NextGen Healthcare Inc (NXGN) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Quality Systems Fiscal 2012 Second Quarter Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, October 27, 2011.

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

Thank you, Christina, and welcome everyone to the Quality Systems Fiscal 2012 Second Quarter Results Call. With me this morning are Paul Holt, our Chief Financial Officer, Pat Cline, QSI President, Scott Decker, NextGen President, Donn Neufeld, Executive Vice President of EDI and Dental, Steve Puckett, Executive Vice President of NextGen Inpatient Solutions, and Monte Sandler, Executive Vice President of NextGen Practice Solutions.

Please note that the comments made on this call may include statements that are forward looking within the meaning of securities law, including without limitations, statements related to anticipated industry trends, the Company's plans, products, perspective, and strategies, preliminary and projected, and capital equity initiatives in the implementation of potential impacts of legal, regulatory, or accounting principles.

I'll provide some opening comments and then turn it over to the team. Our results reflect the previously-announced, Board-approved, 2-for-1 stock split, which became effective yesterday for shareholders of record as of October 6, 2011. Each shareholder of record at the close of business on October 6, 2011, received 1 additional share for every outstanding share held on the record date.

Today the Company's shares will begin trading on the NASDAQ stock market at the new split-adjusted price. All share and per-share data provided herein have been adjusted to reflect the impact of the stock split.

The Company reported record net revenues of $107.6 million for the fiscal 2012 second quarter, an increase of 32% versus $81.5 million for the fiscal 2011 second quarter. Net income for fiscal 2012 second quarter reached a record $20.5 million, up 53% when compared with $13.4 million for the comparable period a year ago.

Fully diluted earnings per share were $0.35 in the second quarter of fiscal 2012 versus $0.23 fully diluted earnings per share for fiscal 2011 second quarter, an increase of 52%. Our extraordinary growth and our solid performance stem from sales resulting from decisions made in part based on the stimulus plan. As the stimulus continues to gain momentum and our pipeline continues to fill, we are realizing the benefits of the positioning and preparing we did in advance. The quarterly results reflect this ongoing acceptance of our solutions and strength of our services as we continue to progress very positively in the marketplace.

As a result of our strong first-half performance and our confidence in the second half of this year, we are now prepared to up our general views for the year. More in line with consensus views, we are now in general agreement with a revenue range of growth of 21% to 24% for the year and an EPS range of growth of 29% to 33% for the year. This is an upgrade from our previous views of 20% to 23% revenue growth and 20% to 30 -- 28% to 32% EPS growth. Our confidence is strong, we're bullish on our second half, and I'll now turn it over to Paul and we'll take you through the entire management team here. Paul?

Thanks, Steve, and hello everyone. I'm going to being my comments with a brief overview of our quarterly results followed by a balance-sheet recap.

As Steve mentioned, we're very pleased to report a solid 32% year-over-year increase in consolidated revenue this quarter based primarily on the strength of our growth in systems sales in both our ambulatory and inpatient divisions. Consolidated systems sales grew by 53% at $38 million compared to $24.9 million a year ago. Our consolidated maintenance, RCM, EDI, and other services revenue grew 23% to $69.7 million compared to $56.6 million the prior-year quarter.

Primary contributors to this growth in this category were maintenance and other services, which grew on a year-over-year basis by 28% and 47% respectively. A portion of the strong growth in maintenance revenue came from the recognition of certain maintenance revenue, which had been deferred, in prior periods pending receipt of payment from a particular customer. We're not going to get into details regarding this customer or the amounts recognized but did want to make mention of it to understand a portion of the growth in maintenance revenue this quarter. Other services revenue includes consulting services, which has shown strong growth on a year-over-year basis.

As stated in our press release, we have split our stock on a 2-for-1 basis, and thus our earnings per share will be reported on a post-split basis, which was $0.35 per share, up 52% from the prior-year quarter at 23% -- I'm sorry, $0.23.

Our consolidated gross profit margin this quarter came in at 66.5%, up significantly from the year-ago quarter at 63%. The biggest contributor to the higher gross margins this quarter was the strong growth in high margin software and maintenance revenue this quarter.

Our total SG&A expense excluding amortization increased by approximately $7.4 million to $32.2 million this quarter compared to $24.8 million a year ago. This increase was driven primarily by an increased headcount commissions and bad debt expenses.

Our segment performance was as follows. NextGen revenue $82,489,000. That's up 35% from $60,944,000 a year ago. NextGen ambulatory operating income was $34,310,000. That was up 52% from $22,603,000 a year ago. EDI Dental revenue was about unchanged at $4,512,000 compared to $4,645,000 a year ago. Operating income for the Dental division was $620,000.

Our Practice Solutions revenue was $12,179,000. That was up 1% from $12,054,000 a year ago. Operating income for Practice Solutions came in at $1,098,000, which dropped slightly from a year ago at $1,277,000. Our Inpatient Division revenue was $8,453,000. That's up 122% from $3,814,000 a year ago. Our Inpatient Division's operating income came in at $2,450,00. That's up 92% from $1,343,000 a year ago.

I also want to add that on July 26 we announced the acquisition of CQI, provider of surgery information systems installed at over 100 of the nation's hospitals. We're very excited at what this acquisition brings to our product portfolio, and Steve Puckett's going to provide further details on that later in the call. The purchase price was a mix of cash and stock, which totaled $8 million -- approximately $8,546,000. That includes contingent consideration payable over a 2-year period of the fair value of approximately $2,346,000. That's based on management's estimate. We'll provide more financial details on our Form 10-Q, which is expected to be filed shortly.

Moving on to our balance sheet. Our total unrestricted cash in marketable securities this quarter grew to $126.9 million, or $2.16 per diluted -- per shared. That compares to $117.7 million, or $2.03 at the beginning of our last fiscal -- at the end of our last fiscal year, March 31, 2011. We were able to grow cash by approximately $9.2 million in the last 6 months while paying approximately $20.4 million in dividends as well as making a total of approximately $5.8 million in cash payments related to acquisition.

Our DSOs net of amounts included in both accounts receivable and deferred revenue was about unchanged at 80 days versus 81 days a year ago. Our DSOs based on our gross accounts receivables increased slightly compared to the prior-year quarter at 127 days versus 126 days a year ago. On a sequential basis our DSOs dropped by 8 days.

For those of you who are tracking this, our non-cash expenses for the quarter break down as follows. Total amortization of capitalized software $2 million. Amortization of intangible assets $1.1 million. Total depreciation expense $1.3 million. And stock-option compensation $705,000.

So I would like you all for being on our call and your interest in our Company, and I'll now turn things over to Pat Cline, President of Quality Systems.

Thank you, Paul. Good morning everyone. Once again, the management team at QSI has made me proud. Just last quarter I spoke about how the Company crossed the $400 million annual run rate threshold, and here we are crossing a run rate of $430 million.

As you know, we recently announced my retirement, and while I greatly appreciate all the kind comments and offers and well wishes that I've received, I need to remind everyone that the Company's success has been based upon the commitment and tremendous sacrifices made by an awesome and close-knit entire team of people.

