NextGen Healthcare Inc (NXGN) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by. And welcome to the Quality Systems Incorporated fiscal 2011 fourth-quarter and year-end results conference call. During today's presentation, all parties will be in a listen-only mode. Following to presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Thursday, May 26 of 2011. And I would now like to turn the conference over to Mr. Steven Plochocki. Please go ahead, sir.

Thank you, Alyssa and thank you to the Quality Systems fiscal 2011 fourth-quarter and year-end call. With me this morning are Paul Holt, our CFO; Pat Cline, President of Quality Systems; Scott Decker, NextGen Healthcare President; Donn Neufeld, the Executive Vice President of EDI and Dental; Steve Puckett, the Executive Vice President of our Inpatient Solutions Division; and Monte Sandler, Executive Vice President of Practice 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 and then turn it over to Paul. The Company reported record net revenues of $97.1 million for fiscal 2011 fourth quarter, up 24% from the $78.5 million reported in the comparable period a year ago. For the 2011 fourth quarter, net income reached $18.6 million, an increase of 42% when compared with net income of $13.1 million, for the same period last year. Fully diluted earnings per share were $0.64 in the fiscal 2011 fourth quarter, a 42% increase versus $0.45 fully diluted earnings per share for fiscal 2010 fourth quarter. Revenue for the fiscal year ended March 31, 2011 reached $353.4 million, rising 21% when compared with fiscal 2010 revenue, up $291.8 million. Net income for fiscal year 2011 was $61.6 million, an increase of 27%, versus net income of $48.4 million for the 2010 fiscal year. Fully diluted earnings per share increased to $2.12 for fiscal year 2011, up from $1.68 earned during fiscal year 2010, an increase of 26%.

The record fourth quarter and year-end results were positively impacted by the onset of the stimulus plan. The last quarter of our fiscal year marked the first full quarter under the stimulus plan of the American Recovery and Reinvestment Act. As we have stated, we spent much time preparing all facets of our organization for this important point in time. As we enter the front end of the stimulus, where regulations are now finalized, [Meaningful Use] standards have been established and our products certified, the rubber is hitting the road as it relates to benefiting from this stimulus period. It's been a long time in coming, and nonetheless, we are now here. Our preparation for the front end of the five-year stimulus period puts us in a strong position. We've just completed a record quarter and record year.

Our strong pipeline continues to get stronger and build momentum, as Scott will talk to you about that. Our sales organization is continually producing at a higher level every quarter. Our four divisions are progressing towards their deliverables and we've just completed the first quarter of the 20 quarters stimulus period as healthcare continues its [see] change transition towards a paperless and electronic healthcare system. We like the position we are in, and we've built the nice foundation for the future. Paul, will you take us through the financials, please?

Will do. Thanks, Steve and hello everybody. I am very pleased to be able to report a record quarter with strong results from all of our business segments, including our newest segments, which we are very excited about, NextGen Inpatient Solutions. NextGen Inpatient Solutions focuses on the hospital market. We are now going to be reporting that separate from NextGen Ambulatory. Our form 10K will include more details regarding this new reporting segment, which offers both financial and clinical applications to the hospital market.

To summarize, we now have four reporting segments -- NextGen, NextGen Inpatient Solutions, NextGen Practice Solutions and QSI Dental. I am going to provide more details later in my presentation, but all four of our business segments turned in outstanding results this past year, contributing to our strong performance. All of our business segments grew revenues in the double digits in fiscal 2011. So, I'm going to begin my comments with a brief overview of our total fiscal year results, followed by our quarterly results and then the balance sheet recap.

As Steve mentioned, our total 2011 fiscal year revenue came in at a record $353.4 million, which is a 21% increase compared to last year's $291.8 million. Our fiscal year results include approximately $17.9 million in revenue associated with our Inpatient Solutions segment, which was created from our acquisitions, Opus, in February 2010, and Sphere, in August 2009. Earnings for the full fiscal year were $2.12 per fully diluted share; that is a 26% increase year-over-year.

So, moving on to our quarterly results, our record fourth quarter revenue of $91 -- $97.1 million, represents 24% increase over the prior-year revenue of $78.5 million. And, earnings per share, diluted earnings per share of $0.64 was up 42% from the prior year, $0.45 per share. Reflecting strong execution by our sales force, consolidated systems sales grew 26% over the year ago quarter, to a record $36.7 million compared to $29 million in the prior-year quarter. Consolidated maintenance revenue cycle, EDI and other service revenue grew 22% to $60.5 million compared to $49.5 million in the prior-year quarter. We benefited from year-over-year growth in all of our major service revenue categories with our largest categories -- maintenance, EDI and revenue cycle, growing at 21%, 17% and 27%, respectively.

Our consolidated gross profit margin this quarter came in at 65.8%, that's up from a year-ago quarter which was 64% and the previous quarter, which was 64.8%. And our gross margin was up primarily due to a strong performance in software license revenue, which is included in system sales during the quarter. Our SG&A expense, that's excluding amortization, increased by approximately $4.1 million, to $29.3 million in the fourth quarter compared to $25.2 million a year ago. And this increase was primarily driven by increased headcount in selling related expenses including commissions. Our strong revenue growth helped us leverage our SG&A expense and bring those expenses, as a percentage of revenue, down to 30.2%, compared to 32.1% a year ago.

