunity before us, and confident in the certified electronic health solutions we bring to the physician, dental, and hospital marketplaces.

We've had a record quarter. Our pipeline continues to build. The sales reps are starting to produce at a higher level. All our business units are making great progress towards their deliverables. The regulations are now finalized, uncertainties have been lifted, and we are in the first month of the 60-month stimulus period as the country moves towards an electronic, paperless healthcare system. We like the position we're in and we intend to do extremely well in that position.

Paul? The financials, please.

Thanks, Steve, and hello, everybody. I'm going to begin my comments with an overview of the quarterly results, and then I'll follow it up with a balance sheet recap.

So, our consolidated third-quarter revenue of $91.9 million represents a 23% increase over the prior year revenue of $75 million. While we're very pleased with the record revenue that we achieved in the quarter, I want to remind all those on the call of the fact that, last quarter, we had reported two large deals over $1 million each, which pushed into the December quarter, as well as approximately $1.1 million of backordered hardware, which also carried into this quarter.

Our consolidated net income per share was, as Steve mentioned, a record $0.60, up 33% from the prior-year$0.46. Our earnings this quarter was driven by strong revenue growth in the Systems sales line, as well as some help that we got from a $0.03 tax benefit related to the R&D tax credits. This credit was retroactively reinstated back in December. That reinstatement went back all the way to the beginning of calendar 2010, resulting in a significant reduction in our current quarter tax provision.

I also want to note that our earnings were negatively impacted by an approximate $1 million expense that we reported in the quarter, went into a fair value adjustment to contingent consideration associated with our Opus and Sphere acquisitions. Each of these acquisitions has performed even above our own internal expectations and forecasts, resulting in us being required to reassess our estimate of contingent consideration, which, according to our accounting rules, is requiring us to take a charge to expense. So, our Opus and Sphere acquisitions contributed $5.8 million --approximately $5.8 million in revenue during the quarter. The strong performance is resulting in this charge.

Our consolidated systems sales grew 23% over the year-ago quarter to a record $33.9 million compared to $27.9 million (sic - see press release) in the prior-year quarter. Our consolidated maintenance, RCM, EDI, and other services revenue, grew 22% to $57.9 million compared to $47.3 million in the year-ago quarter. Revenue cycle management revenue was up 20% over the prior-year quarter at $11.5 million versus $9.6 million. Our backlog there continues to be strong at $6.9 million.

Our total recurring services revenue, including maintenance EDI, RCM, and Other, accounted for approximately 63% of our total revenue this quarter, which is about flat versus a year ago. Our gross profit margin came in at 64.8%; that's up from 62.2% in the year-ago quarter.

Our SG&A expense, excluding amortization, increased by approximately $6.3 million; $27.9 million this quarter versus $21.6 million a year ago. Our SG&A expense was higher primarily due to, again, to our increased investments in sales and marketing versus a year ago, and the inclusion of our Opus SG&A expense, which we did not have in the prior-year quarter, and -- as well as the $1 million expense that I just spoke to you about.

Moving on to our balance sheet, total cash and marketable securities increased by approximately $11.4 million this quarter to $118.2 million. That's equal to $4.06 per diluted share. That compared to $106.9 million or $3.67 at the end of the prior quarter, continuing to maintain no debt on our balance sheet.

Our DSOs net of amounts, included in both accounts receivable and deferred revenue, declined by a day from year-ago and now stands at 82 days. Our DSOs based on the face of our balance sheet ended at 122 days versus 124 days a year ago. On a sequential basis, our DSOs declined slightly by four days. Our total deferred revenue increased to $71.9 million compared to $65.7 million just last quarter. Primary driver of the increase was, again, implementation and training services.

I'd like to thank you all for being on this call, your interest in our Company. And I'll turn things over to Pat Cline, President of Quality Systems. Pat?

Thank you, Paul. Good morning, everyone. I'm very pleased about our performance in the December quarter. Often this quarter can be difficult with the holidays reducing the number of business days available to sell and implement systems. To overcome this, our sales force did a great job early in the quarter.

As Paul mentioned, we had a couple of large deals -- and we mentioned this, I think, on the last call as well -- that weren't bookable in the prior quarter. Those deals were booked in the December quarter and that also helped our performance. We were also able, with a couple of exceptions such as sales commissions and incentive accruals, to keep our costs relatively flat quarter-over-quarter. Our NextGen Practice Solutions business unit continues to grow, with annual revenues reaching about $50 million in this area. We've got an additional pipeline of executed RCM business, and we'll also be adding salespeople and getting more aggressive in this area as we move forward.