To our clients, thank you for the confidence you've expressed in the Company and for pushing us to be better. And in closing, I'm proud of what the Company has achieved to date and I look forward to watching the Company as it continues to achieve in the future. I truly wish all the employees at QSI the very best, and I thank them from the bottom of my heart. Thanks also to everyone on this call. Scott?

Thanks, Pat, and good morning everybody. As Paul mentioned, we had really a great quarter in the ambulatory division with 35% topline growth year-over-year and 53% operating income. In general I would say that the quarter was strong across all fronts with really not a tremendous amount of material change in the market, and obviously we'll get into it a little bit more in Q&A, but the market looks good right now.

From a metrics standpoint, we signed 94 new contracts in the ambulatory division. Approximately 12 of those were software and service contracts. Discounting did not materially change in this quarter, which has been the case for at least the last 6 quarters.

As of 9/30 we have 102 quota-carrying sales and management positions in the ambulatory division, which is approximately the same number we had 1 year ago. The pipeline as of today is 173 million versus 143 million a year ago. That pipeline is a combination of inpatient and ambulatory.

From a meaningful use standpoint, as I mentioned in our call last quarter, our product's been out in the market now for a couple of quarters. We're getting very good traction with our client base. We are well into adaptation at this point. NextGen clients have identified, at least informally to us, approximately $16 million in federal funding that they expect and -- and/or have received. Approximately 40% of that is coming from Medicare, 60% from Medicaid.

On the development front, we were excited to release this quarter our new KBM 8.0 clinical content. Really the focus of that product has been a fairly dramatic re-engineering of the -- of the front-end of the product, which we think is a much more intuitive product and should help our clients with a much simpler and easy rollout of the product as they move forward to large-scale deployment over the next several years.

As we move forward over the next 12 months, obviously our focus shifts towards ICD-10 and getting our client base ready for that. We're well underway in our development of that release of product. Our current goal is to have that out the middle of next year allowing our clients to have a full 12 months to incorporate it into their workloads before the deadline of October 2013.

With that, as always, our clients and our staff at NextGen have been working extremely hard. The pace just continues to pick up but everybody is hitting on all cylinders at this point so I very much would like to thank the NextGen staff, the management staff, and of course our clients for their commitment to us and going forward.

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

Thank you, Scott. We continue to have success selling QSI's electronic dental record integrated with the NextGen EPM and EMR. We added 5 new joint clients during the quarter. Dentists using the NextGen EPM, EHR, and the QSI dental record received Medicaid incentive payments. The QSI dental pipeline is approximately 7 million.

NextGen EDI sold a record amount of new EDI services in the quarter, showing the results of new product introductions and a better integration of EDI into the sales process.

Thanks to everyone on the call for their support and interest in our Company. I will now turn things over to Steve. Steve?

Thanks, Donn. At Inpatient we're very excited as we continue to see much success and solid performance from the division. This July we completed another acquisition, as Paul mentioned, with a company called CQI. CQI offers centralized scheduling and surgical services to a broad range of hospitals and facilities. Adding CQI to our family of products allows us to begin to scale upward into larger markets and it includes specialty hospitals as well. It allows us to offer more comprehensive product suite overall.

This quarter we also completed the integration of the previous quarter's acquisition called IntraNexus into our financial product group. As you can remember, that was the group that we had from the very beginning. We've been able to benefit from this addition of many seasoned professionals, and we have greatly complemented and strengthened the existing financial team as a result.

Our Q2 highlights include the closing of another 9 deals including several from our new CQI product group. When you consider all of our collective hospital footprints from our product groups now, we are now over 200 hospitals strong. We continue to see many cross-sell opportunities, not only within the inpatient product offerings but also with our traditional ambulatory offerings. In fact, most of our inpatient sales include the ambulatory product, and it remains a selling strength to us against our competitors.

Another significant accomplishment is the attestation for meaningful use dollars from 10 of our clients. These include both Medicare and Medicaid attestations and will be soon be announced in the subsequent press release. This is a major accomplishment and a team effort from both our hospital clients and our inpatient team. We're very proud of it.

In closing, we continue to focus on the rural and community hospital market, we continue to benefit from the fact that this market has been traditionally underserved, and we're finding this an excellent opportunity to facilitate the synergies of our established ambulatory product with our new and exciting inpatient offerings. We look forward to the future. Thank you for your time and attention, and now I'd like to turn it over to Monte Sandler.

Thanks, Steve. Good morning everyone. I remain extremely pleased with the progress we continue to make in our -- in NextGen Practice Solutions, our RCM business unit. Revenue is up 8% for the 6 months ended September 30, and operating income is up 114% over the same 6-month period. Our backlog of signed deals not fully implemented remains strong, and our sales pipeline has several large deals at various stages of the sales cycle.

As reported last quarter and in addition to service delivery, our focus remains on sales and marketing. To positively impact sales we've added new services based on our customer's business needs in an effort to complement our truly full-service revenue cycle offering. Examples include enhanced data reporting and analytics and patient access verification among others. We continue to prepare for the implementation of 5010, and we're watching the future Medicare reimbursement closely.

With all these changes forthcoming, I'm confident that we remain well positioned to help our providers navigate the changing environment and optimize their revenue cycle with our full-service, all-payer best practice solution that is built on NextGen's industry-leading software platform.

Thank you for you time and interest in our Company. Christina, we'd like to take questions at this time.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Ryan Daniels with William Blair. Please go ahead.

Yes, good morning guys and thanks for taking the questions. Let me start with a couple quick financial ones, I guess for Paul. Just on the SG&A spend, you had some commentary of that ticking up from headcount commissions, and then you also referenced bad debt. So I'm curious if there's anything unique in the quarter, if there was a big uptick in bad debt due to a client problem, or if it's really just the growth with sales.

And then as we look to the back half of the year, is that a pretty good run rate to start off of for SG&A?

Okay, so there's a number of points behind your question. I think bad debt, any given quarter you may have different situations come up that -- sometimes it's up, sometimes it's down. We're going to have more details on that in our 10-Q, but I wouldn't necessarily call that some kind of a trend. It's just a number that -- just like sometimes we talk about having more hardware in the quarter than other quarters. Sometimes it's up, sometimes it's down. So I really wouldn't categorize -- get into calling that a trend.

Some of the other items -- and also you have to keep in mind that we are a bigger Company, and as your revenue base grows you're going to expect to see some of the other things grow as well. Commissions and headcount expenses -- commissions are going to fall somewhat in line with the fact that we're selling more. And headcounts are just the fact that we continue to make investments in different areas of the Company, and that's just reflective of the fact that we're growing.

So I think your third question was getting into is this the right level of SG&A going forward, and some components of that are variable and some are not. Obviously the headcount additions that we've had and I think that as we progress in the year we'll continue to make investments there. So I would -- I wouldn't expect that to drop, and I also wouldn't expect to see commissions drop.

