NextGen Healthcare Inc (NXGN) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Quality Systems fiscal 2013 second-quarter results conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today Friday October 26, 2012 at 7.00 a.m pacific standard time. I would now like to turn the conference over to our host, Mr. Steven Plochocki, CEO. Please go ahead, sir.

Thank you, Ron, and welcome everyone to the Quality Systems 2013 fiscal second quarter results call. With me this morning are Paul Holt, our CFO; Dan Morefield, our Chief Operating Officer. Welcome, Dan, to the Company and your first earnings call.

Thank you, I'm happy to be here.

Donn Neufeld, our Executive Vice President of EDI and Dental; Steve Puckett, our Executive Vice President of NextGen Hospital Solutions and our new Chief Technology Officer; and Monte Sandler, Executive Vice President of RCM services. Please note that the comments made on this call may include statements that are forward-looking within the meaning of the securities law, including without limitation statements related to anticipated industry chance, the Companies plan, products, perspectives and strategy. Preliminary and projected and capital equity initiatives for the implementation of potential impacts of legal, regulatory and accounting principles. I will provide some opening comments and then turn it over to the team.

Company reported $116.1 million for the fiscal 2013 second quarter in terms of revenue, an increase of 8% percent versus $107.6 million for fiscal 2012 second quarter. Net income for the fiscal 2013 was $15.7 million, down 23%, when compared with net income of $20.5 million for the comparable period last year. Fully diluted earnings per share for the fiscal 2013 second quarter was $0.26, a 26% decrease from $0.35 for the fiscal 2012 second quarter. While revenues increase slightly in the quarter, we are moving forward by continuing to reorganize the Company in a manner that better aligns with the changing healthcare information technology sector in which we now operate. This will allow us to further leverage our four business units throughout the marketplace. Which include dental, EDI, revenue cycle management services, hospital solutions and ambulatory.

To this end, thus far, we have appointed a seasoned technology executive in Dan Morefield to serve as our Chief Operating Officer. We've restructured our sales and marketing functions to report to Gary Voydanoff, one of our veteran, senior sales executives. And created a chief technology roll under Steve Puckett to consolidate our software development efforts. We believe these initiatives position the Company to take advantage of future opportunities as the sector remains in the very early stages of, not just EHR adoption but also health care reform, and it prepares us for future accountable care modeling which is now evolving.

Also the Board of Directors declared a quarterly cash dividend of $0.175 per share in the Company's outstanding shares of common stock, payable to shareholders of record as of December 14, 2012, with an anticipated distribution date of January 4, 2013. The $0.175 share per share dividend is consistent with the Company's current policy to pay a regular quarterly dividend on the Company's outstanding shares of common stock, subject to Board review and approval.

In other news, we are proud to announce that Mark Davis was appointed to the board of directors effective October 25, 2012. Mark fills a seat vacated by Maureen Stevak who resigned due to a conflict of interest relating to a new employment position she recently accepted. Mark will also be appointed to serve on the board's audit committee and transaction committee. Davis is a managing director at D Riley & Company LLC, an investment firm specializing in research, sales, trading and corporate finance. He brings more than 20 years of experience advising and financing technology companies, including software, cloud infrastructure and information technology firms to the quality systems board.

In addition, he is a certified public accountant whose financial expertise and knowledge will provide beneficial acumen to the board efforts. Previous, Mark served as a head of technology investment baking at Cantor Fitzgerald; managing director at Baker Reed Capital, an Australian merchant investment banking firm; and managing director, as well as other senior leadership roles, at Citigroup. Earlier in his career he was an audit senior with Price Waterhouse. He holds a Masters of public administration from Wharton, of the University of Pennsylvania and a bachelors degree in accounting from the University of Maryland. We welcome Mark to the board, his two decades of experience advising in financing technology related business, coupled with his public accounting background, will provide the board with insights and expertise in terms of technology and finance. We look forward to the guidance he'll bring the board and contributions he will make to the Company and management team.