R&D spend was up to $5.8 million, a 35% increase compared to the prior quarter and a 7% increase on a sequential basis. And our effective tax rate this quarter, at 34.9%, was higher than last quarter's tax rate at 32.1%, and down slightly from the year-ago tax rate of 35.2%. If you'll recall, in the prior quarter, we benefited from a catch-up of R&D tax credits which brought our tax rate down to 32.1%. And, this quarter, we are about even with our full-year effective tax rate at 34.7%.

I'm going to now turn to our segment revenue and operating income performance, which I also want to point out, does not include any allocation of corporate expenses or amortization of intangible assets related to acquisitions. So, NextGen revenue was up to $73.661 million, that's up 21% over the prior year. Operating income was $30.735 million, that's up 28% over the prior year. Our QSI Dental Division revenue was $5.646 million, that's up 21%, over the prior year and operating income was $1.317 million, that's up 43% over the prior year. Practice Solutions revenue of $12.66 million, was up 22% over the prior year, and operating income was $1.477 million, that's up 133% over the prior year. And, our inpatient solutions revenue of $5.142 million, also turned in operating income of $1.751 million. I'm not going to present year-over-year comparisons because they are not meaningful in that we did not own Opus for a full quarter a year ago.

Moving on to our balance sheet. During fiscal 2011, we generated $70.1 million in cash from operations which was the primary reason we were able to pay a $34.7 million cash dividend, while also growing our cash and marketable securities balance by $25.9 million during the year. Our total cash and marketable securities this quarter was $117.7 million, or $4.05 per diluted share -- or per share, I'm sorry, compared to $91.8 million, or $3.18 at the end of the prior year. Our DSOs, net of amounts, included in both accounts receivable and deferred revenue, stayed flat, with last year at 79 days.

Our DSOs is based on a gross basis, which is presented on our balance sheet, increased to 131 days versus 125 days a year ago and on a sequential basis, our DSOs increased as well by nine days. Our gross DSO number was impacted by a significant amount of deferred services which were sold during the quarter, which coincided with our strong system sales results. Our -- reflecting the strong system sales that I just mentioned, we -- our current deferred revenue balance increased to $76.7 million compared to $64.1 million, just last quarter.

And, finally, for those of you who are tracking this, our non-cash expenses for the quarter breakdown as follows -- total amortization of capitalized software approximately $1.8 million; amortization of intangible assets, $830,000; total depreciation expense, approximately $1.1 million; stock option compensation expense, approximately $1 million; internally generated capitalized software investments equaled about $2 million; and we had fixed asset investments of approximately $2.8 million. So, I would like to thank you all for being on this call and your interest in our Company and I will turn things over to Pat Cline, President of Quality Systems.

Thank you, Paul. Good morning everyone. I'm also very pleased with the Company's performance during our fourth quarter and with our year-over-year results. Once again, our sales force did a terrific job. I don't want to steal the thunder of the business unit leaders on the call so I will let them give you a number of details, but I will say, that I think the Company has a great plan and a very bright future.

The Company is working hard today on its next generation of web-based technology, our mobile platforms, new patient and customer and consumer, rather, initiatives, the integration of our inpatient and outpatient products, and a number of other things that we feel really differentiate us from our competition. We are also working on a number of other new initiatives and partnerships, the details of which I can't go into at this point, but we are excited about them nonetheless. Before I turn things over, I'd like to thank our employees for a job well done and our customers for their confidence they continue to express. Scott?

Thanks, Pat and good morning, everybody. For the ambulatory division as Paul pointed out, we had another excellent quarter, with topline growth of 21% and operating income growth of 28%. So, I think we definitely turned the quarter -- corner now to very good quarters. To give you some metric, that I've shared for the last several quarters, we signed 102 new contracts this quarter, for ambulatory versus 88 last quarter. I'll note, I am now breaking out ambulatory versus inpatient so, that's 102 this quarter versus 88 last quarter just for ambulatory. Discounting did not materially change, so it continues to be a competitive market, but fairly equivalent to the last several quarters from a discounting standpoint. Quota carrying sales and management positions for the ambulatory division are 89 as of March 31 versus 94 last quarter. Once again, that's just ambulatory. The pipeline, which is a combination of ambulatory and inpatient, for this quarter is $168 million, versus $156 million that we reported last quarter.

Two other things I would just highlight, I know there is continued interest in how we are doing in the REC. We now have 50 of 54 RECs that have made selections, chose NextGen as 50 of the 54, with 30 of those naming NextGen a preferred or partner vendor. We are also now beginning to see REC qualification as part of some of the RFPs and contracts that we are being asked to respond to, which makes it that much more important with our very high percentages of the wins in the RECs across the country. The last thing I'll note is just the Meaningful Use progress, I'm very pleased with the progress our clients are making in the roll-out of the technology that will qualify them.

We have numerous clients who have already begun receiving Medicaid funds and, as you maybe noted this morning in our press release, we actually had one of the very first in the country, client Springfield Center for Family Medicine, recognized by ONC last week at the press conference as being one of the very first Medicare recipients. So we feel like we are very well-positioned to help our clients get to Meaningful Use. I will just end by thanking all the clients and really, the staff of NextGen, who have been working so hard over the last 12 months as everything has been gearing up. I think we really have the best in front of us. So, thank you to the staff and clients. I will turn it over to Donn Neufeld.