Bad debt is a little bit more variable. I'm not going to make predictions about that, but hopefully that provides you with a little bit more color on -- as you try to think about your modeling.

Sure. No, that's very helpful. And then maybe one just on the revenue cycle line. It looks like that actually had a little bit a drop sequentially. I know that had been improving kind of quarter-to-quarter over the past 6 to 7 quarters or so. Is that anything to do with seasonality or anything unique there that we should read into with the sequential downtick, albeit a modest one?

This is Monte. So really when you look at revenue cycle year-over-year we're actually up about 1%. There's -- the way some of it's accounted for is a little different. Certainly seasonality is some of it, and we've got some customers in various stages of implementation. So I don't think there's much to read into other than we continue to focus on sales and marketing and continuing to grow the business unit.

Okay, great. And then one final one and I'll hop off. Just in regards to the pipeline, it looks like that may have flattened out a bit in the quarter. I think it was up about $1 million sequentially, and you kind of indicated that the market outlook looks pretty stable. So are you seeing the demand environment top off a little bit or maybe as we're farther into the delay of stage 2, has that started to postpone anything? Just any color on market demand would be helpful. Thanks a lot guys.

Yes, this is Scott. On the pipeline I think it's just a little bit of a flattening out, but I wouldn't say that we would characterize the market that way. So once again the pipeline is a pretty big number at this point and you're going to see a little variability quarter-to-quarter. We maybe see a little bit of, with the end of the year, maybe the client rollout, and add-ons aren't quite as strong as we go through a December quarter. But I would say if you look out 12 -- 12 months and further, it's unprecedented with the amount of demand we see coming for our clients for rollout levels to extents they've never talked to us about in the past, so it is flat but I wouldn't read too much into that.

Okay. Perfect. Thanks and congrats on the quarter.

Thanks.

Thank you.

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

Thanks. I know Steve quoted some out-of-station figures on the inpatient base and just wondering if you had similar numbers for ambulatory?

I don't have the discreet number of clients unfortunately, so I have a cumulative number at this point. And the key thing to note on this is there's really no formal way for us to know. So this is all self-reported and really just represents a percentage, I'm sure, of the install base that's really there.

I'm -- so is there a percentage number you can give us?

No, I'm sorry. What I was trying to indicate is that only -- only the clients who self-report in is what we can publish in a number. And so we're not sure what the total number is but clearly it represents only a portion of the total install base.

Okay. Okay. And then Steve, I just want to be clear on your updated guidance. I mean, if I -- if I do the math it sounds like a range of about $1.36 to $1.41 on the bottom line versus revenue that's a little higher than what the street's expecting. So I just want to be clear, is that you guys being just a little conservative or is that some of the investments I think you guys have talked about just pressuring operating leverage a little bit in the back half of the year?

Well I think the way to answer that would be that the first half of the year was very strong for us. Scott has already characterized that. When we report our pipeline, we're talking about near-term closure cycle business that are categories 3 and 4, businesses that have not yet entered closure cycle. Those categories are large, which gives -- and those are the future.

And so our confidence going into this quarter and our fiscal year fourth quarter is very strong. So it gave us the opportunity to take a second look at the ranges we had provided historically and gave us the confidence to up them slightly. And as you know, we're typically quite conservative.

Okay. Last thing, Paul, can you just give a little bit more color on that maintenance revenue item? Thanks.

Yes. So I really -- can't really get into any kind of particular dollar figures, but it was -- or details about any names or anything like that, but it was related to the fact that we had deferred revenue due to some collection issues that we had, and we got -- we collected, and so we didn't have any reason to continue to defer that revenue. And it did help with our maintenance numbers this quarter, and it was enough that I thought I should at least mention it but at the same time make it clear I -- as we've said historically we really don't get into that level of detail, certainly talking about individual transactions and things like that.

Thank you. And our next question comes from the line of Michael Cherny with Deutsche Bank. Please go ahead.

So I just want to dig in a little bit to the new clients signed during the quarter. You mentioned 94 new clients on the ambulatory side. Can you give a little more color on the types of clients those are, whether these are greenfield opportunities versus replacements? Kind of your different success I guess in the large versus mid versus small market. Any other color just in terms of digging down a little further into market demand would be great.

Sure. I wouldn't characterize it as we saw anything materially different, which means it's really across the board we're seeing good opportunity. The ambulatory market at this point, especially -- well, I guess across all fronts I wouldn't really describe it as greenfield so much anymore. I would say in the vast majority of cases now we're in a replacement mode.

Now with that said, there's the clear consolidation starting to occur into larger enterprise kind of environment, so a lot of the replacement cycle is the smaller one-off type EHRs now getting wrapped into enterprise models like -- like NextGen. So in general our client base is large -- large client, large enterprises, increasingly. Hospital systems or large IPAs who are amassing -- amassing groups of physicians and consolidating onto a single platform. And through that we're accumulating both small practices and obviously the large client -- client base.

Great. And then you also brought up the ICD-10 product development efforts. Obviously that's going to be a big issue and need to resolve for your customers going forward. Can you just give a little sense in terms of what conservations you've already had with customers as you work on developing this product ahead of the rollout I guess mid next year?

Sure. I mean we're obviously in constant dialogue with the install base because they're trying to time out their ability to get this type of system implemented. And really the communication with the client base right now has been, as I said, trying to get the product to market, which I feel we're on track for middle of next year, which gives them really a 12-month horizon to get the product installed, tested, and ready to go.

And the majority of the client base feels -- feels very comfortable with that model. I would say the reverse, or the flip on this is is the payer side going to be ready, and talking to the client base I wouldn't say they're nearly as bullish on that side. They probably feel much more comfortable that we'll be ready on -- on the product side.

Great, thanks.

Thank you. And our next question comes from the line of Jamie Stockton with Morgan -- I'm sorry, Morgan, Keegan and Company. Please go ahead.

Yes, thanks for taking my questions. Good morning. I guess, Scott, first just as far as the demand you guys are seeing in the marketplace, it looks like the EHR registrations with the government for physicians really ticked up in September. I was curious if you guys saw any change in the market as that happened?

No, I think it's just the ongoing trend. And I guess I would echo your sentiment. We certainly see critical mass starting to occur. Our clients have now had the product in place, and really the step there was to get it into the workflow and positioned, which is not a trivial factor. So got the software installed, over 3 to 6 months as they start with the physician base to really get what they need done and the workflows so that they qualify for meaningful use. And so I think we see the bubble coming.

There's certainly a reinforcement as that money starts to flow, obviously, of people saying okay, it's real, we're seeing it, and I think we still have a lot of physician opportunity out there who still haven't made a meaningful use decision but maybe has gained up some confidence. But I think this is just the relatively steady build that we've been talking about for the last 18 months just coming to fruition.

Do you have any feel for what portion of the market has been really skeptical of the program or just maybe even hadn't been aware? I know I've seen some studies that have shown that maybe 20% of physicians didn't really know much about it, and now that the checks are starting to flow it's starting to change their thoughts around it.