Before I turn things over to Donn, Steve, and Scott, I'll just say once again that we continue to feel that we're very well-positioned for the future. Now I'll turn things over, first, to Donn for a brief review of our dental and EDI units, and then to Steve and Scott. Donn?

Thank you, Pat. We continue to have success selling FQHCs to QSI dental record integrated with the NextGen EPM and EMR. We added 11 new joint dental sales this quarter. The QSI dental pipeline is approximately $7.8 million. NextGen EDI revenue was up 21% and operating income was up 46% from last year. NextGen EDI revenue and operating income were both records.

Now I'd like to turn things over to Steve. Steve?

Thanks, Donn. As many of you know, the Inpatient Solutions business was built over the past year with the acquisitions, as Paul referred to, of Sphere Healthcare and Opus Healthcare Solutions. Since the acquisitions were completed, we have worked to combine our inpatient financial and clinical applications into one compelling offer for the hospital market. We're happy to report that we are seeing success in the market at large, as well as in our own internal integration efforts.

Our Q3 highlights include the completion of meaningful use certification for our NextGen Inpatient Clinicals Version 2.4 application, which will enable our current and future clients to qualify for funding under the American Recovery and Reinvestment Act. Additionally, in Q3, we completed agreements with 11 new hospitals [all year] to utilize some the best technology in the industry. And currently, we have a deep pipeline, representing about 50 unique opportunities, and continue to enjoy many of the synergies with our ambulatory counterparts.

It was a really great quarter for us and we're excited about the opportunities that lay ahead. Thank you for your time and attention, and now I'd like to turn it over to Scott.

Good morning, everybody. Thanks for joining us this morning. I will just echo what you've already heard, which is very pleased with the performance of the NextGen division. We delivered approximately 30% top and bottom line growth, really building on some momentum that we had been seeing in the pipeline the last couple of quarters.

Just to give you a little feeling on metrics that I generally cover, we did sign 110 new contracts across NextGen, ambulatory and inpatient this last quarter. That's a 75% increase over the first quarter of this calendar year. We've been talking about the growth of the sales team and salesforce over the last several quarters, and I think you could probably attribute this growth in new contract signing to that increase, and starting to see productivity out of the additional reps.

Discounting for the quarter stayed relatively the same as we've seen the last several quarters; so, no change there. From the standpoint of number of reps we have out in the field right now, as of 12/31, we had 100 reps and managers in quota-carrying positions. That's down about five from what I reported last quarter, and that's mostly due to attrition, as we work through quite a few number of hires that we have made over the last couple of quarters. I'd anticipate that number to go back up to the 105 to 110 range by the time we report next quarter.

The pipeline for this quarter is $156 million versus $143 million reported last quarter. Once again, that's a combination of both inpatient and ambulatory.

You've also asked a lot of questions on the regional extension centers the last couple of quarters, so I wanted to give you an update on that. We have seen 46 different regional extension centers make decisions now. NextGen has been included in 37 of those decisions; 20 of them created preferred lists; and 17 have decided to be provider-agnostic.

Overall, as I've said, very pleased with the quarter; obviously, very pleased with the top and bottom line growth; market activity looks good.

With that, I think that's our prepared comments. Britney, I think we'll open it up for question-and-answer now.

(Operator Instructions). Michael Cherny, Deutsche Bank.

Congrats on the quarter. So just one quick question -- I don't know if I missed it or not. Did you give the breakdown in terms of the revenue between NextGen versus QSI like you typically do?

Yes. Here, I can give that for you. We reported total revenue of [$91,871,000]. That breaks down into QSI, $4,321,000; NextGen, $75,054,000; and the Practice Solutions unit $12,496,000.

Thanks. That's helpful. And then just quickly on the Inpatient Solutions you mentioned, you said you signed 11 new hospital agreements and you have 50 opportunities in the pipeline. Can you just give us some characteristics of what types of hospitals you're having the most recent success with? Whether these are attached hospitals to legacy NextGen clients or if these are new footprint? Just a little more color around your push into that market would be great.

Okay. This is Steve. I can take that one. Yes, as we mentioned before, we're primarily targeting hospitals under 100 beds, which continues to be the market that we are addressing. And there's 11 hospitals I mentioned, all of them fall into that category. All of them are relatively small size deals and the majority of them are critical access hospitals.

Great, thanks. That's helpful. Thanks again, guys.