Thank you, Scott. Good morning everyone. QSI Dental had record revenue for Q4 and for fiscal year 2011. We continue to have success installing QSI Electronic Dental Record integrated with NextGen EPM and EMR. We have added 14 new joint sales during this quarter. The QSI Dental pipeline is approximately $7.1 million, NextGen EDI had record revenue and operating income in Q4 and fiscal year 2011. Thanks to everyone on this call for their support in our Company. With that, I will turn it over to Steve. Steve?

Thanks, Donn. As a new division, Inpatient Solutions is happy to report and into a very successful first year for our new hospital product line. We now sell our inpatient financial and clinical applications as one compelling offer to the hospital market. In particular, the underserved rural and small community ones. We are happy to report that we are continuing to see success with these products. Some of the fiscal year highlights for us include the achievement of Meaningful Use, the continual integration of our product line with our ambulatory family of products, and the integration of our acquired entities into one cohesive and therefore, stronger division. Our Q4 highlights include the addition of another four hospital cells into our client family, thereby, bringing our collective total to more than 100, now. So, we are excited to reach the significant milestone in our newest market segment, after only one full year of operation. So in summary, it was another strong quarter for us and we continue to be excited about the opportunities ahead. With that, I'd like to turn it over to Monte Sandler.

Thanks, Steve. Good morning, everyone. I'm pleased with the progress we continue to make in Practice Solutions, our CM business unit. We realized strong revenue growth and considerable margin improvements to our recurring revenue model of fiscal 2011. Our focus was geared toward continued integration of HSI and PMP and our overall service delivery. For fiscal 2012, in addition to service delivery, our focus will be on sales and marketing. We have recently added a new Practice Solutions Sales Specialist in an effort to continue to support the NextGen sales force. In addition, we've implemented new tools to help our sales team continue to sell our services. We are watching the change in healthcare landscape closely and feel that we are well-positioned to help providers optimize the revenue cycle.

We continue to see the patient portion of healthcare reimbursement increase faster than any other payer class and are aggressively working with our customers and vendors to help them collect these dollars. We are also closely watching the evolution of ACOs, the implementation of 5010, and the future of Medicare reimbursement, to name a few. Again, we feel that we are well-positioned to help our providers navigate the changing environment and optimize the revenue cycle, with our full-service, all payer, best-practice model that is built on NextGen's industry-leading software platform. Thanks for your time and interest in our Company. Operator, we will now take questions.

Thank you. Ladies and gentlemen, we will begin the question-and-answer session at this time. (Operator Instructions) Our first question comes from the line of Michael Cherny with Deutsche Bank. Please go ahead.

Hello, guys. I just wanted to dig a little bit more into the new contract number. I know we have talked about this in past quarters, but can you give a little more color in terms of the contracts that you are winning. Who's making the decisions now to make the purchases? Are there certain areas of the market where people are being more aggressive versus others that are taking a wait-and-see approach until they see some of their other brethren making their purchasing decisions? I just want to get a sense -- just more of the color -- some color about who is buying from you guys now?

Scott, you want to take that one?

Yes, I will go ahead and start, this is Scott. I would think we are seeing actually pretty good activity across the board. I would have characterized maybe a quarter or two, but clearly, some of the larger clients with broader resources who could see a very clear, economic path to the value of getting literally hundreds of positions up and running. We are early movers on this, but I would say the last quarter or two, it's been fairly broad-based across all of our segments, meaning small, medium and large practices. And, probably increasingly, maybe the fastest-growing trend is just with the -- with hospitals we are trying to get ready for the ACO market, accelerating their plans on both acquiring physician practices and making sure they have the EHR technology that they are going to need to manage clinical outcomes.

Great, and then with regards to the Inpatient segment, you guys have obviously had success, so far in the rural market. As you continue to grow that segment, is there a thought process that you might try and go further upscale some large hospitals? Are you going to continue to focus on that smaller, critical access market?

This is Pat. We continue, at this point, to target the small hospital market. At some point in the future, we will likely move upmarket, but right now, the small hospital market has many more targets, in fact, thousands of more available in the market and that segment also has the biggest need and the weakest competition. So, it is a great place for us to be right now. We also continue to value our relationship with Siemens and we partner with Siemens still on the high end, the large hospitals, but in the future, I guess the bottom line answer is, you probably will see us come upmarket somewhat.

Great, thanks.

You're welcome.

Thank you. And our next question comes from line of Jamie Stockton with Morgan Keegan. Please go ahead.

Hello, good morning. Thanks for taking my questions. I guess, to follow up on the inpatient topic, one question that I've got is whether or not you guys are seeing a benefit from the initial Medicaid checks that have gone out? It seems like those are fairly lucrative for the small or rural facilities and I was wondering if that's sparked a little more demand in that segment?

Yes, this is Steve. I can respond to that. We have seen that in a couple of our clients. The Medicaid, actually, was obviously the first ones to go. We are actually seeing a lot of the small, rural community actually looking for those first, to actually help fund some of the new purchases, too. So, we are seeing that, yes.

Okay. And then, I guess, I know these are just rumors that you guys have been rumored to be looking at a couple of other inpatient platforms that have catered to that small hospital market. Without commenting on any specific deal, I guess, could you give us a feel for whether or not you feel like you need to buy any more footprint in that market? Or, are you satisfied with the solutions that you've got now and feel like you can just grow it organically?