Our strategy to capture significant opportunities for continued revenue and earnings growth in this marketplace is sound. We will continue to pursue significant opportunities to sell our electronic health care record and complimentary solutions. Industry estimates indicate that adjustable market for EHR solutions is 40% for physicians and hospitals combined. We are only in the second year of government incentive payments of physicians and hospitals and we anticipate continued opportunity in this market as incentive payments drive further adoption.

NextGen ambulatory EHR currently is fourth out of 400 competitors in Medicare at the stations. And also ranks fourth in REC application of software, showing our strength and enabling our customers to demonstrate meaningful use. As the governments requirements for achieving meaningful use and receiving incentive payments become ever more stringent, we believe that proven vendors like NextGen will separate from the pack as physician groups replace systems by vendors that simply cannot meet these requirements. We see significant potential for cross selling new solutions to our existing customer base and bundling multiple product solutions for sale to our customers as well.

Over the last several years we have established four business units led by experienced managers to provide focused leadership and develop the business plans, technology infrastructure required to successfully introduce new complimentary software and services. At the same time we have worked to tightly integrate many of the new solutions with our existing software to further strengthen our ability to cross sell within our existing customer base for each of our product lines and to win multi- solution deals with our customers. We announced the IASIS Healthcare and agreed to deploy our RCM services in its network of 19 hospitals across 7 states. IASIS, which already had licensed our ambulatory EHR software initially selected our practice management solutions to enhance its financial workload. But later decided to implement our RCM services in order to quickly and effectively roll out a new financial system across its enterprise.

In addition we announced some new agreements with Norton Sound, headquartered in Alaska. And we also announced the agreements with South Community Health. These were multi-product sells which are starting to demonstrate our ability in being effective and successful in these prospective areas. We seek to stay at the forefront of developing technology in our industry. In addition to ongoing enhancements of our core software products, we are developing and acquiring new technologies to capitalize on future growth opportunities and to support delivery models such as the emerging accountable care organization model. Examples of recently introduced enhancements and solutions, our enhancements to our ambulatory EHR solution provides physicians with automated outcome reporting, enhanced disease management capabilities, and a new user interface that can make the latest version of our EHR more intuitive and easier to use.

Our new patient population management solution allows physicians to monitor patient compliance with treatment plans and to track, capture and process revenue associated with proactive patient communication and care. Our performance management suite provides sophisticated self-service analytics to healthcare organizations to meet required reporting needs for regulatory, clinical and key financial performance indicators. Our NextGen Solution that we have talked in the past is an innovative pen device that quickly and accurately captures patient data for transfer to ambulatory EHR solution. Eliminating paper entry and transcription cost while improving operational efficiency, another example of our innovation.

Our NextGen mobile solution allows providers to access records and perform various services such as viewing and making appointments, documenting phone calls and updating components to the patient records from a variety of hand-held devices. New surgical management enterprise solutions offered by our hospital solutions division enable hospitals to improve patient, resource and staff management to increase capacity and efficiency of surgical operations. Our health information exchange is a highly secure data exchange and repository that enables electronic transfer of clinical information among disparate health information systems within a region, community or hospital. In addition to the currently available solutions, we are in the process of developing new ambulatory hospital and dental software as a service offering that will rely on cloud based architecture and allow us to increase our recurring revenue base. QSI is at the forefront of enabling new healthcare delivery models such as ACOs. Patient-centered, medical, home, and of course, fee for service--or fee for performance. Many of the new products and enhancements described above address growing demands of healthcare providers to be more effective in terms of the way they deliver care and improve outcomes.

We see opportunities to grow our RCM services business as the industry seeks to reduce costs by outsourcing and billing collection activities. Management is actively looking to capitalize on the growth and potential we see in this line of business in particular by extending our current RCM capabilities into the dental and hospital markets, of which we are actively pursuing at this moment. With nine acquisitions in the last four years, we continually evaluate acquisition opportunities of all sizes. A core part of our acquisition strategy is to use acquisitions to fill a strategic gap or kick start our entree into newer business lines. For example, we recently acquired Matrix Management to expand our RCM offering and we acquired the Poseidon Group to expand the emergency department capabilities of our hospital solution customers.

