NextGen Healthcare Inc (NXGN) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Quality Systems fiscal 2012third quarter results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday, January 26, 2012. I would now like to turn the conference over to Steve Plochocki. Please go ahead.

Don't feel bad,I have a hard time saying it myself. Thank you, Alicia, and welcome to the Quality Systems 2012 third quarter results call. With me this morning are Paul Holt, our CFO; Scott Decker, the President of NextGen; 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 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 in the implementation of potential impacts of legal, regulatory, or accounting principals. I'll provide some opening comments and then turn it over to the team.

The Company reported record net revenues of $112.8 million for the fiscal 2012 third quarter, an increase of 23% when compared with $91.9 million for fiscal 2011 third quarter. Net income for the fiscal 2012 third quarter reached a record $21.1 million, up 21%, versus the $17.5 million for the same period a year ago. Fully diluted earnings per share were $0.36 in the third quarter of fiscal 2012 versus $0.30 for fiscal 2011. Third quarter up 20%.

Our continued record growth can be attributed to the shift towards transitioning to electronic health records amongst physicians, hospitals, and medical groups. As the momentum continues and more practices adopt electronic-based solutions, Quality Systems is capturing additional market share.

We now have entered the second year of the five-year stimulus period, which appears to be the most aggressive in terms of health information technology adoption. Our quarterly results are indicative of the continued acceptance of our innovative solutions throughout the marketplace and across the physician practices, small hospitals, and dental groups.

The Company's Board of Directors declared a quarterly cash dividend of $0.175 per share on the Company's outstanding shares of common stock, payable to shareholders of record as of Tuesday, March 20, 2012, with an anticipated distribution date of April 5, 2012. The $0.175 per share cash dividend is consistent with the Company's current policy to pay a quarterly dividend on the Company's outstanding shares of common stock subject to further Board review and approval and establishment of record and distribution dates prior to the declaration of payment of each such quarterly dividend.

Our pipeline continues to build to record levels. As leads, RFPs, online demos, web hits continue to accelerate throughout all of our business units, we're setting a very strong foundation for what we believe is going to be a powerfully robust period here in the second year of the stimulus movement.

Paul, why don't you take us through some of our financials and then we'll get on to our divisional folks.

Thanks, Steve, and hello, everyone. Our consolidated revenue of $112.8 million included strong performance in both our system sales and services revenue lines, which both grew 23% over the prior year. Our consolidated system sales continue to benefit from strong growth in our ambulatory and inpatient division, reaching a total of $41.6 million. System sales in the NextGen ambulatory unit grew 18% on a year-over-year basis to $34.7 million, and system sales in our inpatient division group grew 62%, $5.4 million. Our total consolidated maintenance, RCM, ESI, and other services revenue grew 23% at $71.1 million versus $57.9 million a year ago. The primary contributors to growth in this category were continued growth in maintenance and other services, which grew on a year-over-year basis by 30% and 43%, respectively.

Maintenance revenue continues to benefit from continued growth in our customer base and other services revenue, which includes consulting services, annual licenses, and other recurring types of services have continued to show strong growth on a year-over-year basis. Our consolidated gross profit margin this quarter came in at 66%, up from a year ago quarter of 64.8%. The biggest contributor to the higher growth margin reported this quarter was a drop in relative amount of hardware revenue included in system sales, which is partially offset by lower gross profit margin on our implementation services.

Margins in our professional services were impacted by additional investments we made in growing those resources, as well as lower utilization rates related to normal seasonality which we experienced in the December quarter. Our total SG&A expense, excluding amortization, increased by approximately $5.1 million to $33.1 million in this quarter compared to $28 million a year ago. This increase was primarily driven by increased headcount and other SG&A expenses which were up by $3.6 million and $1.5 million, respectively.

Net income for the quarter grew 20% to $21.1 million versus $17.5 million a year ago, and I wanted to mention that our December 2011 quarter results included approximately $1.2 million of intangible amortization expense related to acquisitions versus $0.8 million a year ago. This quarter, we also had approximately $0.8 million in stock option expense versus $0.9 million a year ago.

Moving to segment performance. NextGen ambulatory unit, $85.9 million. That's up 24% from $69.3 million a year ago. Operating income was $35.2 million, up 24% from $28.5 million a year ago. Our inpatient division total revenue, $9.9 million, up 71% versus $5.8 million a year ago.

Operating income, $3.4 million, up 68% from $2 million a year ago. QSI Dental, revenue $4.9 million, up 13% from $4.3 million a year ago. Operating income, $0.6 million versus $0.8 million a year ago. Practice Solutions, total revenue, $12.1 million, down slightly from $12.5 million a year ago. And operating income roughly unchanged at $1.2 million versus $1.3 million a year ago.

I want to add that on November 14, 2011, the Company acquired ViaTrack, a developer and provider of information technologies that enhance our EDI offerings. This acquisition bolsters our EDI capabilities and provides a foundation to bring EDI services to the inpatient market. The ViaTrack purchase price totaled approximately $10.9 million, including contingent consideration payable over a one-year period with a fair value of approximately $3 million, which is estimated based on management's forecast of expected revenues. We'll provide more financial details in our Form 10-Q, which is expected to be filed shortly.

Moving on to our balance sheet. Total cash and marketable securities not included in restricted cash was $129 million, or $2.19 per diluted share compared to $125.8 million, or $2.14 per share at then of the prior quarter, and $116.6 million, or $2.01 per share at the start of our fiscal year. As a result of our strong cash flows from operations, this quarter we were able to grow our cash by $3.3 million, while at the same time paying a $10.3 million dividend and paying $5.7 million for our ViaTrack acquisition.