Constantine Davides, JMP Securities.

Yes, one follow-up on that earlier question on the inpatient side. Steve, you described 50 unique opportunities there in the pipeline. I'm just wondering if, definitionally, that's consistent with how you describe pipeline on the ambulatory side? Can you just remind us what the average deal size is on the inpatient side?

Yes. It is consistent with the way we do it on the ambulatory side. Are you familiar with that, the way we do that? With 100% in category 1, the 75% in category 2, and 50% into category 3 for us. We do that.

The average deal size, I would say, for us, is somewhere between $600,000 to $700,000 total deal size on the critical access market.

Okay. And then on the revenue cycle business, guys, I know margins took another dip there and, typically, I think in the December quarter, you see some strength on the margin side. So is there some more integration activity going on or something else you can call out? And then where do you see margins heading maybe into fiscal '12 in that revenue line?

This is Pat. I think we do see additional integration synergies ahead of us and we do feel, as I mentioned last quarter, we can continue as we move forward to improve our margins in that business. That's probably about as far as I want to go. I want to stop short of setting an expectation relative to margin except for directionally.

Okay. And then just one last one for Paul, on the tax rate, the benefit in the quarter. Should we expect that that sort of normalizes next quarter? Thanks.

Yes, that -- I mean, we're going to continue to have an R&D tax credit next quarter, but this quarter, we played catch-up, if you will, because we got the benefit of going all the way back to the start of the year. So, next quarter, will be on a more normal run rate, if you will.

Newton Juhng, FBR Capital Markets.

Just on the sales rep front, how should -- I mean, obviously, they're starting to produce a lot more now. At what point do you think we could call them fully ramped up on a full quota?

I would say we're probably approaching that from a -- they've been in the pipeline long enough that we should starting to be seeing them at full productivity. With that said, it's probably a year to two years before you really understand the business and how to best sell. So, if we're just talking about the pace of the curve, we've probably seen the most rapid part of the curve, but I would still expect our productivity to improve over the next year.

Okay. That's helpful, thanks. And then just -- Paul, did you mention what the stock-based comp expense was for the quarter and the D&A expense?

No, just -- we're going to file our 10-Q real quick here. I just -- stay tuned for that. You'll have all those details in there.

Okay. Fair enough. Thanks.

Glenn Garmont, ThinkEquity.

Just a couple of questions at the -- pertaining to the lower end of the market. Pat, I think on last quarter's call, you talked about maybe some competitors there getting more aggressive on price at the lower end. I was just wondering if you could update us there, have you seen an acceleration of that trend?

And then, Scott, related to NextGen, you referred to some initiatives that you were undertaking internally to make NextGen more accessible to the small end. Things like -- I think you used terms like pre-packaging and rapid implementation. I'm just wondering where you stand on that front.

I'll start and then I'll turn things over to Scott for the latter part of the question.

With our market -- our market is a great market; a lot of tailwind, a lot of room in front of us, and a lot of dollars coming into the market. And, of course, with that, competition is intensifying, both with larger players coming downmarket and the small players moving upmarket. There is more price pressure -- there seems to be almost every quarter, a little more price pressure coming from the low end. And I think I heard recently from one of our folks that there are now six different free EHR systems being marketed. But thus far, we've been able to compete very well against those low-price competitors. And of course, that's our intention going forward.

The strategy of broadening our portfolio over the last couple of years, both in the RCM business and now, more recently, in the inpatient business, added very significant addressable markets. So, even as that competition intensifies and maybe we come under some pricing pressure perhaps in the future, we feel that we've got a heck of a lot of greenfield ahead of us. Scott?

Yes, to address your question on how we're going after the lower end of the market, I did comment, I believe, last quarter how we're trying to package it up to make it easier for the smaller practices to absorb. I think that's incremental progress quarter-over-quarter. We did revamp our whole specialty content interface this last quarter, which I think is making it easier for practices to pick it up and use it out of the box.

Clearly, the productivity of just the sales reps at the lower end of the market, we continue to see a lot of interest in our SaaS-based offering. I think we had 12 new SaaS clients this last quarter. So all those things just continues to grow pace.

I think you tapped on another one that is going to be important to us going forward, is just making the implementation and training for the smaller practices as easy as possible. And we continue to just incrementally refine that process. We've made a lot of ground in the last year and I think we still have a lot of ground to go. And then maybe the last wild card on all this is all these RECs we've been talking about for the last year. You really haven't seen them with much productivity yet from a delivery standpoint. And hopefully, that will certainly address below-market, as that's what they're tagged to go after.