We have also considered, and will continue to consider, larger more transformative transactions. Regardless of the transaction size, we will continue to focus on acquisitions that provide a strategic benefit to the Company and make financial sense for our shareholders. Again, in the past four years we have made nine acquisitions that have helped grow the company and solidify its market position. At the same time, we have been disciplined in the pursuit of acquired businesses and have rejected acquisitions, both large and small, because they were strategically or culturally incompatible or not financially accretive. Acquisitions will continue to be an important part of our growth strategy.

As we look ahead to capture growth opportunities we are working to achieve cost efficiencies that will increase our margins. Our expanding use of offshore capabilities, in particular for software development and other back office functions is one example. Our growing technology innovation center in Bangalore, India currently employs more than 200 technologists and engineers. Significantly increasing the breadth and efficiency of our product development expertise. International expansion is another area of focus that we have talked about in the past and our growth strategy is evidenced by our international opportunity that we developed at Dell and Puerto Rico Hospital. These initiatives will allow us to move towards the successful long term future in light of current changing market conditions. I will now turn it over to Paul and he will then turn it over to Dan. Paul?

Thank you, Steve, and hello everyone. Our consolidated September of quarter revenue growth of 8% was driven by 20% growth in service revenue categories partially offset by a 15% decline in system sales revenue. As Steve mentioned, we remain confident in the Company's opportunity moving forward beyond useful use. We are also seeing opportunities in a growing replacement market as lower tier vendors grapple with the expanded requirements of meaningful use. We also are pursuing opportunities to expand our relationships with our payer customers, who are also acquiring medical practices and becoming our customers.

Our earnings per share declined by 26% to $0.26 versus $0.35 a year ago. Profitability was negatively impacted by decline in software license revenue compared to the prior year, as well as higher SG&A expenses. I'd also note that we recorded $1.3 million in amortization expense related to intangible assets versus $0.5 million a year ago. We are pleased with our growth and service revenue categories including maintenance, RCM and EDI, which grew 20% on a year over year basis to $83.9 million versus $69.7 million a year ago.

We'd also note that our other service revenue which includes subscription, SAAS, and hosting services grew 38% to $15.6 million over the prior year of $13.3 million. Our recurring revenue as a percentage of total revenue represented approximately 68% of total revenue this quarter versus 61% a year ago. We remain very positive about our opportunities to continue to grow these revenue streams by cross selling into our expanding customer base as well as to new customers. Monte and Donn will provide more details on their comments.

Our total systems sales revenue declined by 15% on a year over year basis due to the decline in software and hardware revenues, which declined by $8.2 million to $23.7 million versus $31.9 million a year ago. This decline was partially offset by higher implementation services revenue which increased 40%, $8.5 million compared to $6.1 million a year ago. Our consolidated gross profit margin this quarter came in at approximately 60% versus 66.5% in the same quarter last year. Our gross margin percentage declined primarily due to comparatively lower amount of high margin software revenue, and change in revenue mix toward lower margin implementation and other services revenue.

Our SG&A expense, excluding amortization, increased by approximately $5.6 million to $37.8 million, compared to $32.2 million a year ago. This increase was primarily driven by various acquisitions that we have made during the course of the year, as well as additional headcount and other expenses. We will continue to review our planned expenditures moving forward in light of our recent results to ensure that we are efficient and prudent with our spending. R&D spends declined 15% to $6.3 million compared to the prior-year quarter. Our decreased R&D spend was primarily due to stepped up investments in development projects being capitalized. Investments and capitalized software development grew to $6.3 million in the quarter versus $3.6 million a year ago. Our effective tax rate this quarter came in at approximately 36% versus the prior year 34.9%. Our current period tax rate was higher primarily due to the fact that we are not including any R&D tax credit as it lapsed in December of 2011. If Congress reinstates that R&D tax credit we will be able to take that as a benefit but that has not happened as of late.