I don't know that I notice a material change on that front. I mean, your numbers sound -- sound reasonable. I think if they had their head in the sand they still have their head in the sand. Like I was saying earlier, I think the biggest mover right now is just the consolidation that's going on, which is dragging a lot of the smaller practices into this -- this whole debate.

I would also just characterize that meaningful use -- it's interesting because it's important, but I would say just as important of a driver right now is people starting to position for healthcare reform. And what I mean by that is really positioning to be networks of providers and the critical nature of having an EHR in place as they form those networks.

When we talk to our larger clients, the meaningful use dollars are important, but their strategic plan, it's really the network and the fact of getting a large base of physicians on a common platform is as critical as anything they're doing.

Okay. And then, Scott or Paul, whoever wants to tackle this one. Your maintenance revenue growth was very robust, and I know that Paul called out the deferred rev that you had recognized during the quarter from a single account. Even if you set that aside, it seems like maintenance revenue is growing at a pretty healthy clip here. Is there any -- any color other than just hey, our software footprint is growing at a similar rate? Is there maybe a trade-up going on where clients are looking for more support than they had in the past and they're willing to pay for a more premium level of support or anything like that?

No, I wouldn't characterize that, and Scott may have some other color to add to that as well. No, I think -- I think it --. I did call out that one other issue, but I think what continues to be true is that the main driver of that maintenance growth is coming from the fact that we're selling software licenses, and that's a growing customer base and that's going to push maintenance revenues higher. So it makes the software business great.

And I would actually characterize, if anything, as the clients get larger and we see more of that in our install base, it actually discounts the maintenance a tad because they take on some of the first line support for us. So it really is just inherent in the software growth.

Okay. Thank you very much.

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

Great. Good morning everyone.

Good morning.

I wanted to follow up on some of the comments from some of the other questions, or some of the answers to the other questioners. I think, Scott, you mentioned there is a lot of replacement business. I know -- obviously you don't provide bookings, but if you had to at the back of the envelope put a percentage on that, is it -- are you saying it's almost 100% replacement business now, or how would you gauge that? I'm just trying to picture it in my mind.

I wouldn't characterize it as 100%, but I would say with every passing quarter it's a higher and higher percentage.

See I think a few quarters ago I thought it was pretty de minimis, that's why -- I mean, is this is a change or?

As I said, I think it's just more and more the market has at least gone through a stage 1 EHR, so maybe it wasn't a fully deployed EHR equivalent, maybe they were doing e-prescribing. But it's rare that we come into a place any longer who has had no exposure to some form of clinical product.

Okay. And then I guess, and again I know you don't provide bookings, but I was also interested -- you did comment on consolidation with systems. Are you -- how much of your business comes in through existing clients versus say new clients that are new to NextGen? Just in ballpark terms.

This is Paul. Yes, yes. No, a fair amount. I mean, it's going to vary from quarter to quarter, but I mean I would say it is a material number. I mean it's definitely -- it can be a third, 30% to 40%. I mean, it ranges because of the fact that you've got some -- many times customers will come and they'll buy an initial number of licenses as part of a pilot or a rollout and then they will just continue to come back to us as they're rolling and implementing the software.

So many customers are buying licenses from us for a long period of time. So it does continue to contribute to our revenue.

Hey Don, this is Steve Plochocki. You know the -- we've long said, and it's actually been pretty well documented by some of the research writers that the top 10 companies, us included, that have had a historically large installed base going into the stimulus period are clearly going to be major benefactors of this consolidation we're seeing in healthcare today. And of course we are absolutely experiencing that with over 3,000 group practices, nearly 80,000 doctors that have been on our systems historically, they are -- they are part of the consolidation, and many of them are becoming the consolidators.

So large companies with large installed bases are realizing the benefits of the consolidation as small groups and small docs start joining up into larger groups.

Great, thank you.

So that -- that is a very important part of our business, but it's a byproduct of all the work that we have done to put ourselves in the position we're in today.

Great. Let me sneak 1 last 1 in. I'm not sure if you mentioned what the revenue contribution roughly was from CQI in the quarter, and how do we think about that in the second half from a run rate perspective just to get sort of an organic growth?

Yes, we're not going to get into that level of detail. Just suffice it to say that it did make some contribution but -- to the Inpatient Division's results, and we expect it to continue to make contribution. But some of that comes -- also comes from the fact that -- the fact that we have that product helps us to sell all of our other products, and so the lines get a little bit blurred there in terms of what it's actually contributing, but it does make -- and Steve's probably got other comments to add to that.

Yes, I mean roughly -- I mean part of the whole method to the madness so to speak is to complement our product suite. And when we do that we have opportunities to cross-sell back and forth. We're able, in many cases, to go and take these products right into existing clients that we have or are even in the process of installing.

I'll just add 1 piece to what was said earlier about greenfielding and stuff. On the inpatient side, we are traditionally replacing systems that have traditional HIS systems out there. Theirs are financial systems, they've been around a long time, but most of the inpatient deals we do are new clinical systems. They do not have existing EHRs.

So if you think about that kind of market, they also don't have things like centralized scheduling, surgical suites, those kinds of things. So those are all good opportunities for us.

So as Paul said too, it would be hard to put a number on it. But obviously the reason we put that into the product suite is because we think it's very, very complementary.

Okay. Thank you.

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

Hi, thanks for taking the question. To the extent you can comment on this, could you talk about the relationship with Siemens and the new relationship with Dell that you signed, particularly with Siemens because there have been some rumblings in the market about how that's going to shape out and contribute to going forward? And then I have a couple of follow-up questions.

This is Pat. I can take -- I can take that one. Siemens has, as I think most of you know, announced that they are developing an ambulatory electronic health record system, and they're targeting that to come out within the next couple of years as I understand it. But our partnership with Siemens remains strong.

A lot of the low-hanging fruit relative to the Siemens client base has -- has been harvested relative to ambulatory EHRs, and NextGen enjoys many of their -- those clients as our clients. I think probably the bottom line that I would want to know in your place is what happens if the Siemens relationship goes away and Siemens stops selling new business. And my opinion on that is not much.

Again, we value Siemens as a partner, but the revenue run rate, which I won't give you exactly, is such that it's not at this point making a material contribution to our results. And also keep in mind that Siemens purchases our software on a wholesale basis, so if we were to sell half as many Siemens' customers but do so directly, it again wouldn't have much of an impact.

With respect to the Dell part of the question, another valued partner, great opportunity for us. Dell has made quite a commitment to our Company and we've made a similar commitment back, and that's a multifaceted relationship, but tremendous opportunities across our entire product line to work with them in co-marketing and many other areas.

Got it. Thanks for that color. On the pipeline number, it seems like that's going to be the topic of the day. How should we be looking at deals that Steve, I think you mentioned, were in the category 3 or 4 kind of stage that are larger but are probably not in your pipeline as you explain it to us? I mean how should we think about those on a risk-weighted basis? Just because the sequential increase was not that much yet, you're saying that there is -- there is an increase on the larger size deals.