Okay, thanks. That's helpful. So it sounds like, Scott, that the 12 new SaaS clients that you gained in the quarter, those were not a result of the REC activities?

That's correct. The other thing I should mention is, to get after the lower end of the market, a real key to that, I think, as we've talked in the past, is really signing up our large health systems is distribution channels for us. And we continue to see really good success on that front. So, in some respects, it's hard for me to even see directly some of the things we're doing on the low end, because it is through distribution points of health systems.

Okay, great. Thanks for the commentary.

Jamie Stockton, Morgan Keegan.

Yes, thanks, guys, for taking my question. Just real quick, Scott, on the regional extension centers, the roughly 15 or so that have not made a decision so far, as far as their preferred vendors, do you have any feel for when those are going to come down? Do you think we'll see them maybe by the time you guys report the March quarter?

Yes, it seems they're on that path. I'm sure there will be a few outliers, but there is activity on all those. I would imagine they're feeling pressure to get their decisions made. So, I'd say we should be pretty much all the way there by the end of the next quarter.

Alright. Thanks, guys.

Greg Bolan, Wells Fargo.

Thanks for taking the questions and congrats on solid results. Steve, clearly, the attention has been directed towards the federal incentives available for providers who adopt the EHRs, but can you describe or characterize how aggressive commercial payers have become with pushing for increased EHR adoption?

And then, Steve and Pat, do you think payers will start penalizing or even dropping noncompliant providers from networks?

Well, there's no question that the government isn't solitary in their desire and effort to get all of healthcare paperless and electronic. There's a lot of advantages and benefits to the commercial markets and the managed care markets to get there as well.

And just anecdotally in some of our travels and with some of our interactions with major payers, they appear to want to move on an even more aggressive path than the government in trying to get their provider base electronic faster than even the government wants them to become electronic. So I think this is a unified effort across the board by all payer groups to move to an electronic paperless systems. It benefits all of them and they all have varying degrees of urgency, but they all have the one thing in common, and that is urgency.

That's helpful, great. And there seems to be a thought process that because NextGen has historically succeeded in the large group practices, this might limit the addressable market size for the Company. But as I think about the percentage of physician-owned -- or excuse me, hospital-owned physician practices increasing over the years, there definitely seems to be a growing convergence between the kind of, call it, ambulatory and acute healthcare services.

So, I guess over time, do you think that convergence will continue? And then number two, do you think that the small practice -- or small doc practice market may, I guess, decline over time? So, basically, the same question.

This is Pat. Yes, we do think that convergence or the integration between medical practices and health systems will continue. This ties a little bit to the prior question relative to commercial payers, which leads me to think about reimbursement models. And reimbursement models are changing and they are favoring that integration of care across ambulatory inpatient and other ancillary services -- models like patient center, medical home, and [account of] care organizations. You see the private payers pushing out various bonus programs and pay-for-performance programs -- all of those bode well for electronic systems.

And while -- you're right, there are only a certain amount of large medical practices or mid to large medical practices, again, we think we've got a lot of greenfield not only moving to the smaller practices, but more importantly, through the RCM and now the inpatient business presents us with many billions of dollars of addressable market that we hadn't previously been in, except for the prior, roughly, a year.

That's helpful, thanks. And then just lastly, Paul, to your knowledge, were any sizable deals, other than, obviously, the ones that we knew about, that were pulled in or pushed out of the December quarter?

We had -- no, I wouldn't say anything that I'd talk about on this call.

Okay.

Yes.

Nothing unusual other than the ones that we've already talked about.

Yes, great. Thanks, guys.

Bret Jones, Brean Murray.

Thank you for taking the question. The first question is around the organic growth rate. Because, obviously, with the addition of the inpatient market, things are getting a little less transparent. I wanted to check my math. You said Opus and Sphere contributed about $5.8 million, so to me, it looks like the organic growth rate is around 15% to 16%. Is that correct?

You can -- yes, you can back into it -- I don't have that number handy right in front of me, but if you -- yes, I mean, you've got those numbers (multiple speakers) --

I just wanted to check on Sphere in the year-ago period because that's the only number we don't have, is the contribution of Sphere a year ago, if you have that.

Very minor -- a year ago. Probably a couple hundred thousand dollars at the most.

Okay. So 16% sounds about right then. And then can you quantify -- I know you said that you had two multi-million software deals and then I think you said $1.4 million of hardware. Can you quantify the total contribution of those deals? Was it $3 million to $3.5 million or can you be a little more specific, I guess?