DSOs net of amounts included in both account receivable and deferred revenue dropped by a day at 81 days versus last year's 82 days. Our DSO is based on a gross basis increased slightly compared to the prior year quarter at 129 days versus 126 days a year ago. On a sequential basis, our DSOs increased by 2 days.

Our current deferred revenue increased to $90.6 million compared to $83.3 million last quarter, and Our growth in deferred revenue was driven by increases in deferred implementation services, maintenance, and annual licenses.

In summary, we're very proud of our results this quarter, which included continued investment and implementation, sales, support, and development, while continuing to maintain strong revenue and earnings growth and strong cash flows from operations. We're excited about our position in the market and the opportunities that we have in front of us. I'll turn things over to Scott Decker.

Thanks, Paul, and good morning, everybody. We're very excited in the ambulatory division with the quarter we just completed as it represented another great quarter of growth. And we're real happy with where the market is and how everybody is executing at this point.

As Paul indicated, we had about 24% top line growth in the division in operating income in line with that. As far as metrics for the quarter, we had 128 new contracts signed this quarter versus 94 last quarter, so a real significant jump on that front, 12 of those were SaaS deals this quarter. Discounting did not materially change for us in the market.

As of December 31, we now have 107 quota carrying sales and management positions versus 102 that were reported last quarter and 96 a year ago. Our pipeline as of today is $183 million versus $173 million that I reported last quarter.

I also want to take a little bit of time and clarify Greenfield opportunity, which was a topic that came up last quarter. We started to be a little more in depth at our Analyst Day in November, and we'll give you the latest on that. I now actively track what replacement occurred on new EHR sales.

So for this quarter, 90% of our new contracts, there was no existing EHR in place. That compares to two quarters ago, 80% last quarter, 87%, and as I said this quarter, 90%, so we still see a hugely large market as far as Greenfield opportunity for EHR replacement.

Also from an ICD-10 standpoint, we continue to track to a fall release for our ICD-10 compliant software. That's when we'll get it out to market. We then, obviously, have a big conversion to get through, but it gives us a year for all of our clients to make that happen. We've also now released our KBM version 8 out to the market, which is a totally new user interface for our clients.

I would say the response from both our large clients, who are now aggressively rolling out the system, has been excellent. I think also represented in our 128 new contracts, the new user interface is getting some good uptake in the small practice segment, as well, as we've really simplified the front end.

With that said, obviously, we'll get into Q&A in a little bit, but I would like to, as always, thank the NextGen staff that's working so hard to deliver these numbers and our clients who continue to be great proponents for us and work closely with us to take the product to the next level.

So with that, I'm going to turn it over to Donn Neufeld.

Thank you, Scott. Good morning, everyone. We continue to have success selling QSI Electronic Dental Record integrated with the NextGen EPM and PMR. We added 11 new joint dental sales during the quarter.

Dentists using the NextGen EPM EHR and the QSI Dental Record received Medicaid incentive payments. The QSI Dental pipeline is approximately $7.3 million. Again, this quarter, NextGen EDI sold a record amount of new EDI services. With new EDI products and our sales team focused on EDI sales, we see this trend continuing.

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

Thanks, Donn. I'm pleased to report that this quarter represented our best revenue quarter to date on the Inpatient side and we are excited to see the continued acceptance and success as we expand our portfolio of products.

In summary, we closed nine new hospitals, and CQI, our most recent acquisition announced in the last earnings call, provided nice contribution to the overall total. Adding CQI, now known as NextGen Surgical Systems, to our family of products has allowed us to scale upward into larger markets, including specialty hospitals and it allows us to offer more comprehensive product suites. Our largest deal of the quarter was to this specialty hospital segment.

I mentioned last quarter that our inpatient products are now in use in over 200 hospitals. I also noted the added station of our first hospital clients in the last call, and this quarter we continue to have additional clients attest for both Medicare and Medicaid dollars. Adding new ancillary products such as surgery scheduling allows us additional cross-sell opportunities into our install base and we continue to see many cross-sell opportunities with our traditional ambulatory offerings. In fact, as a reminder, most of our inpatient sales include the ambulatory product and it remains an extremely strong selling point against our competitors.

In closing, we are continuing to focus on the rural and community hospital market, which is our strength, and we continue to benefit from the fact that this market has been traditionally under served and we're finding it an excellent opportunity to facilitate the synergies of our established ambulatory products with our new and exciting inpatient offerings. With an expanding offering of new portfolio products, we're beginning to scale upward in the market and we look forward to the new opportunities this will provide us.

Thank you for your time and at attention. And now I would like to turn it over to Monte Sandler.

Thanks, Steve. Good morning, everyone. I remain pleased with the progress we continue to make in Practice Solutions, our RCM business unit. Revenue is up 4% for the 9 months ended December 31, and operating income is up 58% over the same nine-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 I continue to report to you each quarter, our focus remains on sales and marketing. We have added resources in these areas and expect continued growth in the coming quarters. We're excite about our newly announced relationship with IASIS Healthcare, where we are in the process of deploying our full-service revenue cycle offering to more than 150 employed physicians throughout their 19 hospitals in seven states. IASIS had previously selected and implemented our electronic health record software and has now selected our practice management software and is partnering with NextGen Practice Solutions to optimize their revenue cycle from software utilization to revenue realization through outsourced billing, and collection services.

I continue to hear how provider cash flow is struggling with the new 5010 EDI requirements. I'm pleased with the minimal impact we have experienced on behalf of our customers to date. We are watching the future of Medicare reimbursement closely and hope that a more permanent solution is reached before March 1st.

We also believe that with the implementation of ICD-10 we make in October of 2013, that providers will choose to focus on their core competencies of providing quality medicine, thereby creating opportunities for our full-service offerings to help them optimize their revenue cycle. With all of these changes, I'm confident we will remain well-positioned to help our providers navigate in the changing environment and optimize their revenue cycle with our full-service all-pay or best practice solution that's built on NextGen's industry leading software platform.