This is Pat. Since you will see this in our filings anyway, I will go ahead and let you know that we did recently acquire a company called IntraNexus. Right now, we are working on integrating the Company into our inpatient business unit. The platform, essentially, is a very scalable inpatient financial system that we're currently interfacing and again, we will be integrating and will become the basis of our new, web-based financials offering. We are also happy to welcome their customer base, the IntraNexus customer base and we look forward to supporting them and helping them reach their goals including helping getting them to Meaningful Use with our world-class inpatient EHR.

To give you a little bit more texture, we just felt it was important that we have a more scalable, inpatient financial platform sooner rather than later because so many of these small, and as we talked about, moving upstream, mid-size community hospitals, we'd like to purchase both the EHR and the financial platform. And with that acquisition, we now have over 100 hospitals on our inpatient systems and we think a terrific foundation as we move forward with that business.

And just to follow-up on that Pat, is there roughly, the existing customer footprint for IntraNexus, do you have a rough number?

There are about -- it's a relatively small customer base. Steve just mentioned to me that they have about 30 hospitals.

Okay, thank you.

You're welcome.

Thank you. And, our next question comes from line of Donald Hooker with Morgan Stanley. Please go ahead.

Thank you, good morning. Thank you for taking my call. Is there -- I'm just tracking your NextGen pipeline. I mean, is there anything in that pipeline that is different in the past, such that it may -- it's converting at a slower rate into revenues in the coming quarters? It just seems to me that it seems like if I'm doing my math right that, that pipeline is growing much faster than the case for several quarters. Is there anything in that pipeline or how you are calculating that, that has changed?

We don't think so. We haven't changed the calculation methodology, I think maybe a little bit of that is the inpatient side pipeline is growing as we begin to market those platforms. While we don't want to get into the breaking out of the pipeline for you, I think that's a little bit of it, but, no, I don't think we are calculating it any differently and we are real happy to see the pipeline number coming up as it is.

So, if I'm interpreting what you're saying right, I guess, perhaps the -- you feel like that the definition there, that a 50% chance of converting that pipeline into revenue still exists but perhaps the implementations or the sales cycles are taking a little bit longer? Is that a fair --

No, not necessarily. I wish I could tell you, John, that it's an exact science, but it's just not. It would be nice to be able to have a model or a spreadsheet that can directly translate that pipeline to revenue. But, one large deal might swing that model pretty wildly. So, all I can tell you is there is not a big change in the way we've done things. All of our leads and the progress that we are making and the status and the forecasts are maintained within salesforce.com and it's a pretty objective set of criteria that we use to report the pipeline. So I don't think I can help you anymore than that.

That's fine. I guess, maybe another related question looking at that pipeline, which is growing nicely, obviously. In the past, I don't think you had done much in the way of subscription or pricing or revenue for your deals, but is that -- is any, is there any change there in terms of a movement away from the traditional licensed software to the subscription software?

We are seeing some. Some of the market moved that way, but in the quarter that we just reported, I think we may have actually done fewer subscription-based deals than the prior quarter. It is tending to run somewhere between the low single digit and maybe the upper teens as far as number of subscription contracts per quarter. We think over a period of years, there will be additional, there'll be more of the market moving towards subscription-based models. But, you wouldn't be able to see a wild shift quarter to quarter.

Okay, and then let me squeeze one last one in. Were there any large single deals in the quarter, like a $3 million to plus size deal that closed and that hit your P&L?

A pretty normal mix. There was a deal that I believe approached $3 million and maybe a couple of others, north of $1 million, but again, nothing crazy as far as being out of line with the past.

Great, thank you.

You're welcome.

Thank you and our next question comes from the line of Constantine Davides with JMP Securities. Please go ahead.

Great, thanks. Guys, a lot of speculation lately that Stage 2 is -- there is a potential for that to be delayed or perhaps the bar is going to be lowered in order to stay on schedule. Can you just tell us what you're hearing, what your thoughts are around that? And then, in the conversations with the prospects in your pipeline, how they are thinking about the potential for a delay?

Scott, you are probably a little closer to that situation than I am.

Yes, I would say your summary of the rumors is the same thing we are hearing. And, some of that is directly coming from ONC. My gut would say that we will see a delay in this stage to criteria. Now with that said, I think there is a lot of speculation that they'll just allow Stage 1, people who have met it to start receiving Stage 2 funding. So, I don't think it's going to have any material impact on slowing down the market. It just set the bar a little lower, potentially for the positions to get there funding. From a logistic standpoint, I think we can all see that, really, the timing of the current rolling out a Stage 2 criteria in the amount of time we, as vendors, would have to implement it and then our clients, lastly implementing it. The math just doesn't work. So, I'm pretty confident we will see an adjustment. At this point, I don't see that the adjustment will hurt us in any way.

Okay. And then, Steve or Paul, I guess any color around your growth expectations for fiscal 2012? I think many of us were hoping to wrestle some color guidance out of you, post this call.

Well, the type of guidance we can provide you is that we are in general agreement with the consensus view of the analysts in terms of their projections for revenue and earned EPS for fiscal year 2012. So, the consensus view, which is well documented is something we are in general agreement with.

All right. Thank you.

Our next question comes from line of George Hill with Citigroup. Please go ahead.

Hello. Good morning, guys and thanks for taking the question. I guess, Steve, I'll start off with the first one. You had talked a little bit before about providing guidance. I guess this isn't the year for that, right?