Yes, you know, we generally don't comment on how much of a deal is bookable and we get into the revenue recognition details to that extent. We did provide some color on that issue last quarter because we felt it was significant enough to be -- to talk about. So we felt it was also significant to talk about this quarter, but we just really don't want to get into the details to that level.

No, fair enough, I just was trying to get down to sort of what's a clean NextGen number. And if I look at -- if I back out the Opus and Sphere, and if I back out the $3 million to $3.5 million, it looks like the corporate growth rate was around, you know, call it, 11%. I'm just trying to reconcile that with the acceleration we're talking about. Have we really seen a pickup in ambulatory BMR sales? Or is it still really just we're seeing that in the pipeline build?

You have those other items that we talked about, but there's no question that this quarter represents an extremely strong quarter for us, as well as NextGen on the systems sales line. I don't think there's any debate about that.

Okay. I guess low double digits just wasn't exactly what I would think of when we talk about material pickups. So I was just wondering if this -- if we're still seeing it primarily in the pipeline, but --?

Okay. Well, I think we might have to go -- you're talking about a lot -- I haven't done all this math work yet, so you're doing some -- you're moving some numbers around. It's probably not appropriate on this call to try to get into that, but --.

Okay. I can move on. I just -- one more question and I'll let you guys get back to the call. This 50 hospitals that you talk about, you did say they were in the pipeline, the [156] number? Is that correct?

That's correct.

That is? And can you give us a sense for what that was last quarter?

No.

You can't?

No.

(laughter) Okay. Well, thank you very much.

We generally don't comment on the exact number of deals that are in the pipeline.

George Hill, Citigroup.

Thanks for taking the call. Most of my questions have been answered already. I guess, Pat, maybe I would just ask you, from a big picture perspective, what's -- you guys painted a pretty rosy picture here; what's not going right for NextGen right now? And I might even focus on that large segment of the ambulatory market, which would seem to be getting the pretty high saturation rates. And, I guess, are you guys seeing things the same way?

No, I'm not sure we see any area -- I can't -- I'm struggling to come up with areas that are not going well. There are always challenges and always opportunities for improvement. I think we've got a pretty good handle on those, though.

We're continuing to make investments in many areas, in our quality programs and additional consultants, implementation specialists, trainers, but I think that's a pretty well-oiled machine that just needs to scale to keep pace with the number of sales that we're making. None of that's surprising or too challenging for us.

I think we've got probably about the best platform product-wise in the business, both with depth and breadth between the inpatient now, the RCM business, the ambulatory systems, high end and low end, as well as our patient portal, which seems to be getting much more traction lately, and our health information exchange, our HIE products and those kinds of things. All of them are seeing what we think is strong demand.

Okay. And on the inpatient side, are you seeing any change in the mix between what I would call greenfield implementations and displacements?

Steve might follow on to that. Certainly, on the financial side of inpatient, they're all going to be displacements. On the electronic health records side, most of the deals will be relatively new, as smaller hospitals are now just making the decision to automate with respect to their EHR and maybe go after some of the stimulus dollars. There may be a displacement or two, but most of that's going to be open territory for us.

Okay. Thank you.

Anthony Vendetti, Maxim Group.

Just a couple of questions. On the 50 pipeline hospital contracts, the 11 that you won, can you talk about the competitive landscape as it's starting to take shape here? Is there any new surprise competitors that you're seeing that are stronger now?

And when you're in the final round, who are you besting? And when you are losing, who are you losing to, mostly?

Okay. Steve, do you want to take that one?

Yes, I mean, we see traditionally the people who have been in that market, that market has a lot of players who have been there a very long time. So that's one of the reasons that we focus there. I would say we don't see a whole lot of new entries into that market. We do see people maybe coming down, so.

Who would be coming down to that market?

We see players perhaps such as Cerner, who has a new ASP-type offering. So we see those people coming -- who have not traditionally been in, for instance, the critical access hospital market, playing downward into that area, as an example.

Okay. And are there any situations where you guys are trying to directly connect to the payer where you're bypassing clearinghouses at all?

From an inpatient perspective?

Yes.

No, not at this time.

No, okay. And then, lastly, maybe on the tax rate going forward, what are you expecting for the rest of this fiscal year and then moving into next year?