Thank you for your time and interest in our Company. Alicia, we would like to take questions at this time.

Thank you. (Operator Instructions). Our first question is from the line of Charles Rhyee with Cowen & Company. Please go ahead.

Thanks, guys, for taking the questions here. Maybe just first touching on the pipeline number here, $183 million, a nice sequential jump, is there any way you can give us a sense on the mix between ambulatory versus inpatient and maybe sort of what the relative growth looked like? And it looks like you did sign a number of deals on the contract. Can you give us a sense on the relatives of the sizes of the practices you're seeing today in terms of -- in these Greenfield opportunities?

Yeah, we're not going to -- still not going to go into detail on the pipeline, but I would tell you we saw good growth across all segments, so there is nothing that is standing out in one division versus the others. As far as the new contracts and the market right now, I would also characterize that that's very similar to past quarters, so we have a really good mix of large opportunities that we closed in the quarter that I'm sure we'll be announcing over the coming weeks via press releases.

And, as I mentioned, we're increasingly -- I think doing well in some of the smaller opportunities as we've re-engineered the user interface. So no material change from an opportunity standpoint and where we're chasing deals.

Charles, this is Steve. To that point, the mix is still about 60% of the deals, essentially being in the mid to large range, and about 40% being in the small-mid to small range. Not dissimilar from any of our previous quarters. So we haven't seen any directional change in terms of the size of the deals. We're just seeing more of them in all categories, and as a result of that, we're closing more business and our pipeline is continuing to build.

Okay. And then just more -- I know you don't want to break out the pipeline between inpatient and ambulatory, but can you give us a sense on the relative growth between the two? I mean, obviously, you add CQI. How much did maybe that help the pipeline growth on the inpatient side?I just want to get a relative sense of which side you see as kind of maybe picking up faster than the other?

As I said, they are relatively the same from a growth standpoint right now.

Okay. Great. Thank you.

You bet.

Thank you. The next question from the line of Sebastian Paquette of Goldman Sachs. Please go ahead.

Thank you, and good morning. So some of your outpatient competitors are heavily discounting their EMRs, and so I wanted to know, while you mentioned that you're not seeing any change in discounting, what would you say the average year-over-year change is in your ASP for new outpatient NextGen system deals.

This is Scott. I was tracking with your question until the very end when you mentioned ASP. Can you just clarify?

Yeah, just the price, your average selling price for new deals year-over-year.

Yeah, so it's basically flat with a year ago from a discounting percentage.

Okay. Great.

You have to -- Sebastian, this is Steve. Discounting is an interesting term. We do -- as a Company that has multiple products and service offerings in dealing largely across the board in terms of small, mid, and large group practices, we have bundling capabilities that we employ constantly in our selling process.

So when you try to isolate a single are or a single product in terms of discounting, we offer bundled services to a large extent in doing a deal. But I think to Scott's point, and he is correct, we haven't seen any material difference in terms of the deals we do, the pricing on the deals, and the competitive environment for those deals.

Okay. So just so I'm clear then, are you saying that you are bundling in some Practice Solutions with your clinical deals?

Those happen periodically, yes.

Okay.

We will -- we offer a bundled product. We try to sell all our products when we sit down with an interesting customer.

Okay. But are you discounting then the Practice Solutions in order to stabilize kind of (inaudible) price or how should I be thinking about that?

No, no. No, you shouldn't be thinking about that that way. I mean, the formulas that we would build into a deal would be predicated on a lot of factors--size of the group, their three to five-year plans, their immediate outlook, their long-term outlook. There's a lot of factors that as we're converting healthcare from the fee-for-service world to its accountable care world and move through this next ten-year progression of the modern era of healthcare.

So our goal is to make sure that we're enterprise and solution partners for the practices we work with. We want long-term relationships and we establish those relationships through our product and service offering deals.

And just to add one last piece of color to that, I've always reported on a discounting level and it has always been a blended rate. So there is nothing materially changing from prior quarters or years. We've always bundled a total solution for our client. And, as I said, we haven't had any additional discounting we have had to do over the last several quarters.

Okay. And just regarding your inpatient strategy following a string of deals, are you satisfied with the current portfolio of technology and footprint in order to grow that organically, or do you think that additional M&A is warranted? And if so, could you just talk about the scope of potential future deals? Should they be similar to what we have seen in recent history or are you interested in potentially expanding to larger size deals there?

Yeah, this is Steve. Just to answer that question directly, we definitely are looking forward to expanding and moving up market. I mentioned that in some of what I had said. We will continue to focus on the rural area, that we have made sort of an entree into, and it has been very good for us. It was a great market.

Like I mentioned, it's under-served, so we're going to continue to exploit that as much as we possibly can. But, yeah, we will -- and I think we will continue to expand the product portfolio so that we can do that because the farther you move up the market, the more the portfolio needs to be rich.

And then just a final question here on your clinical and financial cross-selling Greenfield, could you provide us just a rough update on how many physicians use Practice Solutions but not your NextGen EMR and then maybe vice versa ?

I'm sorry, please repeat that. Please repeat that question, Sebastian.

One moment. Sebastian, please go ahead.

Okay. Can you hear me?

Yes.

Okay. Great. So in terms of your clinical and financial cross-selling Greenfield, could you provide a rough update on how many physicians use Practice Solutions but not your NextGen EMR and vice versa?

This is Monte. Practice Solutions currently has about 5,000 providers that we are performing full-service revenue cycle services to, which is a small percentage of the current NextGen user base. And the existing NextGen customer base remains a big opportunity for Practice Solutions. We continue to grow our reach within our current customer base, as well as bringing new customers into the fold.