No, what I said was that categories 3 and 4 for us are very -- they are very deep. We have a lot of volume in categories 3 and 4. Categories 3 and 4 are not considered in our pipeline because they're not in final stages of closure cycle.

The point we're trying to make is that ever since the bill was announced, all 4 of our categories have grown every quarter over an extended period of time. The categories 3 and 4 for us as we head into this next couple of quarters looked very strong.

So when you take a look at our pipeline for this quarter, it's up sequentially versus the prior quarter, but what's behind it as Scott characterized, is very deep, very vibrant, and a large percentage of that will be moving into closure cycle in our fourth quarter.

Okay. Understood. How about deals that you don't include in the pipeline? How are those -- I mean, sizable deals. For example, Hangar was one that was not in the pipeline. How should we think about those?

Well, I mean we're always going to -- we're always going to have large volume opportunities. We have several that we are working on now that we don't put in the pipeline because they would simply skew all the numbers. They're way too big. So those -- what we give you in the pipeline is our meat and potatoes, standard, 6- to 8-month closure cycle based deal.

Okay.

You remember Hangar was a deal that took well over 2 years to get -- before they made a decision.

Right, right. Okay, understood. Thanks very much.

Thank you very -- very much.

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

Thank you for taking the questions. Just wanted to go back to something you said earlier, Scott, when you were talking about the pipeline and add-on sales flattening out a bit. And I was wondering, are you referring to add-on sales being add-on licenses from the, as you've talked about, consolidation and your enterprise customers buying up doc practices. Is that what's slowing down, or are these additional software modules?

Yes, thanks for the follow-up question because I maybe mischaracterized it. We definitely don't see a slowdown in general with our large clients on add-on, and really if anything it's explosive over the long-term. Really their -- their willingness and really their business plans to grow the install base.

What I was trying to indicate was in the actual current quarter we don't see quite as much demand from some of those large installs, and that's why we're seeing just a slight uptick sequentially. But as Steve was just going through, really if you look at the long term we see -- I think you'll start to see the pipeline build again, and it will be largely driven by our install base and their plans for expansion.

Okay. Thank you. And then on the replacement market, because I think that's kind of the comment that spooked some people that the -- this has become mostly a replacement market. Who are you replacing generally? Are we talking about the smaller vendors who are mostly the throwaways or are we talking going head-to-head with the more traditional vendors that we think about, the Epics and the Allscripts of the world?

Yes, good follow-on question once again, so I appreciate it. Definitely more so -- it's first generation product. So what I would characterize is a lot of people tried something and a lot of people tried something on the cheap, and so a lot of -- if it's replacement it's mostly that. And we do have a few every quarter have a head-to-head with taking out one of the more major vendors.

But the vast majority of the market I would say is just people really moving to a full function EHR that's going to take them through the next couple stages of meaningful use. So not a material change in the market, so I apologize if people got the perception I was characterizing a change in market condition.

All right. Thanks. And then just one for Monte, on the RCM, I know you didn't want to get into specifics, but there was a sequential decline that I wanted to hone in on a little bit and just to make sure, were there any customer losses that drove that decline?

I don't think there were any significantly material losses. I mean, we've got customers that are consolidating all the time, so some are growing and some are contracting a little bit.

And like I mentioned, we've got a lot of customers that are in various stages of the implementation process, so it's kind of the ebb and flow that's occurring. And we also typically see that this quarter is typically slower, not as many people going to the doctor, so volume tends to be a little bit different over this quarter.

So utilization was one of the primary drivers --?

Yes. We definitely see changes from utilization in this quarter.

All right. And I'll try one more on Paul that I can pretty much guarantee he won't answer, but it's worth it anyway. Maintenance -- on the maintenance side, I know you didn't want to quantify it, but we do build our models off of where you're going, specifically on the maintenance line, off growth of where you've been. Is there any reason not to quantify it? I can understand not wanting to talk about the specific customer.

Well, we just -- our history is such that we really try not to get into individual -- what's going on with individual transactions, so I'm trying to be somewhat consistent with that. But I think if you've got enough time looking at the way our maintenance revenue behaves, you look at what the growth patterns have been in the past, I think you'll see clearly this quarter was very strong, and I was trying to give some color to that.

All right. Thank you.

Thank you. And our next question comes from the line of George Hill with Citigroup. Please go ahead.

Hey guys, and thanks for taking the questions. I'm going to beat a couple of the horses that might not be completely dead yet. So with respect to -- I just want to be sure that I understand this clearly. With respect to the ambulatory market and the inpatient market, on the ambulatory side most of the market opportunity that you're seeing is replacement of legacy systems. You're not seeing a lot of greenfield opportunity. I'll ask A, do I understand that correctly, and B, how much of that do you think is reflective upon your historic focus in the up-market settings? And I guess can you provide any color versus what you might be seeing on the down market settings?

Yes, so I think we've gotten into a loop of mischaracterizing the market, and I, like I said to the previous caller, I apologize if that perception is coming across. Maybe our definition of greenfield -- if I would consider greenfield a client who's just never had any exposure to an EHR or component such as e-prescribing, most clients today have something in place.

If you say greenfield is have they put in a major vendor, a NextGen, an Allscript, ECW, no, we still see substantial opportunity on that front. And really what we're seeing is this consolidation of the market, and as it consolidates we're wiping out those first-generation products or where they had nothing. And so the opportunity is still very good on that front to penetrate the EHR market with a product that's going to support clients through meaningful use, through getting patients under medical help.

Could you repeat the second part of the question?

Well I think you covered enough of it right there. And then 2 more quick ones. Number 1 is with respect to meaningful use as you guys look at how the regs are currently structured right now, on the ambulatory side of the market what do you -- how would you characterize the up-sell opportunity for NextGen in Stage 2 and Stage 3 after mid-size and large-size provider organizations have already bought the base EMR and EPM products?

It's obviously a little hard to tell because meaningful use 2 and 3 haven't been defined yet. Are feeling's always been make the bar as high as possible because we feel like we can get over just about any bar they put out there, and the tougher they make it the more opportunity that probably opens for us, as maybe some vendors can't get over the bar. So without having a clear view on that, I don't think I can give you a lot of input.

The second thing I would talk about is really a point I was on earlier, which is I think meaningful use will become less and less important as we get into stage 2 and 3 and really your ability to support really the evolving market of moving to the quality-based care as opposed to fee-based care will be the call of the day, and I think we have some clear differentiators in that market. So I think the opportunity will stay ripe for us in the coming quarters.

Okay. Quick follow-up and then 1 for Paul. Are you guys seeing any meaningful displacement risks where healthcare organizations that are hospital-focused have partnered with an inpatient vendor that's not NextGen and are looking to roll the ambulatory functionality from their inpatient vendor out to the outpatient side?

And 1, I'll add this 1 for Paul, with respect to the maintenance revenue, if I understood that right there was maintenance revenue from a client that was live that you hadn't captured that was captured this quarter and flowed through. I guess I would want to ask from an accounting perspective why that wasn't recognized before and this isn't the reversal of an accrual at the operating line?