Well, if you look at the rate -- this is Paul -- the tax rate that we had going into the first two quarters did not include any R&D tax credit impact. And we benefited approximately 1% on our rate normalized. That can vary. I don't want to get into trying to predict for you what the tax rate is going to be going forward, because there are some moving parts there that I'm not going to be able to predict with exact precision.

But clearly, I did -- I gave out what the relative benefit amount was, at $0.03. I think if you -- from this quarter, I think if you add that back and get back to the range that we've been at, which is between 36% and 37%, I think that's probably fair; but I want to predicate that that I can -- we can only talk about ranges and I'm not forecasting or predicting for you. I'm pointing you to things to think about.

Okay, perfect. Thanks a lot.

Stephen Shankman, UBS.

Thanks for taking the questions. I guess, first one for Steve. I think I've heard you a few times refer to the EHR ramp as more of a steady build. And I'm wondering, kind of given this quarter's results and the nice pipeline build, which involves the stimulus checks starting to arrive this year, we might now be reaching a bit of an inflection point in terms of the growth trajectory. That's the first question.

Well, Steve, we've always said for the -- as we've gone through the 22-month chronology since the bill was announced, to where October, we actually had the last pieces of the Reg's finalized with certification, we've always said that there were different threshold points throughout there. But hitting that certification point, being a company that has three products certified going into the front end of the stimulus, we're certainly greatly encouraged by what we are -- you're seeing in our quarter that we just announced, and what we're starting to see in our pipeline as well.

But we still want to stick to the view until we see it differently, that this is going to be a nice steady escalator ride and not an express elevator to the top floor. And you know what? That's going to serve us all extremely well.

Okay. Fair enough. And then on the R&D line, it looks like it ticked down a little bit in terms of a percent of revenue. And while I do recognize that some of the revenue did shift from the last quarter to this one, I would have expected it to be a little bit higher, given the number of initiatives that you guys discussed at the Analyst Day and also your continued progress of Opus and Sphere.

So I'm wondering what the right run rate might be for that expense line -- or, asked another way, I guess, over the next 12 months, if there are any new projects coming online or if any projects might have finished up during this past quarter?

This is Pat. I think -- I see that as relatively steady state. Hopefully, as revenue continues to grow, we'll continue to be able to make investments in the product. As I mentioned, we're pretty pleased with where the product platform is, though there's always more to do. And we will be making investments commensurate with revenue growth going forward.

So, probably closer to the 6% of revenue than maybe like 6.5% of revenue?

Well, that may tick up a little bit. I guess it also depends -- I might have to defer to Paul a little bit on what we do relative to capitalization of those development projects. We tend to capitalize some of that new development once we reach technological feasibility, et cetera. So, even if we were to bring on a number of new software developers -- and, frankly, it is our plan to do that -- you're not going to see that instantly hit our P&L in a derogatory fashion.

Okay, great. That's helpful. Thank you.

Corey Tobin, William Blair & Company.

Good morning and congrats on the nice quarter. A couple of questions here. Just -- can you refresh my memory? Do you have any sales arrangements today with payers? Any sort of preferred pricing arrangements or distribution agreements with payers at this point?

None that we know of except there are some payers that also provide medical services, sort of staff model kinds of programs or Medicare Advantage plans that move from either tightly affiliating or, in many cases, especially on the private side, in owning physicians. But those are the exceptions for us. There aren't any big payers that we have significant relationships with.

And then just to follow-up on that, I think some of the competitors have gone that route just as another distribution channel or another way to get in the physicians' office. Is this something you guys are exploring? And do you see that as an attractive channel to capitalize off?

It is.

Okay, great. Switching gears, on the hospital side for a second, the hospitals that are in your pipeline today -- just to come back to this one more time -- can you give us a feeling -- do you expect that all 50 of those will be financial deals? Or were they more likely to be a mix of financial and clinical deals?

It will be a mix.

And so are you -- let's look at the 11 that were signed in the quarter, maybe you can give us some detail on that. Of the 11 that were signed, can you give us a rough feeling for what percentage of those would be financial deals, what percentage would be clinical, and then what percentage will be combos?

Steve, do you have that rough information in front of you?

Yes. 80% of them include both financial and clinicals.

80% you said?

Yes.

Okay. And would you expect the pipeline of the 50 to be about the same mix?

Probably exactly the same.

Okay, great. And then finally, last one on the salesforce. You mentioned it was down, I think, five people or so sequentially. Is that -- would you consider it -- was any of that decrease voluntary attrition? Have you lost any people that you would have rather kept, to competition in the quarter?

Nothing comes to mind. So I think most of it was managed attrition. There might always be an exception, one or two to that, but nothing material.