I just made a statement, I -- you may not have heard it.

I'm sorry. I must have been picking up the phone.

But, I will repeat it. We -- that the management is in general agreement with the consensus view of analysts for their projections for fiscal year 2012 for revenue and EPS.

Okay. I'll take that. And then, I guess, Pat, I wanted to circle back on your comments on partnerships and I recognize that you wouldn't discuss maybe specifically what you are looking at, but I guess, could you give any color around what you find interesting? And then, I would just follow that up with on the Siemens side, we have actually heard from some customers that Siemens is considering discontinuing the partnership with Quality Systems. And I guess, are those conversations that you guys are having and how would you think about going to market ex that partnership?

We have, as I mentioned, a terrific relationship with Siemens. And, as far as we know, and we talk to their most senior people constantly, that, that rumor or those statements are unfounded. What Siemens is doing is, they are building out some software on the ambulatory side that I think may be -- fills or plays into that thought. But that's years down the road and I believe that both organizations enjoy the partnership. On the other partnerships, I just -- while, again, I'm excited about them, I can't wait to tell you about them, I just can't give you any more color on that at this point.

Okay, all right. Appreciate the comments.

Thank you. And our next question comes from line of Bret Jones with Oppenheimer. Please go ahead.

Thanks for taking the question. On the inpatient side, I was wondering if, obviously you made this deal with IntraNexus, do you think you needed to have a stronger, broader footprint on the financial side and when I say that, I guess is it a challenge for you to go into a hospital and try to get them to remove the financial system as well as buying your clinical?

It had more to do with expand -- with getting to a particular scale as well as -- more scalable, financial inpatient financial system. The system that we had, while strong for the smallest of hospitals, it would have been tough to move that system into the 150, 200 and up to 300 bed community hospitals. And while again, that's not our market today, we do, as we've discussed, see ourselves coming upmarket in the future. So, we wanted to get started now with that system, as I mentioned, as the basis for our new, web-based, inpatient financial platform.

Okay, great. And then when you are looking at the deals that you have one on the inpatient side, are those primarily within hospitals that have a financial system from a vendor that doesn't have a certified clinical system, or are you going into replacing financial systems with certified, clinical vendors?

This is Steve. I can answer that. Primarily, we are replacing both systems, the financial and clinical. I mean, overwhelmingly right now, we see in the market, people want a unified systems. In most cases, they do not have a certified clinical system. And again, we are targeting the smaller, the rural community hospitals so it's a new system for them from EHR perspective, obviously they have had financial systems for years, but typically, they want that unified registration, that workflow, all of that. So it's a real good opportunity for us, it's almost always a deal we do together.

Okay, great. And then can you give us an update on the cross sell of EMR into the RCM footprint that you guys acquired, and vice versa the RCM into your EMR base?

We don't have numbers and frankly, if we had them, we may not disclose them, but I will give you a general feel, that we still have a lot of room or runway ahead of us to be able to sell the EHR into the RCM base and vice versa. And we are working on some new marketing programs to take advantage of those opportunities. We haven't, at all, [had] the opportunity that is ahead of us on both sides of the cross-selling that you mentioned.

Okay, and then one last quick one on just the margins on within implementations. The sequential decline in -- whereas can you talk about what happened in the margins there? Because, it caught me off guard in terms of how high the cost of goods sold ran in this quarter?

This is Paul. One of the things that we are doing is building out the team because we were selling a lot of systems and you've seen the growth in the preferred service revenue and I think, initially, there are some costs involved in doing that because you have a training time and where they're not fully -- utilization rates are not quite what they will be down the road. But, initially, you have a little bit of ramp up. The good news is, we've got a lot of [bankable] revenue going forward in terms of implementation services. But, you've got to have capacity to be able to fulfill on all that.

And anytime when you -- any sense for when you would expect that to normalize and to [fill that] to start utilizing that capacity that you've added?

Well --

You got a two to three quarter process do you think or three to four quarter or -- ?

I would spread out over time, so -- .

Okay, thank you.

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

Hi, thanks for taking the question. I guess I had a question on the IntraNexus deal. Could you give us any color on how much you paid for it, whether it was cash, stock, the mix there? And what your plans are for the rest of your cash balance, because that's been ramping up pretty nicely?

Well, let me just say that we're not in a position, on this call, to disclose any more than it has been disclosed on that deal. There will be some additional color available in the near future. But, with respect to the cash balance, once again, as much as I would love to answer your question, we do have a couple of other things that we are looking at to found out our platforms. But nothing I could announce to you at this point.

Okay, okay, understood. And then, in terms of the mobile technologies that you said you're investing in, I'm not sure if that's one of the areas of an acquisition or is that something you are developing in-house, and if there's any color you can provide on the type of technologies that you are going to be launching?

I want to be somewhat careful, but, NextGen, both on the ambulatory EHR side and on the inpatient side, already has relatively robust, mobile platforms. But we are continuing to make investments because, well -- I guess because of the obvious and the uptake in the utilization of mobile devices and iPads by [adoption] in our core markets. So, it's something that we are investing in and we are continuing to build out and we see, in the future, but investments that we have made being key, strategic advantages as we come up against the competition. We are trying hard to develop things that further differentiate us from our competition. So, that we can maintain our price points and profitability, et cetera.