Who's going first?

Yes, go ahead, Scott.

Yes, I'll tackle it first. I think we've characterized in prior quarters this consolidation and is it a net gain or loss for NextGen, and we clearly see it as a net gain. If you look at our presence in the enterprise market, consolidation is good.

Now are we running into occurrences where those enterprises are going to a single Epic environment, for instance? Yes, we do. But the overall market trend of going to that model and really consolidating the physician-affiliated base onto enterprise-type software like NextGen is clearly a net gain for us.

Okay, thanks. Paul?

Yes, so 1 of the requirements for revenue recognition is that you have to have some reasonable basis for collectability, and so we had some issues there with this particular situation that called that into very serious question. So we really felt like we were not in a position to be recognizing revenue related to that, and so we just -- but in the end we ultimately collected. And so that removed that roadblock to revenue recognition, and so we recognized the revenue.

So that's what's tied behind that, but I think I also want to reiterate that was a factor in the maintenance revenue growth, it wasn't the -- it wasn't the cause of maintenance revenue growth. We still get the traditional -- received the traditional additional licenses and customer growth and all that. So I think that's about as far as we're going to go in terms of color to that.

That's very helpful. Thank you.

Thank you. And our next question comes from the line of Stephen Shankman with UBS. Please go ahead.

Thanks for taking the question. I guess at this point most of my questions have been answered, but on the inpatient side, I know it's a little early but I was curious as to any feedback you're getting from current or perspective customers regarding the acquisitions of CQI as well as IntraNexus, and also an update on the integration for CQI would be helpful. Thank you.

Okay. This is Steve. I can speak to that. Actually I was out at a client site just a couple of weeks ago and we took a number of the IntraNexus folks with us. This is one of the Sphere clients we've had for a while. And I mentioned earlier that that's been a very good domain build for us. As you recall, IntraNexus had a lot of big clients, much larger clients than what we commonly have on the smaller platform.

So a lot of the expertise that we were able to pull together from a consulting point of view has allowed us to really look into some new opportunities ourselves like post live consulting, those kinds of things that we're looking into. We found the clients, particularly that are based, as I mentioned to you, in the rural areas are very hungry for that kind of thing. So that's actually been a very positive thing for us.

As I mentioned earlier too, we have opportunities when we go out into the rural market, particularly that a lot of the ancillary pieces have not been presold out there. So in other words, we have opportunities in 1 area, centralized scheduling, it's 1 of the reasons we were interested in CQI. The other is their money tends to be made in 1 of 2 places, the ED, the ER, the emergency room, or the operating room basically.

So the operating room is something that we're seeing even in the smaller hospitals, they generally have 1 or 2. As soon as you start to swim up-market just a little bit more, it becomes a system that they actually need, and it needs to be a customized, precise system. So they tend to go looking at vendors.

So for us the common physician and start to go up and position a whole product suite, almost always we are competing against folks who have that product offering. So for us it is very, very important to get that in the mix.

And I wanted to comment, it gives me a good opportunity to comment on, really the strategy that we're doing here. I just want to be clear to everybody too that it's not really a hodge-podge rollup, this isn't --. There is actually, as I mentioned earlier, a method to the madness. The goal here is to execute a plan to be really a formidable force in this industry in a couple of years.

I think we've mentioned, Pat mentioned on a previous call before, that we are actively and have already started building a web native, multi-tiered, cloud-based system with a common unified data model that includes an ambulatory and an inpatient product offering together on 1 data platform.

So all of these are great opportunities for us to expand that piece as well as to get very good feedback from the client base and get some of our very, very first consumers of this product. If you think about it, we have the ability to convert these hospitals, some of the ones I've talked to you about, over. They'll be some of the first beneficiaries from that new system.

So instead of entering the market with a couple of or a speckling of a few clients, we have some opportunity to do a couple of hundred. So that's really the vision in what we're doing with that, and that's why you see us bringing some of these pieces together.

But again, it's a little bit more than you probably asked, but I did want to get a chance to talk through that, but also let you know that almost always we have the ability to go back and talk surgery to a lot of these hospitals, so it's a great up-hill cross-sell for us.

That's great color. And then on the integration plans for CQI?

They're going to be integrated as we've done with all of them, right into our Inpatient Solutions product. So we do -- we do understand as a Company too, as we get bigger and we do have ancillary products, they are already installed in a number of places. For us it's a great opportunity to get a footprint into those facilities, but we intend to maintain those products available individually or as part of our collective mix.

And one more if I can sneak it in there. IntraNexus, it seems like you integrated that in about a quarter. Should we expect a similar type of timeline for CQI?

Yes. Yes. I mean CQI is a relatively small company, and that helps us to do that pretty quickly. Another good thing with the smaller companies, they are quicker to do that with.

Great. Thanks very much.

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

Thanks. Thanks. I just wanted to go over the RCM thing a little bit. So one of the reasons that you mentioned was a decrease in healthcare utilization, which we've seen across the industry as well. But EDI wasn't really down that much. It was only down 1% versus the last quarter. It was up actually 18.2% year-over-year. So I'm just trying to reconcile the RCM being down because I thought that it would be a correlation between that and EDI if it was related to utilization.

Well, Donn could speak about EDI. I mean from the revenue cycle perspective, the summer months tend to be typically slower. So we definitely see visits down over the course of that period. The other thing is we are still in a recession and continuing to hear and find that patients are not seeking care from providers.

But again I don't think that any of this is material. When you look at the results quarter-over-quarter, we're up 1%. So I don't know that we're really seeing a drastic difference, and I don't want to characterize that there's a big material change from a patient volume perspective.

Yes.

This is Donn. I'm sorry, on the EDI side, we work with a lot of partners, and the trend line is very much in the up direction on kind of steady. We did have some way that accounting came in with some of those other products that made last quarter be a little bit of a bump, but the trend line has definitely been up and continues in that direction.

Okay. I was just wondering if you could talk a little bit about any issues you're seeing with smaller hospitals. Some of them are being impacted by the economy and so forth. Has that impacted your bad debt expense of any of these smaller hospitals struggling financially?

Yes, this is Paul. So certainly in the small hospital market that is something that we have to keep -- pay attention to because many of them are financially challenged. I think that's pretty well understood. So we pay attention to that also from a revenue recognition point of view to be -- to make -- to review the credit of the customers and the people that we're doing business with.

And what also can help mitigate that are when they are able to obtain financing from a leasing company. At that point -- and also what's helping leasing companies is the fact that these hospitals are in line for stimulus money. So once you can get them -- and we don't participate in any of the financing. We're very clear about that. We work with third parties on that front. But once those groups obtain financing, then it's -- then it's -- it certainly helps us quite a bit because credit is not quite as much of an issue there.

But it's something that we do have to pay attention to given the space that we're working in.

Okay. Thanks very much.