I will now turn over to our segment revenue and operating and performance for the September quarter. Note that these operating income results do not include any allocation of corporate expenses. NextGen Ambulatory revenue was $87.3 million, it is up 6% over prior year. NextGen operating income $33.9 million, that is down 1% over the prior year. QSI Dental revenue was $4.8 million, up 7% over the prior year and operating income $0.7 million up 10% over the prior year. Hospital Solutions revenue $8.2 million, down slightly 2% over the prior year, and operating income was a wash at $1.2 million. I would note that the hospital division results were negatively impacted by certain one-time events related to the timing of revenue recognition and certain credits that we took in the quarter. RCM services revenue $15.8 million, up 30% over the prior year. RCM operating income $1.8 million, that's up 63% over the prior year.

Moving onto our balance sheet. We ended the quarter with $122 million in cash and marketable securities, equivalent to $2.05 per share. This is down from $139.4 million or $2.36 per share at the start of the fiscal year. Note that in the last two quarters we paid out approximately $10.1 million related to acquisitions, including purchase of intellectual property. As well we also increased our investments in capitalized software development to $11.1 million versus $6.1 million in the same six-month period last year. We've also prepaid certain income tax payments demonstrated by the $6.1 million prepay income tax balance on our balance sheet. Our gross DSOs declined by eight days compared to the prior year at 119 days versus 127 days a year ago. Also our current portion of deferred revenue declined slightly to $68 million compared to $70.7 million last quarter.

Then, for those of you that are tracking this, I'm going to report our non-cash expenses which breakdown as follows. Amortization of capitalized software $2.4 million. Amortization of intangible assets, $2 million. Total depreciation expense, $1.8 million. Stock compensation expense, $0.4 million. Investing activities for the quarter; internally generated capitalized software including the purchase of intellectual property, $9.8 million. And fixed assets, $1.5 million. So, I would like to thank all of you for being on our call and your interested in our Company. I will turn things over to Dan Morefield.

Thanks, Paul, and hello to everyone on the call. We are pleased to report NextGen Ambulatory year-to-year growth of approximately 6%. In addition we are pleased to announce that our service revenue grew 21% due to solid execution of our cross-selling efforts in EDI, annualized licenses, subscriptions, postings and other service offerings. We are also happy to report that the pilot program with Hanger is going well. We expect the probably to expand later this year and hope to be in position for a full implementation sometime next year.

Now for a few of our quarterly operating metrics that we normally report on this call. The Company executed a 117 arrangements on a consolidated basis versus 112 last quarter. Of the new arrangements 73% were Greenfield and the rest were replacements. We executed 44 SAAS agreements during the quarter which are included in the total 117 arrangements. Discounting did not materially change in the quarter. As of 9/30 there are a 112 quarter carrying sales and management positions, slightly less than the prior quarter of a 116--quarter carrying sales and management positions.

The pipeline is currently approximately a 140 million, slightly down from last quarter's 150 million, that includes ambulatory, RCM and inpatient. I would like to thank all of you, our clients and our staff who continue to work extremely hard as we pursue multiple opportunities and challenges across the industry. With that, I'm going to turn it over to Donn.

Thank you, Dan. We had continued success selling NextGen electronic dental record with the NextGen EHR and EPM adding seven new joint clients in the quarter. We recently released a major upgrade to our dental staff product for commercial dental groups, bringing the extensive features of our client server charting to the cloud. The QSI dental pipeline is approximately $6.7 million. The NextGen EDI had record revenues and income in Q2. We saw solid revenue growth in our core products of claims and statements and continued acceptance of our newer offerings across all the business units. I will now turn things over to Steve Puckett. Steve?