As I mentioned, there's a lot of pricing pressure in the market, but as Scott mentioned, our discounting percentage hasn't changed and so far so good. And a lot of that is because of our sales peoples. Their ability to articulate our value. It's not all about the cost of the system, a lot of it is about the return that the system provides. So, mobile is part of that and there are some other things that we are doing that we feel can -- will also be good differentiators for us.

Okay. Okay. And then talk about the competitive landscape. In terms of the new contracts on the ambulatory side, how much of that, I don't know if you can give us any color on how much of that is coming within your existing base versus deals that you are going out to [rip and replace] other systems, be it practice management or EHR systems at other vendors?

Well, we're seeing both new system sales and add-on sales, both trend up over time. I think, looking at the number of -- the total number of new contracts, those are new customer contracts, you're seeing a nice pick-up on the new customers side. But, the existing customers, as we see consolidation and as they add docs and add other products, will continue to purchase from us as well. We've got a terrific asset in our customer base of many tens of thousands of healthcare providers out there. I don't know what the number is, it's probably 60,000 or 70,000 providers today that use NextGen Systems. So, as we continue to innovate and bring out new products again, they will continue to purchase. But we are delighted with the new customer adds that we are seeing as well.

Okay, perfect. Thanks very much for the color.

Sure.

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

Can you talk a little bit, I hate to use the word, but -- because it is overused, but synergies between your inpatient solutions -- (inaudible) solutions and the revenue cycle management to any metrics you can give us on how having an inpatient solution helped you win more business for NextGen and vice versa?

Well, this is Steve. I can tell you, our first year, a lot of what we've experienced out there, some -- I can give you from an inpatient perspective as we go into these hospitals, whether they are small or not, where there are hospitals, there are physicians. And it has been a tremendous asset for us to have a robust ambulatory system. I mean, it's actually been one of our best-selling points. And I say that because so many people we compete with in that area of the market have a weaker system ambulatory-wise. So it's an exciting thing to see that.

And we're seeing a lot of synergies in that. We see a lot of opportunities, too, for us, with the RCM as well. Again, these are smaller hospitals, a lot of the staffing is different and so being able to put a lot of that from a centralized billing office perspective and that thing into the hands of like an RCM group is also a great synergy. You may want to -- I don't know if Scott wants to talk a little bit on the ambulatory side but that's definitely what I see on the inpatient.

Yes, I would echo that, maybe a little different twist on the synergy with inpatient. I think, from the standpoint of us now having a complete solution, even to the hospitals that we are not targeting since we are more focused on the community hospitals, the fact is that the majority of the hospitals we are talking to are trying to put together ACO strategies right now and I think it's [bulked]. A lot of good, constructive conversation and long-range vision thinking with them but we are looking at the inpatient side as well as the ambulatory. On the RCM side, there's obviously a huge, huge synergy where Monte's group and ours are working together jointly both on existing clients to make sure they are using systems in the best fashion and really give us a full portfolio to help clients across the board, not just selling software, but if the service model is a better model we can go that route as well. So, I think we see a lot of -- quite a bit of synergy.

Okay. So, let me take it from this perspective, so 100 clients on inpatient solutions, how many of those hospitals have owned or affiliated medical group that would be a legitimate prospect for NextGen? And how many of them have NextGen?

We are not going to -- this is Pat, we are not going to have the exact numbers, of course, but, taking the conversation to a slightly higher level, hospitals and doctors offices are integrating. Whether it's hospitals purchasing offices or different, tighter management models and whether it is coming together to form ACOs or other types of organizations, one thing that is clear is that physicians and hospitals are integrating and the number of physician offices that are owned by hospitals continues to increase all the time. So, I would venture a guess that most of the hospitals do have owned offices, hospitalists and some of them will have, as we start to move upmarket little bit, medical groups, faculty practices with teaching institutions and those types of things.

So, the market for the ambulatory EHR is very robust when we go out and talk to hospitals of all sizes, even the small ones. As was mentioned earlier, those companies that have integrated platforms that span the inpatient, the outpatient and all the way, as I mentioned, to the consumer, we think will fare much better in the future. And I'm talking integration at the database level, not just an interface and integration at the user interface level, the UI and that type of thing, which is where that one of the places where NextGen is going to be differentiated.

Okay. And one quick one, how many sales reps do you have on inpatient solutions? I think you gave us the NextGen number, but not the inpatient number.

There is a total of six people, quota carrying.

Okay, great. Thanks a lot.

You're welcome.

Thank you. And our next question comes from line of Anthony Vendetti with Maxim Group. Please go ahead.

Thank you. Just a couple of quick questions on recurring revenues which is what percent that was, and how many SaaS deals and then I had a question on the AMA program?

You are asking about the percentage of revenue that is recurring?

Right now, right.

This past quarter?

Yes.

It was 62.3%.

Okay. And the number of SaaS deals, either as a percentage of the deals --

The SaaS deals was in the low teens, I believe.

I think it was 13.

Okay, thank you, Scott. 13.

13. Okay. And then, on the AMA program, is that more of a hunting license, and what's the criteria they are using to choose you and are they -- could they choose other vendors? And are you offering them any type of special deals under the normal discounts you typically offer?

The AMA offering does have special pricing. It might be character -- it's not really just a hunting license and the [DAMA] does have an offering that they are leading with and marketing and advertising to their members and executing with their members. We're just starting to see the benefit of that relationship and we're hopeful, with respect to the future, but it's tough to characterize where that might be going. But, we think it's a terrific offering at an attractive price.