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

Okay. Thank you. I'll try to keep it quick here. With respect to ICD-10 and having your platform ready I guess midyear next calendar year I suppose, could you talk a little bit about any type of incremental costs on research and development that you're going to experience over the next call it 9 months?

Sure. Really we just have a multitude of fronts we'll continue to invest in on R&D. So the cycle never really stops. We're staffed right now with what we need for ICD-10. That product is well underway and really will be through its development cycle by first quarter of next calendar year.

But with that said, we still have significant ongoing investment in clinical product and getting ready for really the ACO patients under medical home market as we go forward. And then as Steve indicated, the investments we're making in building a combined platform for inpatient ambulatory.

So I just wanted to give you a little more color, Richard, because there's a lot of moving parts on R&D. I guess in the grand scheme of things I wouldn't say that ICD-10 has a material impact on that spend over the next year.

Okay. That's helpful. And then Paul, you mentioned something I think in answering Ryan's question on the SG&A talking about the bad debt and commissions and headcount and such, and you mentioned something that you expect commissions to drop, and I just want to talk about that a little bit because if the pipeline is flat now but categories 3 and 4 are really strong and they're going to come in, you're going to be paying out commissions on that stuff as you take those deals down, so what exactly does commissions drop mean?

Okay, well first of all I don't believe I said. I said -- in fact I think I said -- I thought I said the opposite which was as you -- as system sales rise you have to expect that commission expenses are going to go up. We like to pay commissions. In fact, we're very happy to pay a sales guy commission. We'll write that check any day of the week because they're bringing in revenue.

Maybe I misheard you on that. I apologize if that's the case there.

Sure.

And then just final question, if we look at the pipeline, Scott, in talking about the pipeline, 172 I guess for the June quarter, 173 in this quarter. If we look at it inpatient versus ambulatory, is there any way you can, I guess, divide those out in terms of percentage changes from June to September of the different parts of that?

Yes, I think at this point, Richard, we haven't broken out -- out the pipeline, so I think for right now we're just going to keep it as a consolidated number.

Okay. But no significant change, I guess, higher level talking about it? Inpatient didn't bump up and ambulatory go down from mixes, or any direction?

Yes, I'll say I think they're -- proportionally there's not anything material different.

Okay. Excellent. Thank you.

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

Hi, thanks. I think I have a question that hasn't been asked yet. Cap software costs on the balance sheet went up a little more than usually sequentially. Was that because of the acquisition, and could you give us what the capitalized software development costs were?

Yes, so, this is Paul. So we are making a fair amount of stepped-up investments in various areas of development, and I think KBM, our template, is 1 area in particular that we're making concerted efforts on. And that is contributing to a higher amount of capitalized software. So the total there was about $3.6 million for the quarter is what I would characterize as investments. That's how we put it on our statement, cash flows, investments, and capitalized software.

Okay. And what was it last quarter?

Last quarter -- I don't have that sitting right in front of me, but I'm sure it's in our --.

Right, I can look it up. No problem. Paul, it would help the market a whole lot if you could just quantify this maintenance -- deferred revenue on the maintenance line. That's nothing -- not anything you're willing to do?

Well, I think we started out on that premise with -- on the call. I think what's important to note here I guess is, if this helps, that was just a portion of the growth in maintenance revenue. It wasn't the entire growth in maintenance revenue. In fact, it was a small, smaller portion of our maintenance growth.

The majority of our maintenance growth is still coming from the traditional way that we've done it and will continue to do it by growing our customer base. So I -- that was just a bit of color to talking about a maintenance number that grew quite a bit this quarter. And I wasn't -- certainly I don't want anybody to mischaracterize that, that somehow we're not going to grow maintenance any further or we didn't really grow maintenance revenue this quarter. We did. We did by a strong margin.

And even if you took this 1 component out, you'd still see we had a very good growth in maintenance revenue in the quarter.

Was it less than half of the growth?

Yes. Clearly.

Okay.

It was a minority. It was a minority share of the growth, we'll say that for sure.

Okay. That's helpful. And then so continuing on that path, Steve, the market is reacting to this, your commentary today, as almost as if this EHR market is maturing and topping out given your guidance, the pipeline, the characterization that most of these -- that your business is no longer greenfield.

Well I -- Scott --.

Take this opportunity to just set the record straight.

Sure. Let me set the record straight. Again, terminology, if not defined, means different things to different people. So let me be as clear as I can.

Recent studies out of the CMS indicate that about 50% of the large practice market, those are doctor groups of 25% or more, are in the process of or have purchased a fully functional certified EHR. About 25% of the mid-size group practice market, 10 to 25 doctors, have done the same. And about 75% of the small practice, 1 to 9 doctors, have done the same.

Now within that mix, classes put out a number of reports indicating that anywhere between 30% to 35% of this historical installed base in the ambulatory market will need to be traded out because it won't meet either stage 1, 2, or 3 expectations.

Then on top of that you have the consolidation we were talking about where large installed bases like ours are taking in these groups joining our system. So in every one of those 3 cases, whether we get a piece of business in the remaining 50% of the large practice, in the remaining 75% of the mid practice, or the remaining 75% of the small practice, we -- we are selling a new system.

In some of those cases they have some functionality. In some of those cases they have limited functionality. But there is a fee change of sorts going on in the replacement, add-on, and new system sales markets that is tied into this entire stew.

So the greenfield opportunities are plentiful. As I said, more than half of the large practice market, more than 75% of the midsize practice market is still fair game for new system sales. And in that grouping there's a varying -- there's varying degrees of what people have and don't have.

So I think that's what we're trying to say in all of that.

Okay. Thank you very much.

Thank you.

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

Hey, can you just go back to what you had mentioned about EPS guidance for the year. I think you started off saying that you were comfortable with where consensus estimates are? Is that correct, or not?

No. I'll tell you exactly what I said.

Okay.

What we said was that more in line with the consensus views, we are now in general agreement with a revenue range of growth of 21% to 24% for the year and an EPS range of growth of 29% to 33% for the year, which is an upgrade versus our general views previously.

Okay. That's great. Thanks. And then what's the last 90-day window for docs to attest to stage 1?

That's fourth quarter of next year.

Yes, October of next year.

October 2012.

Okay. And you expect your sales to still be robust going into stage 2? I mean if you have 30% to 35% of the base needs to get treated out according to this class report, chances are even beyond next year your sales -- your new sales to the beat of this replacement market probably would be pretty good, right?

Yes, and this is all very early stage. As a matter of fact, in addition to some of the stats that I just quoted you, the government also put out that through September of 2011, which of course is our first stimulus year, that only 2% of the physician provider network has applied for or received stimulus dollars. So we've got a long way to go in this -- in this game.

And there's even legislation in Washington's that's being bantered about in terms of waiting until at least 75% of the provider market meets stage 1 meaningful use standards before there is an embarkment on to stage 2 standards.

So I guess the stimulus period of 2011 to 2015 is off to the type of start where we may see this thing spread even over a longer period of time. And of course as we've always said, we've always believed that if you're going to take one-fifth of the economy through a sea change, it's going to be along the lines of an escalator ride, not an express elevator.