Thanks, Donn. The Hospital Solutions division sold another six hospitals this past quarter, including two new specialty hospitals. We also had add-on sales of both our surgical product suite and new emergency department systems which is a nice trend to start seeing. This past quarter we see our customer base growing past the 200 hospital mark. And as I mentioned before, most of the non-specialty hospitals purchased our ambulatory product suite as well. As I commented on the last call, specialty hospitals are a great match for our product portfolio and provide us opportunities to expand in urban and metropolitan markets.

I commented also, that we had signed a corporate network of surgical facilities allowing expansion over to 25 states. We executed on this plan and we added two new surgical clients that I talked about earlier. These clients also give us an opportunity to grow our products richer and new features, that are important to these markets, which include cost performance analysis tools. This past quarter contained some unique one-time events that negatively affected our previously strong performance record. This impacted our implementation and training revenue for the current quarter, as well as and impact to our maintenance numbers. However, we are extremely proud of our live, clinical hospitals who have not only installed NextGen clinicals. But that the majority, some 80% now and counting, have attested to meaningful use stage one. This is also a team effort between the client and ourselves, and we look forward to recognizing this joint achievement at our upcoming user group meeting next month.

In closing, we are continuing to focus on the rural and community hospital market which has become our strength. And in this segment we continue to see a strong pipeline of deal opportunities ahead and are enjoying the new urban and metropolitan market opportunities that our specialty hospital offerings are providing. We look forward to the benefits Gary Voydanoff will bring with consolidated sales effort as we continue to grow our hospital business. Thanks for your time and attention and I would now like to turn it over to Monte Sandler.

Thanks, Steve. Good morning, everyone. RCM Services revenue for the second quarter was $15.8 million, representing a 30% growth over the prior-year quarter. We continue to improve operating margins, revenue enhancements and cost reduction initiatives, led in large part to our best practice methodology that is laser focused on continuous improvement of service delivery to our customers. As reported, operating income grew 63% over the same period last year. We signed several new deals during the quarter driven by our ability to help our customers optimize revenue and maximize the use of our products. Our backlog of signed deals is not fully implemented remains strong, and our sales pipeline is yet again the highest it has ever been to date. Thanks in large part to our growing sales team and renewed sales focus.

We continue to see that practices are concerned about their financial future as a result of pressures from the pending SGR cuts, the November elections, ACA reforms and ICD 10 to name a few. Our tailored RCM services driven by people, process and technology make us a great solution to help providers position themselves for future health care reimbursement models. I am confident that we will 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 your time and interest in our Company. Ron, we would like to take questions at this time.

Thank you. Ladies and gentlemen we will now conduct the question-and-answer session.

(Operator Instructions)

Greg Bolan from Sterne, Agee

Thanks, guys. So Paul, is it safe to say NextGen maintenance revenues were flat on a sequential basis?

No.

Then how should we think about maintenance revenues going forward because they did obviously did slow quite significantly this quarter?

Yes, we had a couple of -- I would call a one-time event. I am not going to get into further detail than that. I also want to point out, like I have done in prior periods, that where you really want to look at is the year-over-year discussion because there will be some noise around that maintenance number quarter to quarter when you look at it sequentially.

Okay. Maybe just a lead-on question. Can you share with us maybe the client turnover at this point? How significant has net turnover picked up as of late? Or has it?

I have not noted a significant amount of turnover in our maintenance numbers, if that is where you are going.

Okay. How should we think about the dividend policy here, has the board considered switching over to a concentrated stock buyback effort?

This is Steve. The dividend policy, as of now, will continue. The board has not considered a buyback policy. We have at the present time a number of MDAs out there in terms of potential acquisitions. And we feel that in order to prepare the Company for the future, because we still believe that the healthcare reform and HER movement is in its beginning stages, it is a better use of cash--a better use of our funds to make investments and acquisitions which would give the shareholder a much better return over time. So our policies right now, at this point in time, are not looking to change.

So, the parameters --it sounds like leverage would be considered, which is a little bit outside of the parameters you have discussed in the past. In terms of financial impact the goal would be to be accretive over say the next 12 months. Is that still in the same parameter, Steve?