Okay, when you -- but can you clarify if it is more than a hunting license? What -- are you -- in other words, you're preferred vendor, can they sign up more vendors?

We are a preferred vendor. We are a preferred vendor; we do believe that they either have or will sign other vendors. I think they've signed, or plan to sign, one or two others. It's not, in other words, an exclusive relationship.

Okay. Do you have any pipeline projections on -- or is it too early to say, what this could be or what the potential could be?

Nothing I can share with you. Frankly, we're not sure what the potential is. We do have some internal projections and expectations. But they are not much more than wild guesses based on everything we know about the relationship. But, again, I'm not at liberty to share that with you at this point.

Okay, sure. All right. Thanks.

You're welcome.

Thank you. And our next question comes from the line of Ryan Daniels with William Blair & Co. Please go ahead, sir.

Hi, thanks. It's Jeremy in for Ryan and I'm just wanting to dig back into the inpatient a little bit more. I know last quarter you talked about [50] decisions that are potentially going to be made here in the near-term and I'm curious how that may be qualitative. I know you want to shy away from qualitative, or sorry, quantitative update on that. But does that continue to increase? And I'm curious, how much you think the number of decisions that you are seeing reflects the total market versus your upgrade or sales penetration in that market or sales coverage, I should say?

Yes. This is Steve. I -- we see, for the most part, a consistency in that, what we had talked about last quarter. No noticeable change in that, our pipeline on our side continues to grow. As far as the opportunities for us, even in the small hospital area, we see places where there are folks consolidating those. So when we get one deal, it's possible it could be four or five different hospitals, some as big as ten or 12 even if they are small. And some of the deals are just single hospitals as well. So, for us, some of those decisions can sway and change some of the number of hospitals that we bring on at one time. So, we're seeing a lot of consistency. Those decisions, I think, remain largely the same as they were.

Do you feel like you have, with the six reps, adequate sales coverage to have a pulse on how the total market dynamic? Or, is there opportunity there to expand it further?

Yes, we plan on expanding the inpatient one. We've also -- we do benefit, too, from cross-selling between the two sales forces as well. So, it's a great source of pushing. Like I said, we're there if hospitals or physicians and vice versa, so yes, but we do intend on expanding the inpatient sales force.

Great and do you have a sense for of the 100 hospitals out how many already have either made a decision or have an inpatient electronic health record?

Well, a lot of those, by virtue of them being our clients, have that. Some of the new acquisitions, there are opportunities within those. We are still flushing through some of those as well.

But then I guess, within that community of 100 hospitals, you also said on the ambulatory side that the penetration rate is lower than the total market? In terms of opportunities to go out and following up on what Sean was asking about, the cross-selling opportunities on the ambulatory side?

Yes. We continue to see those, really in all of these acquisitions, there are opportunities to go after those guys, so yes.

Great. And then, one for Paul, it's more of a housekeeping question, it seems, based on the systems margin that the hardware revenue was probably below $1 million. I'm wondering if you can give us a feeling where that came in?

I -- well, you're going to see a lot more color as soon as we file the 10K document. But why don't we just -- you only have to wait a couple of days and you will have all the details you need in terms of the hardware component. I don't want to conjecture here. But, I know we had a strong quarter in terms of license revenue and software revenue and that clearly helped drive the gross profit margins higher.

Okay, fair enough.

Thank you. And our next question comes from the line of David Larsen with Leerink Swann & Company. Please go ahead.

Hello, I think you said you had four Opus sales in the quarter --

Sorry?

Okay. It looks like he's taken himself out of queue. Let's take a question from the line of Edward Hemmelgarn with Shaker Investments. Please go ahead.

Yes, just a little bit more of a follow-up on the inpatient. As you are facing these decisions or the smaller hospitals are facing decisions and you are participating, can you talk about a bit about why you are winning or why you lose?

Yes. I mentioned something earlier, that was key, as well. One of the synergies that we have as a Company, is a very strong ambulatory suite. And, I think that is definitely a positive for us. We move fast to do a lot of integration within the products and I think that has helped us tremendously, too. I think that both the size and stature of the Company helps us in this market as well with -- there's a lot of players. I mean, some of the people that we replace literally are a very small shops, 20 hospitals, 30 hospitals. They've been around, they are declining. So even the name NextGen and the reputation there, and they give a lot of comfort to these guys wanting to settle down for a system for a long period of time and invest in that. So, all of us are, I guess, compelling reasons that we see some wins for us.

Did you -- or in these competitive situations, have you been running into some of the larger players that are focused on the community hospital market?

Yes, we do see some people come down when there is a new ASP offering from the bigger folks. I think I mentioned one of them, Cerner, last time that we had this call. We do see that a little bit. We see some extensions coming, there are certain vendors that offer extension programs for larger systems so we do see that. A lot of times, though, the service offerings that these guys are receiving from these vendors is a lot less than full service. They are offered through third party, things like that we see as well.

This is Pat, I'll powered just a little bit. I think, one of the reasons the hospitals are purchasing from us has to do with their understanding of our vision for the future and integration of the systems and what we are doing with our technology and with our analytics products and really helping them to position their organizations for the future through what we are doing. The robustness of our ambulatory EHR, as Steve mentioned, really helps us in the inpatient market, just like, as we've mentioned on prior calls, it helps us on the RCM side, too. Nobody in the RCM competitor world has an EHR that will touch NextGen EHR.