Great. Thank you.

Thank you. The next question is from the line of Michael Cherny with Deutsche Bank. Please go ahead.

Hi, guys.

Hi, Michael.

Obviously, you have made some tuck-in acquisitions over the past couple of years, as you think about those businesses and your product development strategy going forward, particularly as you move upstream into more of the hospital market, your R&D spiked a bit this quarter, can we think about this quarter's R&D rate as more of a run rate in terms of what you're investing back into the business or is there some unique functionality in this quarter that caused R&D to spike?

This is Paul. There was no unique one-time event. We, as a Company, are just continuing to invest in our products, and that's across all of the -- each business unit. We're doing a lot of work with further integration of products between the inpatient and ambulatory, we're introducing a variety of new products into our customer base and with new customers, and so I think that's -- it's just -- the R&D expense number you are seeing is just indicative of that.

Great. And I guess jumping back to the ICD-10 product launch later this year, arethere any plans to do beta testing?I know it's obviously tough given that the compliance rules don't go into effect until next year, but what's been the customer involvement so far in the product development and/or what will it be prior to the full launch?

This is Scott. I'll go first and then Monte might want to chip in a little bit. At this point, there hasn't been a lot of customer involvement because it's really just the pure R&D side. So between our EDI group and our Practice Solutions group, we have a pretty good sense of exactly what needs to be done; the development is really in its final stages.

From that point, we will go through our normal beta process that we always go through with the install base, and, once again, I think with our Practice Solutions and EDI group, it gives us a great chance to really test it out, both with our clients and internally as we move through it. What I'm probably most bullish on is just that we're giving ourselves a really nice window of a year to shake anything out and I think we'll be in good shape.

From a Practice Solutions perspective, we will continue to support our customer basis to make that transition from ICD-9 to ICD-10. We see it as an opportunity for us as it grows to our business. As you know, the complexities become much greater going from ICD-9 to ICD-10, and so Practice Solutions with our full-service offering will be a good support system and allow providers to focus on practicing medicine and getting up to speed with respect to that transition while we focus on their backend revenue cycle and revenue optimization.

Great. Thanks.

Thank you. The next question is from the line of Ryan Daniels of William Blair & Company.

Good morning, guys. Thanks for taking my question. Let me throw out a few financial ones up front for Paul. I think you mentioned that the implementation and training margins dropped a bit sequentially and hit gross margins due to some ramp in hiring ahead of what you think will be a big year from new system implementation. Is that at a level now where you are pretty comfortable going forward with the staffing levels there?Do you think you'll continue to ramp that up in stack function? Just any color there would be helpful.

Yeah, this is Paul. So we clearly did do a fair amount of ramping up there this quarter and I think we have to reserve the right to make changes to that as conditions on the ground based on what the conditions are like. So this quarter -- we also have that seasonality that comes into play inthe December quarter, and it is fairly pronounced because you have the issue of the holidays and we have our user group meeting that happens in the month of November, as well.

So I think going forward, you'll typically see a rebound in margins in the March and June quarters in that particular area, but in terms of future hiring, we're just -- we'll see how it goes. I mean -- and I'll let Scott add to that, too.

This is Scott. So I would definitely expect that we'll continue to sequentially add just as we get our sales continue to accelerate. It's just a byproduct of that. We'll need more capacity.

The other thing to note is in our implementation and training, I'd really categorize it as billing resource and so there is also ongoing hiring with billable management consulting resources, which we see as a really nice growth segment that impacting that. So just from perspective, we grew our overall billable resources implementation, training, and consulting over 10% in this last quarter, and they -- but the first quarter they're on, they're essentially not billable. So you'll see a little bit of that choppiness just as we go through peaks and valleys of increasing that bandwidth.

Okay. That's all very helpful color. And then if we think about the sales force, I think you said it was up about five quota-carrying reps to 107. What are the thoughts going into calendar 2012? Do you envision that hovering around that low 100 level still or have you put some plans in place to continue ramping that throughout the year?

Yeah, I plan on continuing to ramp it. I think we still feel like there is more opportunity than we're getting to in some respect, so we'll continue to test that rationally. You won't see a huge jump, but I would continue to see that drift up over the next few quarters.

And maybe one last bigger picture one for Steve. You talked about the international front at the analyst day. It sounded like there might be something afoot there. Any color you can provide just on your thoughts in terms of international growth opportunities or how much you are currently investing in the international markets, etc. would be helpful. Thanks.

Sure. Yes, wedid talk about international. We do have teams dedicated to expanding in those areas. We have strategic alliance partners that we're engaged with. And, unfortunately, I can't give you any specifics because we're right in the midst of several activities right now. But, yes, you can expect to see that we'll become engaged and more engaged throughout the year in international opportunities. They are quite plentiful.

Okay. Thanks for the color guys.

Thank you.

Thank you. The next question is from the line of Jamie Stockton with Morgan Keegan. Please go ahead.

Good morning. Thanks for take my questions. I guess, Scott, the first one, when you think about the pipeline metric and how much of that gets converted over the next couple of quarters, historically, that number was kind of around 60% for years, and then when the stimulus hit, it started to drop. Maybe some of that was the change to using the CRM to drive the pipeline number. But is there going to be a time in 2012, because this is going to be such a big year for positioning the HR adoption, when the conversion rate of the pipeline kind of ramps back up? It seems like it is in the low to mid 40s right now. Any thoughts on that would be great.

Sure. I don't see that yet. I mean, we're continuing to see it grow in robustness and part of that is still deals maturing into the overall pipeline. So I think maybe it is just when we change to the CRM system it changed the metric and methodology, which is two years ago now. I just don't -- at this point, don't see anything materially changing in the conversion percentage.