You mean if we do an acquisition?

Yes, correct.

Yes, that is always a goal, absolutely always a goal. However, there are some strategic opportunities that may, you know, supersede the 12 month accretive initiative. Accretion is always what we are looking for in the 1st 12 months. It has always been one of our guidelines and quite honestly the deals we are looking at right now would be accretive in that first 12 month period.

Okay. That's great. Thanks, Steve.

You bet.

Ricky Goldwasser from Morgan Stanley.

Good morning. Follow-up to the last question. Can you just define to us what would be the upper limit that you would be interested in terms of acquisition?

We have no dollar amount. We essentially are looking to, as we have always done, to acquire businesses that supplement or complement our existing core or can give us an entree into a new business line. There is a number of deals that we are looking at right now that run the full gamut of the spectrum, from small product-based deals to revenue-based deals of well established organizations. We are not holding ourselves to any kind of a standard along those lines.

Okay. Can you give us a little more color about what you have seen in the competitive environment this quarter?

I don't know about this quarter, I will tell you in the competitive environment that there is a lot of initiatives in place. I think one of the most meaningful statements that was made, it was made by the government. It was when they pushed out stage 2 and ICD10 from a 2013 starting point to 2014. That translated back to us in the market and I am sure back to you, that of those 462 companies out there that are providing software under stage 1 certification, there is a whole lot of them that are not going to meet the standards for stage 2 or ICD10. The government is giving them an extra year to get there, but it is our belief that many of them still won't be able to achieve that. We believe that will be an enormous replacement market for those of us, I would say in the top 10, of which we ranked fourth. To take advantage of that big replacement market that we think is right around the corner.

In terms of timeline you think this will materialize 12 to 18 months from now as we get closer to '14?

I'm guessing you are going to start seeing it unfold pretty soon. There is already been in the market a number of the smaller competitors in our sector that are looking to be acquired or are looking to partner because they simply don't have the capability in their development ranks to keep pace with stage 2 and ICD10. Of course as we all know, on the heels of stage 2 and ICD10 will be stage 3 and ICD10 11. So it does not get easier, it gets more difficult. The companies like us who have large installed bases, we have large maintenance income--I think our recurring base now falls about 68%, or there about?

Yes.

We can afford an infrastructure of development, not just here in the United States, because we've talked we have a large infrastructure of development capabilities in India with over 200 developers and engineers. It takes that type of strength in order to meet these standards.

Okay. Thank you.

You bet.

Charles Rhyee from Cowen and Company

Thanks. Steve, maybe going back when we look at this pipeline number and I remember in the past when we were having--when stimulus was first-- when high tech was first introduced. There was some delays as we were waiting for the final rules to come out. Back then our pipeline numbers still didn't really drop as significantly as we are seeing right now. Can you tell us what is different this time around? And how you guys, when you are sizing up the pipeline, is there any sort of change in how you are looking at it? Maybe if you can help us think about that a little bit and how you keep that project regarding.

Yes, the pipeline has gone down. We think partially our market conditions, the high end areas of the hospital and the high end areas of group practices, are certainly reaching the point of maturation in terms of their buying decisions. But I think the bigger piece for us is that in developing our core product line, where RCM was developed to acquisitions in '08 and came [up for -- ] in 2010 and we put it together under Monte. Than our preparation for a Hospital Solutions product, which began in '09 and 2010 and was ready for 2011 under Steve Puckett. Those areas now are operating well and they are operating cleanly. We believe that we are going to be able to build our pipeline considerably under our new strategy and sales and marketing, with Gary Voydanoff, where we are going to be doing more multi-product and cross-selling across the spectrum of the112 salespeople that we have. This is an initiative that we are just beginning now. As a matter of fact those of you that come to our analyst day on November 5th in New York, you are going to get a very good reading on that from Gary in terms of our sales organization. We believe that we are going to be much better in our sales organization and we are going to be able to build pipeline much faster more substantively.