Understood. Okay, great. Congrats again. Thanks.

Atif Rahim, JPMorgan.

Thanks and congrats on a great quarter. A couple of questions. 4Q has historically been your seasonally stronger quarter. And given there was some push-through of revenue from your second into the third quarter, is that still your expectation going forward, for 4Q?

You mean the strong seasonality aspect of it?

Correct.

Well, yes, I mean (multiple speakers) --

Would you expect (multiple speakers) [that could] still ramp up from here? Or do you think -- I mean, just given the pull-through that you had into this quarter, some of that might not occur this year. Just trying to get a gauge of what you see going forward in terms of seasonality. (multiple speakers) -- guidance area.

I'll try to give you a little bit on that. As I mentioned, the fourth calendar quarter or the quarter that we're reporting can tend to be tough because of the holidays and taking -- let's say, there are a fewer number of sale days in that quarter. And in the March quarter, you don't have that issue. You do have a little bit of an issue in the RCM business with co-pays. So the RCM business -- in the RCM business, the worst quarter tends to be the first calendar or March quarter. But outside of those couple of things regarding pull-through or rollovers, or deals pushing or deals pulling, nothing that we can think of.

Okay. That's good. And then on the inpatient side, how much of the pipeline or your success there has been driven by the VHA relationship that you announced last quarter, I think, or it was just the quarter before that?

This is Pat again. I think very little at this point. We're looking forward to seeing much more from that relationship. That relationship is more aligned on the ambulatory side, but we're always talking to them about new possibilities.

Got it. Okay. And then last question for Paul on the tax rate. So the $0.03 that you mentioned, are we thinking about that just retroactively for the first three quarters of calendar '10? And then the fourth calendar quarter had a separate amount, so it should be like, you know, $0.04 for the full calendar year? Just want to get some clarity on that.

Yes, so, what's included in that is the first three months of the calendar year, we're on a fiscal year, so the credit was reinstated going back to January 1. So that means that we had three months worth of credit that we're taking from that period, as well as the first three quarters of this year. So it's a full year's worth of credit, is really what that translates into -- in one quarter.

Okay. And then from a percentage basis, I know you're reluctant to give the range, but make sure we just assume maybe down 1% versus your average rate for, call it, calendar '11?

You know, I have to be careful about getting -- there are a few other aspects to -- there's a domestic manufacturer's tax credit that we also benefit from, but there's some moving parts in that and it's a little hard to predict. So also the impact on the rate -- the only tax credit is just a -- is a $1 credit, so it's not really tied to -- it has nothing to do really with our taxable income. It really has everything to do with how many -- how much credit do we qualify for, based on our development activities.

So, there are -- those two elements can move in different directions. So, I think it's -- probably a good way to think about it is just look at a dollar amount of credit versus a rate. I mean, the rate kind of -- I can't tell you or predict what -- exactly what our taxable income is going to be next quarter, so it really gets kind of hard to tell you exactly what our rates going to be and how much of the R&D tax credit is going to impact the rate.

So unfortunately, it's not an exact science when you're looking at that. But I think if you look at, say, $0.03 worth -- and there will be a few more details you'll see in the footnotes in the 10-Q, which we're about to file -- but if you look at $0.03 worth of credit, that's a full year's worth of credit. Now I'm going to get -- you can back into what that was on a quarterly basis, and then you can say, well, okay, that's -- I know what my rate was the first two quarters and I can sort of approximate what the credit might be next quarter. And those are kinds of the things -- that's the approach I would take if I was trying to model this.

Okay. Perfect. That's very helpful. Thanks very much, guys.

Sandy Draper, Raymond James.

All my questions have actually been asked and answered, but congratulations on a nice quarter, guys.

David Larsen, Leerink Swann.

Hey, great quarter, guys. Just broadly speaking for the ambulatory product, what percentage of your sales would you say are into physician offices where they don't have an EMR, versus where they have an EMR but they're replacing it with NextGen? Thanks.

This is Pat, and my answer is going to be what I'd characterize as an educated guess. Probably 85% or so of our EHR deals are new implementations with the balance being replacement kind of deals.

Okay, great. Thanks. And then how many hospitals are in your network now using Opus or Sphere?

Steve?

Yes, we've got around -- I think a total of around 70 now.

Okay. And then how does that compare to about a year ago?

Let's see, that's a rise of about 20, 25 from about a year ago.