Okay. And then the other question I had for Steve Puckett was you said that the nine hospitals that you guys signed up during the quarter that CQI helped with that, did you mean that some of those hospitals were from the CQI base that you signed up for a broader clinical platform or was it that some of those nine hospitals had signed up for CQI surgical platform?

Specific to this quarter, I think that we have opportunities in both ways that you just described as we go forward. But specific to this quarter, what it did was it gave us a better product portfolio overall. So I mentioned to you about the specialty market, those things, and certain -- we're talking about surgical hospitals which that kind of a system is absolutely essential for. So, for example, we were able to get some deals or be more successful in deals having CQI with us. So really, it brought new business with us pitching that together.

Okay. But those were hospitals that were buying more than just the CQI platform?

Absolutely. Absolutely.

All right, thank you.

Thank you. The next question is from the line of George Hill with Citigroup. Please go ahead.

Hey, guys, thanks for taking the question. Sorry if I missed this number, did you guys detail the contribution from ViaTrack in the quarter? I'm sure it was probably small. And also was there a meaningful contribution from ViaTrack to the pipeline?

Yeah. This is Paul. The ViaTrack didn't add a material amount of revenue in the quarter. It was down right about the middle of the quarter, and I think what ViaTrack does more for us is our costs and certain aspects of the EDI line. So I think the bigger bang there is on the cost line as opposed to the top line. There's a small amount of revenue, but it is not a lot.

And, Steve, you had talked about how -- you mentioned earlier the stage two recs will be out soon. And I guess when I think about the ambulatory set, I generally think that the upsell opportunity for the ambulatory vendors is less than the upsell opportunity for the hospital vendors as we look forward to stage two. Can you give us a sense of what is purchased incrementally from the physician practice or the clinic space as they move from stage one and stage two, or do they buy incremental from Quality Systems and how should we think about that from a dollar sales or an incremental sales perspective?

This is Scott. So the biggest change is likely to be the need for additional connectivity, both the sharing of data between physicians and then probably at, more importantly, the patient side. So I think the biggest incremental sale we'll see is patient portal and some HIE drag also.

I think the other more subtle opportunity is -- increasingly, I think you'll see clients wanting to move to our KBM platform, which doesn't necessarily -- isn't an add-on but I think it makes it more and more important for clients to be on a preconfigured system with the robust content that does all the reporting for them. So I think we'll see some tailwind from that, as well.

And how about, I guess, from a dollar perspective, if we think as an EMR license is $15,000 or $20,000, what is the incremental kicker from these incremental pieces and functionality?

Well, the list price on patient portal is $2,000 per physician and $59 a month. HIE is more of an enterprise sale, ranges probably from a quarter million to half million type deals.

Okay. I guess just one last one quick. Are we seeing any meaningful sales pipeline develop from the Dell relationship yet or is it still too early to make a call?

Subjectively, we're seeing really good activity with Dell and some nice opportunities we're working on together. I wouldn't say that from a pure pipeline literal translation that you see it in the pipeline yet.

Okay. All right. Thank you.

Thank you. The next question is from the line of Richard Close with Avondale Partners. Please go ahead.

Yes, thank you. Paul, I was wondering if you -- can you give us the ambulatory revenue and operating profit again real quick?

Sure. Revenue $85.9 million and the operating income $35.2 million.

Okay. And then with respect to the acquired intangibles $1.2 million. That's not tax affected, correct?

That's not.

Okay.

Correct.

Steve, I was wondering if you could talk a little bit about the pipeline. You know, last quarter when it was essentially flat sequentially, you did talk about stages three and four being extremely robust. Obviously, you showed sequential improvement in stages one and two here with the $183 million that you just mentioned. Can you talk a little bit about the later stage pipelines, or earlier stage, I guess, three and four?

Well, I think what we're starting to see here as we enter into the second year of the stimulus is exactly what all of the industry reports are stating, including the CMS report that came out November 30th, is that the activity levels for adoption in 2012 through 2013 should be the most robust period of adoption. So as a result of that, our leads, our web hits, our online demos, our RFPs continue to pour in and build into categories three and four, which eventually funnel into the pipeline that we announced to you guys.

So, yes, as categories three and four continue to be extremely robust and funnel into categories one and two, which is what we report to you, those are dealsthat we want to get done within six to eight months. We think we have strong indication that calendar year 2012 is going to be just as CMS said, Kathleen Sebelius said, is going to be a powerfully robust year for us.

Okay. And then over the last couple of quarters, you have been providing us some higher-level guidance in terms of growth. Can you update us on where you stand with respect to this current fiscal year?

I think the guidance that we provided last quarter was 21% to 24% revenue growth for the year. That's the year that will be ending in two months. And then our EPS, I think we upgraded to 29% to 34%. And actually, quite honestly, we probably have a pretty good shot at 35% on that bottom one. And then, of course, we'll be announcing guidance on our next call for our fiscal year 2013.

Okay. Thank you.

Thank you.

Thank you. The next question is from the line of Greg Bolan with Sterne Agee. Please go ahead.

Hey, thanks for take the question. In the community hospital markets, we have heard that NextGen has been taking share from some of the other rural vendors as of late. Can you just give us a sense of your competitive edge, what are your new clients telling you?

Well, I think the -- as I mentioned earlier, I think I have been saying this on each call, but without a question, the strength of the ambulatory product suite is significant for us. On that area of the market, nobody, none of the competitors have as strong a suite as we do on that capacity. And where there are hospitals, there are always doctors, and in our case, on the smaller side, typically in the rural areas, most of them are owned and, as a result of that, we'reselling the system simultaneously together.