Maybe in terms of the sales pipeline here, as we think about the Dell partnership, can you talk about how much that sits in the pipeline today, sort of how that is developed so far and maybe be remind us how the economics work in the relationship?

Yes, Charles, there is nothing in the pipeline on Dell. As I have said in the past, mega deals, and as matter of fact deals that fall under business development, which this would fall under--mega-deal, they don't enter the pipeline. Dell is essentially a deal that we closed, we are doing Panama and Puerto Rico right now, it is starting to roll out through the sales organization out there at Puerto Rico hospital supply company and Dell. And we are looking to go to additional countries; Canada, Great Britain, and others once we establish the partnerships with distribution that works in those countries. Again, this is an early stage project, we believe it has tremendous potential. But again, it will not pay dividends for us until probably the middle of next calendar year or the beginning--the beginning of our fiscal year 2014 fiscal year.

Okay. Great, thanks.

You bet. Thank you.

Michael Cherney from ISI.

Good morning, guys. I just want to get back a little bit to the competitive environment. We see a lot of fluctuating deals between vendors, you talked a little bit about the replacer market taking hold. When you go in and you are pitching for replacement deal, what are the key metrics that your pushing onto a law that, your value profit resonates with customers. On the other side, have you seen any pressure in any of your installed base in terms of some competitors coming in and trying to potentially push you out?

I think in the replacement areas you see push and pull everywhere. Like I said, about two thirds of our deals were Greenfield and one third were replacement. We don't like to talk about the actual deals or who we replaced. But I lot of it we believe is going to be the beginning of what I was talking about just a second ago. Is that the--many of the providers, those 400 and some odd providers outside of the top 10 of us are starting to realize that they are not going to have the infrastructure capability to meet software development needs with the new standards. Their group practices are starting to understand that. That is opening the door for replacement market.

Okay. Just quickly, obviously last quarter you guys decided not to update the guidance number, it doesn't look like you are doing it here. In terms of the business visibility, what do you think it will take, in terms of the next set of steps, in order to give you enough visibility to potentially reconsider issuing guidance.

Mike, we probably won't issue guidance until we head into our next fiscal year. There is several reasons for that. One of course is the market conditions are changing rather dramatically. Two, we just came off of a tough proxy fight, we had a few officers that left the Company. But the management team that we have put together here with 11 new executive committee members here at the management level, and the creation of a Chief Operating Officer role.

The consolidation of our sales and marketing organization under Gary Voydanoff, the consolidation of all of our development efforts under Steve Puckett, and then our business development efforts also being consolidated across the board under Ike Ellison. These are all people you will hear from at the analyst day on November 5th. We have an entirely new operating structure here at the Company and we are bringing things together quickly. But we are also doing it under market conditions that are starting to see just a bit of a deceleration in the sector simply based on some high end penetration rates. We have got a lot going on, I view it all as extremely positive. As a matter of fact, I have been around a long time. I've been running companies for 38 years and I am extremely confident in this executive team. The collegiality, our ability to work together and the initiatives that we are embarking upon I believe are going to be a great long-term benefit to the shareholders.

Ryan Daniels from William Blair.

Hello guys, Andy in for Ryan this morning. Last quarter you indicated that some of the uncertainty around the stage 2 regulations were causing a pause in client activity. Have you seen an uptick at all following the stage 2 final rule?

Andy, the stage 2 delay of course does not help. There is probably a laundry list of a dozen reasons why this is a bit of a slowdown, that is one of him. When you give anybody an extra year to make a decision on something, many of them take it. To what degree that is causing a slowdown out there is very difficult to tell, but it is causing a bit of a slowdown. You've got the letters that have gone out from the GOP to Kathleen Sibelius about ceasing the payment system under the stimulus under meaningful use. You've got an election that is going to take place within--what, 12 days, 10 days now or whatever. So, there are a lot of areas that I think are creating a bit of a pause as we roll forward. And stage 2, and ICD10 delay, I think is certainly a significant piece of that.