So, that translates to win, both on the RCM side and on the inpatient side. Also, we've got a lower cost of ownership on the inpatient side than many of the large companies that are trying to come down market. So, we can be very competitive from a pricing standpoint and in many cases, even though we are selling at a lower price, we see more profitability in those deals. So, I think we've got a number of solid advantages in both of those markets.

I guess I was thinking more of like the traditional companies that are in the smaller community hospital market, like companies like Computer Program, CPSI and some of the others, are you running into -- I can see where you have the cost advantage, clearly against companies like Cerner. But, what about -- what's been your -- have you been running into the likes of CPSI and some of the others that have traditionally been focused on this market?

Sure. We typically are going to compete with CPSI and [Healthland] and HMS and a number of other vendors that their core market is that small hospital but we are finding ourselves competing very effectively. And as I mentioned, when I talked about our target market, we think that the competition in that space is pretty weak.

Okay. Thanks.

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

Great, thanks. Just most of my questions have been asked. Just a couple things. One, Pat or Scott, maybe following up on a question asked earlier, on the ambulatory side, on EMR wins, can you just give us an approximation or some type of percentage of how often it's -- when you are going in, you're replacing a vendor versus someone who doesn't have an EMR system at all?

Scott, do you want to take that? My impression, before you start, is that most of our EHR sales are greenfield, not replacements. Increasingly, we are seeing ourselves replacing other systems, but I think that's by far the minority. So, let me turn it over to Scott.

That is my answer as well.

Okay, great. And then, following up on one of the other questions where they came up, was it four or six? I didn't get the number of inpatient deals this quarter?

Four.

It was four, okay great. And then the final question, I think is for Pat, or maybe, coming down on the revenue cycle side, I know you guys have talked about margins have been hampered little bit by your inability to fully integrate. Can you remind us, are the earnouts all completely done now? And should we expect more margin expansion in the next year or two? Or are there other investments besides just inability to fully integrate the businesses that may be holding back margins?

The earnouts are behind us at this point. We do have a little bit of an integration road still ahead of us. We are making good progress. You are seeing margin expansion and our plan is to continue to improve the margins and the profitability of that unit.

Okay, great. Those are all my questions. Thanks guys.

Thank you.

And our next question comes from line of Richard Close with Avondale Partners. Please go ahead.

Yes, congratulations. Pat or Scott, I was wondering if you could just enlighten us, now that we are receiving these first wave of incentive payments. Have you seen demand ratchet up at all or are we somewhat flattening out right now?

Why don't you take that one?

I think it certainly has provided more clarity. And so, I'd say the last two quarters we feel like we see just the strength of the overall market improving. I wouldn't say it's overwhelming or dramatic, but I just think we are seeing uptick in each of the last two quarters and just the volume of opportunity and activity.

Okay, thank you.

We will take one more question, operator.

Okay, sir. Our next question comes from the line of Leo Carpio with Caris and Company. Please go ahead.

Good afternoon, gentlemen. Just want to drill in more on the ACO market opportunity. In terms of your --

It looks like he's taken himself out of queue.

Operator, we lost that question. We will take one more.

Okay, no problem. Our next question comes from the line of Gene Mannheimer with Auriga USA. Please go ahead.

Well thank you, thanks for sneaking me in and nice quarter, guys. A couple of quick ones. Did you, Paul, did you happen to mention what was the NextGen software revenue for the quarter?

The NextGen, just stand-alone NextGen? No, I did not. I gave out the total revenue, try not to bury people with too many numbers since we've got four segments to talk about now.

Got you.

You're going to see a lot -- this detail is going to be in the K that is going to be filed here shortly, but I mean, NextGen, stand-alone system sales is about $31.6 million.

Okay. Terrific. And we will look forward to the K in a couple of days. It looks like quota carrying reps fell off sequentially by a handful. Is that the outcome of natural selection? And is the right number to look at for fiscal 2012?

Yes, that's correct. So it was just attrition occurring, as you guys know, we hired quite a few reps over the last 12 months to 18 months. I would set the expectation that we will be bringing the number back up as we just continue to hire and feel good about the market. So, it will probably trend up the next couple of quarters.

Okay. Good deal. And then last one. Just a quick one on IntraNexus. Is this to say that you would be migrating Sphere customers to IntraNexus over time or will you continue to invest in both platforms? Thank you.

Yes, our plan right now is to integrate those platforms altogether. So, no, there isn't a massive thing to move one to the other. We are going to converge those things -- those platforms together.

Thanks.

Okay. Well, thank you all. We really appreciate your time and your support. Just to reiterate, we've just completed a record quarter and record year. Those -- many of you on this call know how hard we've worked in the last two years to make sure we had our certified products in place for the beginning of the stimulus, the fact that we have built up our sales organization and that our pipeline is continuing to build up every quarter as we enter the front end of the stimulus period. So, we are very bullish on our future. We think we are nicely positioned along those lines and we continue -- we are hopeful to continue to perform in a superior fashion. Thank you again and we will talk to you all very soon.

Ladies and gentlemen, this concludes our call for today. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 and enter the access code of 444-2392. Thank you very much for your participation. And, you may now disconnect.