And so that's been, I think, our number strength. The other thing I think, too, is we have a browser-based clinical system and it's easy to deploy and easy for us to enhance very quickly. And I think some of our -- a lot of the existing competitors when you look at them are running on older technology, so I think those two things have probably given us the best edge.

That's helpful. Thanks. And, Steve, big picture question here. But with the $9.5 billion or so that is expected to bolster FQHC capacity for healthcare reform, how much do you guys think might siphon through as demand for clinical IT applications and services? And are you already seeing inquiries increase from the FQHCs.

Well, the FQHCs have always been a strong target for us. As you well know, we've -- by having a service offering that providesdental as well as physician capabilities in software, we have been able to be an ideal one-stop shop for those areas. It continues to be an important part of our mix in terms of our business, and we anticipate it will be continue -- now with the infusion of more dollars, will continue to be an important part of our deal mix.

Okay. That's helpful, and then this last question --

My point is it won't slow down. It will continue to grow.

That makes sense. Definitely. Paul, last question. On the other side of the equation just in terms of the hit to margins of ViaTrack, can you quantify the hit to margin this quarter since it probably was mostly caused with not a lot of revenue?

Yeah, you know, it -- since we just acquired these guys, I don't want to leave the impression that this was a -- nobody should have the impression that this was hugely material to the results in our quarter. We just -- since it was in the middle of the quarter when we acquired them, it clearly gave us a benefit on our cost structure, as well as a small addition to our revenue. But if you look at the -- take a look at the EDI gross margin and you compare that to the prior quarter and the year ago quarter, you'll see we had a little bit of a pickup.

Got it.

In margin. So take a look at that.

Okay. That's helpful, thanks guys.

Thank you.

The next question is from the line of Donald Hooker with Morgan Stanley. Please go ahead.

Great, thank you. I was wondering if you might kindly elaborate on I guess this other services line. I know you do a lot of consulting work and that seems to be an interesting new area for you andI was wondering if you could elaborate on some of the growth there.

Well, part of that growth has been in the area of consulting services. We have got a very big opportunity there to help our customers in making the best use of our product. Our product has got a lot of great functionality and features and we see a lot of opportunity there. And we have been investing in that area and it's really been contributing to some nice growth.

We have also had, similar to maintenance, when we -- we have these annual licenses that we sell. They are ancillary products that we'll sell an annual license to, and as our customer base grows, that grows, as well. And we have been seeing nice growth in that area, as well, so unless Scott's got some additional color on that -- he probably does.

Yeah. So on the consulting part, Don, as I have been talking about for a while now, we do continue to see really nice complementary services we can offer into the client base. I would say our -- the first two areas of expertise we really delved into is just operational performance from a financial side going in and working with clients. And early results there are nice, so we continue to try to scale that practice. And then the other one is maybe just some more advanced deployment services for some of our larger clients as they are trying to ramp up the pace, but they can roll out the product, so we'll continue to grow that practice.

I think the next practice we'll really start to look at is probably more on just the clinical work flow standpoint, as well as maybe doing a little bit more partnering even with third-party consultants who built up practices around NextGen that we might be able to collaborate with in a more constructive fashion than we have in the past. So as you alluded to, we started going down this path about a year ago. I'm pretty pleased with the early results and we do hope to continue to see really good momentum this year in the practice we've already started, as well as expanding into some new ones.

Great. And just one last one and I'll jump off. In terms of when I think about Practice Solutions, kind of longer term in terms of the revenue growth trends, doyou guys have like a vision, just in terms of a top line growth? Obviously, it moves around quarter-to-quarter, but if you could us like with just a general trajectory goal for you in that business in terms of revenue growth.

Yeah, this is Monte. We see Practice Solutions as a significant growth opportunity. As I mentioned before, we have a large install base with NextGen product that we continue to focus on. With the stats I gave you earlier, there's a lot of upside within that base.

We also have an interest in expanding the scope of services and supporting Steve Puckett and the Inpatient group and possibly even Donn in the Dental group. So we think that just within our existing customer base, there is a large opportunity for growth over the next several years, as well as new opportunities in the marketplace. So we're focused on growing the business and certainly see significant growth over the next several years.

And, Don, I would just add our sales force is pretty opportunistic, and just working with them on a day-to-day basis, I would say their enthusiasm for Practice Solution and revenue cycle management is definitely on an upswing right now. And with the size of our sales force, if they get excited about something, you start to see movement. So I would agree with Monte's characterization; I fully anticipate that RCM will be gaining some momentum over this next year.

And I think you mentioned real quick that you were reincentivizing the sales force towards that product area, is that correct?

Yeah, we did change around their incentive plan just within the last quarter or two and so that goes hand-in-hand with the comments I just made. So that also incents them and we're seeing good momentum and good early activity. So that should start to materialize in the next couple of quarters.

Thank you.

Thank you.

Thank you. The next question is from the line of Bret Jones with Oppenheimer. Please go ahead.

Thank you. I wanted to circle back on a couple of points that have been hit already. Mainly on the implementation side and the margin there, I was wondering if you could talk about the percentage of third-party consultants that you're using for your implementation deals? And with the additional capacity that you've added, internal capacity you've added, does that change the percentage of how you are using third-party consultants?

Let me go first and then Paul might want to give some of the more detailed information. Where we're starting to use third-party consulting more is on the larger hospital-based opportunities, and so, as you know, we have signed some pretty big deals over the last few quarters, and to supplement our existing capabilities, we have tapped into that. So I would anticipate we'll continue to sell some of those and that's where we may tap into third-party resources.

Our standard blocking and tackling, deployment of EHR, EPM is still, for the most part, completely staffed by internal resources, and that's where we have good visibility and where you are seeing the scale that we have done this last quarter. So I don't think -- at this point, I see the need for a lot of third-party help on that front.