But all of these are good because the government is doing, in our opinion, the right things to ensure that they don't discourage adoption, which is critical. Because if you don't wire the healthcare system, you can't reform it, and the next decade will wreak hell on the tax base if we don't fix this thing.

Thank you.

Thank you. And our next question comes from the line of Frank Sparacino with First Analysis. Please go ahead.

Hi guys. I'll take mine off line just to wrap it up.

Okay. I'm sorry, Christina, are there more questions?

We do have a few more questions in the queue.

Okay. Please go ahead.

And our next question comes for the line of Dave Windley with Jefferies and Company. Please go ahead.

Hi, thanks for taking the question. I'll try to make it direct here. The -- you've danced around -- or not danced around, but you've talked about -- general terms around inpatient deals. I'm wondering if you could talk about who specifically you displaced in I believe it was 9 wins in the quarter and who you were -- who you beat competitively to get those 9 wins.

And finally, if you had ambulatory outpatient presences with the affiliated docs to those hospitals that would have helped you with those wins.

This is Steve. I'm going to kind of answer this pretty generically. I've said on a couple calls before we generally -- where we play is -- there's a certain set of players, typically HMS, Healthland, CPSI, that group, sometimes Meditech even. But typically those are the guys that are involved in the community and rural areas.

So typically those are the people that we see or maybe they have systems already installed by some of those players in there. So that maybe gives you a little bit of a guidance on that.

And the second part of your question was what, Dave? I'm sorry.

The second part was did you have affiliated doc presence that helped to lever you into the inpatient win?

I would say not the majority, but we have it. Every quarter I think we both bring in ambulatory and ambulatory brings in inpatient. I think that's been a very, very successful handshake that we do. So we have a little bit of that for both sides each quarter.

Okay. Thank you. Appreciate the answer.

You bet.

Thank you. And our next question comes from the line of Gene Mannheimer with Auriga. Please go ahead.

Good morning. Thanks. It's Auriga. Just a quick question on the maintenance again. I want to approach it from a slightly different angle. What was the gross margin impact of that deferred maintenance that you -- that you recognized this period? And I ask because I want to get a feel for how we should be modeling going forward. Was it 50 basis points or so? Any color there would be appreciated.

Yes, look. This is interesting all the attention that this is getting. So, the -- as I think I sort of quantified a little bit more just to make it clear that this was only a portion, and it was a minority portion of what happened in the quarter as it relates to the growth.

That particular customer now is going to continue with the maintenance. So I think when you're thinking about go -- on a go-forward basis, clearly there was some amount of -- portion of the growth that was tied to this issue, but I'm trying to think about it here what's the best way to respond to you because I really don't want to -- I really want to stick to not really talking about specifically what kind of gross margin contribution a particular transaction gave.

I think it's just a small bit of color, and I think all of the traditional factors that contribute to maintenance growth are all still in place and are going to continue. I think this was just a small bit of color that we're -- I wanted to add to the discussion and I think I'm going to try to leave it at that.

Sure, sure. Understood. I guess just a question then is is it true that gross margin was somewhat positively impacted by that -- by that maintenance issue, and we may be too aggressive to model that going forward? That's really the question.

Yes. So, certainly maintenance revenue is a high margin piece of our business, and so any kind of growth that we get out of maintenance is definitely impactful on our bottom line. I mean, I think that's really as far as I think I can take it.

Great. Thank you.

Thank you.

Christina, we'll take 1 more question please.

Okay. And our final question comes from the line of Leo Carpio with Caris and Company. Please go ahead.

Good afternoon. It's Caris and Company. Gentlemen, I have 2 quick questions. One is probably a dead horse question, the other one is a unique question.

First one, on tax rates, was there any beneficial impact in tax on the quarter, and what rate are you assuming your guidance?

You know, our tax rate is not a whole lot of big surprises there in our tax rate. I think it's -- again, that's a little bit more detail than what I think we really want to give out in terms of guidance. The overall guidance has been more in terms of top line and EPS and it's more into a range.

But if -- you'll see on our 10-Q disclosure that for the most part that rate is tied to R&D tax credits. We get some credits out of domestic manufacturers tax credit. Certainly the R&D tax credit is something that has lapsed in the past and then it gets reinstated again. And I really don't have -- I have no clue what Congress is going to do in the future, so I don't want to get into predicting that.

But I know that the R&D tax credit is something that we get some benefit from, but it's also something I don't -- that I think Congress has shown that they're pretty much in favor of continuing, although sometimes it does lapse, which can cause our rate to fluctuate.

But you'll see in the 10-Q. I think it'll help -- I think you'll get more color out of that, so we'll file that here shortly and I think that'll help you out.

Okay. And then the last question is regarding the competitive environment. It sounds like things are holding stable. Are there any price-aggressive players out there, and how about the smaller sassy vendors? Are they surviving or -- I'm thinking more the mom-and-pops, are they imploding, because it sounds like you're picking up share from them as those accounts gets consolidated into hospital and into larger enterprise market?

This is Steve. You grazed a great point, and this is -- this is part I think of some of the discussion points we've had during this call.

There is probably right now when I talk to our government people, government certified about nearly a thousand products for stage 1. The top 10 of us continue to gain the vast majority of the market share.

Stage 2 and stage 3, the reason -- 1 of the reasons stage 2 was delayed and pushed out was because there's a catch 22 in a lot of these products that made stage 1 certification where they may not have the ability to meet stage 2.

All of this is being filtered into the -- into the buying system out there, and customers are making decisions that if this is a long-term gain, I have to pick a strategic partner that's been in this game for a while, who has demonstrated over time the ability to take an organization all the way.

And that's why groups like us when we talk about add-on sales or replacement sales, they're all new system sales, but I think you're going to see a major benefit to the large companies like ourselves and some of our peers as a result of some of these changes taking place in the market.

I mean, I think they're going to be very positive for us. They're the reason I believe our pipeline is filling, and they're the reason I believe that the consolidations that are fueling the 3,000 practices that we presently have are going to continue to accelerate.

So on all fronts, on all fronts, we're going to be selling more systems, and I think our numbers have been demonstrating that historically, and they will continue to demonstrate that into the future.

Okay. Thank you.

You bet. Okay, before we close here, as you know, Pat's leaving the organization, and so Pat, on behalf of the entire QSI organization, we want to wish you and your family the very best. We value the notable contributions you have made over the years to our growth and success, and on a personal as well as a professional basis, you will be deeply missed. Always good fortune to you, my friend, and we wish you extremely well. Take care.

Thank you, Steve.

You bet. And I want to thank everybody else for joining us. We'll see most of you at our analyst day November 8th in New York. And again, we had a great quarter, we're earmarked to continue along this path, and there are plenty system sales to go. So thank you very much. Take care.

Ladies and gentlemen, that does conclude our conference call for today. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 using the access code 4478711.

We would like to thank all of you for your participation, and you may now disconnect.