Okay. That's terrific. And then -- I'm sorry, I should know this, but when you say 50 in the pipeline, are those -- you think the -- maybe the next six months, a decision will be made for those?

The way we define pipeline is deals that are within the next six months of potential close.

Okay. And then the 600,000 to 700,000, I think, is probably a combined Opus and Sphere sale if we assume 80% have both products together. Is that correct?

That's correct.

Okay. And then just my last question. With the $5.8 million in revenue that was booked for those products this quarter, I mean, how much would you just sort of roughly say -- how much of that is recurring revenue in nature for the Opus and Sphere products versus new revenue, just roughly speaking?

Yes. Roughly speaking, it's about 45% -- between 40%, 50% is -- of that figure is recurring versus new.

Okay. And then would you say the majority of your sales are to new hospitals that are installing these systems for the first time?

I would say they are installing clinical systems for the first time. Almost every hospital has some kind of financial system in place.

Okay. And they would be replacing that financial system with your new one, 80% of the time? Okay. Great. Thank you so much.

David Borah, Century Capital Management.

Just a question for maybe Steve and Pat. It sounds like you've got a lot more visibility now than you have -- you've had over the past couple of years. And you've also -- you have a large number of sell-side analysts out there with a wide range of estimates. Just wondering if now is a good time to consider guidance? So, thank you.

Hello, this is Steve. The management team has been discussing that and it's probably better than 50/50 that going into our next fiscal year, which would begin there April 1, that we will provide some kind of an annual guidance.

We're hopeful at that time to get a better feel for the consistency and predictability we believe is necessary to do that. And as I said before, we've had 22 months of uncertainty under the government programs until they just recently finalized the regulation. So, we're considering that as a management team and, like I said, it's probably a little better than 50/50 that we will.

Thanks.

Gene Mannheimer, Auriga Securities.

Well, thank you, and very nice quarter, guys. Most of my questions have been answered. I have two quick ones for you.

I may have missed it, but what was the ambulatory pipeline number? And how has the composition of that changed, if at all, between smaller and larger practices? And then the other question is on the RECs. What would you estimate has been the revenue to date from the REC program? Thank you.

We didn't break out the ambulatory pipeline. So, as we've been reporting the last several quarters, it's just the total pipeline between ambulatory and outpatients; so I don't have a specific number for you there.

Characterizing it between large and small, that also hasn't changed materially over the last several quarters. I guess I could generally characterize it as the old 80/20 rule. Our deals that are larger and midsize are going to dominate the pipeline.

With -- I don't recall the question on the RECs, if you don't mind repeating it?

How much revenue --

Oh, how much revenue? Once again, not material at this point.

Thank you.

Thank you. (multiple speakers)

(multiple speakers) Operator? We'll take one more call, please.

Okay. And our final question comes from the line of Mohan Naidu with Piper Jaffray. Please go ahead.

Thanks for taking my question, guys. A quick one. Pat, how are your existing customers approaching the stimulus? Are they starting to register? Are they pushing you guys for help on how to get it? And when do you expect to receive -- for your customers, cost checks?

I think it's a combination of the two. Of course, we don't know how many of our customers are registering or signing up. I think there have been thousands across the country, probably approaching 4,000 that have registered. You can bet that a number of them are our customers, but we just don't have perfect knowledge on that.

Many of our customers are coming to us and requesting help, and that's driving some of our internal consulting business as well. And we're doing very well and ramping that internal -- our Consulting Department as fast as we can find good people. That tends to be the larger customers and larger health systems that are asking for help, either implementing or making sure that those features that are required for meaningful use are implemented.

And any views on when your best customers will be able to receive the checks?

I think our customers -- many of our customers will receive checks as early as the government begins to cut checks.

Alright. Thanks a lot, Pat.

Well, we want to thank everyone for joining us today. We appreciate your support. It's been a long run since February 17, 2009, when the bill was first signed. And we like the position we're in today.

We have certified products. We're in the first month of a 60-month stimulus, and we've got a pipeline that's building, and four distinct product lines that are growing very nicely. So we think the best is yet to come, and we, again, thank you all for your support. And I look forward to seeing many of you in my travels. Take care.

Thank you. Ladies and gentlemen, this concludes the Quality Systems Inc. fiscal 2011 third-quarter results conference call. This conference will be available for replay after 12 p.m. Eastern Standard Time today through February 4, 2011 at midnight Eastern Standard Time. You may access the replay system at any time by dialing 303-590-3030 or 1-800-406-7325 and entering the access code of 4403880 followed by the pound sign.

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