So I just wanted to make sure I'm clear, in terms of how you're going to be using them going forward, it sounds like you will be using them slightly more because of some of these larger deals you have signed and that will impact the implementation margin further or do you expect the internal capacity to be able to soak some of that up?

I think there are a couple of deals we have used it on. I would say that will probably stay relatively the same, so we'llroll them off that one deal and they'll move on to the next big one. I feel very comfortable we can staff internally. And what you saw, I mean, this quarter was just a wave of hires in one quarter, which we'll try to spread out a little bit more in going forward quarters, and so they'll be up to capacity as we get into next quarter.

All right, thank you. And then just on the R&D front, when -- Paul, I think you said that this is a pretty good run rate; that there wasn't anything unusual in there. But then as we kind of went through the call, you talked about the ICD-10 development beginning to wind down towards the backend of this year. And also, I would think the inpatient ambulatory integration at some point will wind down. Is there a point where the R&D spend -- you have accelerated because of some of the deals that you have done and also the regulatory changes, major regulatory changes that are taking place, and the pace of growth in R&D spending will slow down? Or is that fair to say?

You know, I don't see anything in the horizon that says we have a reason to slow down at all. I think we're going to continue consistent with what we have done in the past. I think it's going to continue. I think there's a lot of opportunity in further integration between the ambulatory and inpatient products, and I'll just say our development teams, they are not sitting around, they're very busy, and I really don't see that changing.

And just to give you a little flavor. Some of the things on the horizon, we have (inaudible) used stage two right after ICD-10. As I've already mentioned, we're investing in KBM. On this call, we haven't really talked about ACO, specifically, but that's a huge opportunity for us. And as we talked about at the Analyst Day, you start looking at new analytics and data tools, so it's not even just existing product line where we're investing.

We're also right in the heat of building up new product lines that will really help us leverage that emerging market, so there's a lot. Now, the other thing to just consider is, as you know, we've started investing in India operations, and that will help us as we go forward on expense on R&D as we're able to split the workforce on an international basis. So you're probably seeing that start to ramp up to a certain extent.

Okay, great. That's helpful. And just lastly, I wanted to take a crack at the pipeline. In the past, you've talked about seven-figure deals and I was just wondering if you could give us an indication for what kind of contribution (inaudible) maybe sales in this quarter but also in the $10 million increase in pipeline.

Yeah, I would say it's consistent with past quarters. So roughly same -- I think we've talked about double-digit number of deals closed and more contributing to the pipeline because it is a little longer view. That hasn't changed materially. So as we said, we're doing relatively the same number of large deals that we have done, and still have those in the pipeline going forward.

And no change to the definition of pipeline, I assume.

That's correct.

Thank you very much.

Thank you.

Thank you. The next call is from the line of David Larsen of Leerink Swann. Please go ahead.

I wonder of the hospitals you have as clients, how many do not include Opus or Sphere or do they all include those?

Well, when we did the acquisition of CQI, we got a list of about a hundred hospitals from their -- that they are installed in various sizes, so I would say when you say that we're talking somewhere around the 70-type range of where we have Opus and Sphere.

Okay, so there's another 130 hospitals within that 200 that are a potential insell opportunity for Opus and Sphere?

Absolutely.

Okay, great. And then as far as -- like 128 new contracts in the quarter, I mean, I know that you had a good quarter in terms of pipeline, but that's up a lot, like 36% relative to sort of what we have seen consistently each quarter. Was there anything like unusual? Can you maybe talk about how you changed the sales force incentive comp? It doesn't sound like you hired that many new reps in the quarter? Was there anything unusual?

No, there was nothing -- I think you're just starting to see some market build. The one place that's probably on a percentage basis that we have invested heavier is on inside sales, and, as you might guess, inside sales is responsible for the smaller practices. And so you have probably seen a little bit of uptick in small practice sales because of the increased focus on our inside sales group.

So they will make outbound calls from within the office and sell them that way, is that correct?

Right, right. So we're able to actually sell smaller practices with an inside sales force.

Okay. And then just one last question. You talked about the patient portal or the doctor portal, $2,000 a doc for stage two, can you just maybe describe what that is and why you would need it to meet stage two requirements?

Sure. So the patient portal is really the tool that our physician practices used to communicate with their patients. So they put up the patient portal and it allows them then to offer out to their patient population the ability to do online appointments, do their bills online, to do prescription refills, etc. One of the requirements of stage two, almost went into stage one, and obviously stage two is not finalized, but that we expect is the ability to electronically provide visit information to your patients.

And so that becomes -- for our clients really the easiest way to meet that requirement for patient communication is through the installation of our patient portal. In stage one, they really watered it down and you could essentially just give them a stick with their information on it or a whole variety of ways around it. We expect it to be much more onerous in stage two that will really push patient portal need. And, to be honest, we have already started to see the uplift in sales in anticipation of that.

Okay, so if you have 80,000 doctors in your base now, how many have the patient portal now, roughly, do you think?

I know the number, but I don't know the number, so it's a fairly small percentage at this point. I'm going to -- should I guesstimate or not? It's 10% to 20%, probably.

Yeah, it's a low percentage.

Okay, so if you have 20,000 that have it, another 60,000 are probably going to need to buy it at $2,000 a doc?

There's the market potential for that. Now, some may choose not to do it, some may do a different solution, but it definitely opens up a market. And I'm giving you list price, as well, just so you don't get pricey modeling something on me.

Well, there's also a reoccurring revenue opportunity with that, as well, as long with a couple of the other products that we have that we've released recently that have recurring revenue types of things. These are monthly fees that we charge, and those things are nice because they are reoccurring and predictable, and have good margin.

Okay, great. Thank you very much.

Thank you.

Thank you. The next question is from the line of Brian Delaney with Interest Capital. Please go ahead.

Hey, guys, thanks for taking the call. As it relates to the pipeline, can you guys just comment on the margin profile, what's been getting put in the pipeline, is it consistent with the type of margin profile that we have seen in the pipeline over the last few quarters in terms of what we have added?

Yeah, we haven't changed any of the model in our reporting pipeline, so it's very consistent, and there's nothing out of character in the pipeline that we're reporting today versus what we have seen there the past couple of years.

It wasn't a question of it was change, how it goes in, it was just a question of the overall profitability of the types of deals that you are putting into the pipeline.

Yeah, no change on that front. As I said, we don't see any discounting pressure either in what we have experienced the last couple of quarters nor in what is in the current pipeline.

Okay. And to be clear, the ViaTrack acquisition, there is nothing from that acquisition that ended up in the pipeline numbers either?

No, we don't -- EDI is not part of the pipeline that Scott normally reports.

Okay. Thank you very much.

Thank you.

Thank you. The next question is from the line of Bryan Brokmeier with Maxim Group. Please go ahead.

Thanks for taking the call. Just to clarify on the R&D, are you saying that you don't expect to see R&D growth slowing from where you have been investing over the last several quarters other than this last one or at the level that this past fiscal quarter was at? Is this the new run rate?

Is this the new run rate? Yes. I think what we're trying to say is that we're going to be consistent, and there's nothing unusual or one time about what we reported in R&D this quarter.

Okay. And then healthcare utilization showed some signs of improvement in the fourth quarter, and until December, which may have been driven by people not getting sick in the warmer than usual weather, do you see a dip in RCM EDI and other transactional based revenue sources in December from the trends in October and November?

This is Monte. From the RCM perspective, I would say that there's no material difference with respect to the end of the calendar year, if you remember 5010, EDI was being implemented. Some payers started doing that switching over to those formats in November, many in December. So we saw some changes with respect to 5010 being implemented. But as far as utilization, no material difference.

EDI, the same, we didn't notice material difference based on market. We do have the seasonal differences that you see every year.

Okay. Thanks.

Alicia, we will take one more question, please.

Okay, the next question is from the line of Dave Windley with Jefferies & Company. Please go ahead.

Thanks for taking the questions. On the R&D, I wonder if you could rank order your priorities in terms of where this increased spending is going. I know you listed off some, but I'm curious about what's highest on the list.

We have a lot of things on the list, but clearly there is the immediate and then there's the future. The immediate sitting in front of us are KBM. We have the ICD-10 that has got a hard stop of October 2013, so we have to work feverishly to make sure we are prepared for that as our customers are prepared. And we have projects that are emerging from large enterprise opportunities that we have signed historically. So what we believe is that we're going to have probably a very flat line in terms of percentage of revenue for R&D on a going forward basis. But we will be moving on and off various projects that comprise the immediate needs and then, of course, we have project teams working on our future needs.

As Scott indicated earlier, we are going through a pretty dramatic change in healthcare, and for -- even though there's two-thirds of doctors and half the hospitals that still need electronic medical records, there's still a percentage of those groups that are moving about 11%, I think, of healthcare is now actively engaged in creating regionally-based, accountable care organizations. And the software needs of those groups are going to include the additional needs for analytics and formatics, standardized practice patterns, formats, etc., etc. So we are operating in terms of R&D on immediate needs, which, of course, are priority, and then of course the needs that will be emerging from the advent of the creation of accountable care organizations and organizations like that. It will be operating under different models of payment and different models of reimbursement.

Okay. Thanks, Steve. So your comment about percentage of revenue answered a follow-up question I had, if I could just ask one more. As you think about the hospital market, I guess it seems more attractive to me to run as fast as you can after the smaller end of the market where you are, where you are already gaining traction, and less attractive to move upstream into the more competitive larger hospital market, even the medium-size hospital market. Would you agree with that or is there something that I'm missing in terms of knock-on sales to other parts of your business that would make spending more aggressively on R&D for that middle market make sense?

Well, I'll answer your question this way. Clearly, we created our inpatient products for the small hospital market because, as you know, better -- almost three times as many small hospitals as large hospitals, is probably the least penetrated component of all the aspects of this EHR movement right now. But there is varying degrees within the small. You can go from a five to ten bed hospital to a 300-bed hospital and those are all categorized as small.

Our mission and goal, as Steve Puckett eluded to earlier in our conversation, is to continue to add components to allow us to move upstream in that market, but we are performing at a very high level in terms of securing business along that way. So as of right now, we're going to continue to build on our small hospital base, but we are going to continue to move upstream, but -- and there's a lot of work to do. There's a lot of work to do, a lot of hospitals to get electronically based, and, as you can see, our inpatient business has grown at about, what, Paul, 70%?

Yeah.

On a continuous basis, between 70% to 8 0%. So that's how I will answer that question.

Okay, great. Thanks for squeezing me in.

Okay, thank you very much. And thank you all for joining us today. We appreciate it. I think what you see here is a company that's now five straight quarters where we have exceeded analysts expectations for revenue growth and earnings per share. We have $183 million pipeline, which is growing. We have categories three and four in your pipeline, which are building, as well, so I think along the lines of the CMS report that came out late October, excuse me, late November, we truly are embarking upon probably a four to eight quarter period of the most robust growth in EHR adoption, and we're well prepared for it with product and service offerings that we think will serve the shareholder quite well. So again, thank you, I look forward to seeing you in our travels and take care.

Ladies and gentlemen, this does conclude the conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030, and entering the access code of 4507957. Thank you for your participation. You may now disconnect.