That's helpful. Then you mentioned ICD10, I was wondering when you guys expect ICD10 to become a meaningful driver of client activity? And then as a follow-on there, how important, is ICD10, then, in your RCM related conversations lately?

From an RCM perspective, this is Monte, we see it as a significant opportunity. There is a lot of pressures on the providers today, whether it be meaningful use adoption, annexation, pending ICD10. Things that are requiring their attention which gives us opportunity at RCM to focus on the transactional part of their business in which we are experts and allows providers to focus on those things that they need to focus on. We are actually, we will announce soon a new partnership that speaks to ICD10 and what we think the opportunity creates for us in the marketplace. In how we can add value to our customers and continue to bring service offerings that allow them, again, to focus on the things around EHR adoption, meaningful use annexation, and allow us to help them optimize their revenue cycles. So, those are some of the things we are doing. We see opportunity with that and we will be announcing shortly some exciting stuff that you will be interested in.

Great. Very helpful.

Thank you, Andy.

Eric Coldwell from Baird.

Thanks and good morning. First question, Steve. At our conference a month ago, we talked about Health Management Associates and you said that a large portion of the physicians will stick with you and told as much and then HMAs management actually verified what you said at the end of your presentation. However, last week Athena came back and said they had the highest close rate in their history when they're meeting with the HMA physicians. I guess I'm just asking, again, how do we true up all of these comments and can you give us an update on what is going on with HMA?

Again, I'll go back to what we said, you are right at the conference we talked about that and the HMA people followed me on the stage and confirmed it all. HMA is a consortium of about 1200 owned and affiliated doctors. We were working with about 400 of them on the EHR side and near 500 of them on the RCM side. So, there was still a lot of doctors affiliated and owned that were not working with us, so that is fair game for anyone. And there is probably going to be some basis of conversion there. I mean it is a mix bag and difficult to tell at this point in time.

This is Monte. Look, we are continuing to work with HMA management, RCM continues to have a good relationship with them. We are focused on continuing to help them achieve their goals and so, our performance continues to be strong and we will continue to help them navigate through this process. Regardless of what the mix of business looks like. And we will see how it all plays out. We are continuing to be committed to HMA and continuing to help them optimize their revenue and that is really our focus.

Let me jump in and switch gears for a second. Deferred revenue has come down about 25% in the last nine months and I am just curious if there is something more to this in terms of mix of contracting or anything else that would explain the change. Or is it really just the fact that the pipeline has come in a bit and your new sales have weakened and so you are burning through past deals and you have not been able to replace that to rebuild the deferred revenue. If you could give some color on that what is going on there, would be helpful.

This is Paul. The last couple of quarters ago we talked about a change in our contracting and how we modified some of the payment terms around services and that meant that we would not record deferred service revenue for services that are going to be paid for on a T&M or as used basis. So that has contributed partially to the drop in deferred revenue. So you have to keep that in mind when you are looking at that. It is a combination of both the fact that we are not putting up a receivable and deferred revenue on certain--on pretty big amount of our contracts going forward as well as the other issues that we have seen in the system sales line.

Got it. That is what I was thinking, Paul. And I was wondering if you could quantify that change for us at this point? I was not sure if it was relevant by now but it seems that it is becoming relevant.

Let me get back to you on that and see if we can have something, our 10-Q that will be filed shortly.

Great. Thanks. I will jump out for now.

George Hill from Citigroup.

Good morning and I appreciate you guys taking the questions. Paul, I will start with housekeeping item. Cap line software seem to spike very much sequentially. Can we talk about what drove that? And what do you guys estimate the impact was to earnings there?

What drove that was stepped up investments in our development projects. We've got some major projects that are underway and are appropriate to be capitalized. I think I would take that as increased investment on the part of the Company. In terms of--you can do the math on what that means to our financials, just take what we've capitalized in the quarter and take out what we have amortized. I gave those numbers out earlier on the call. We capitalized approximately $6.8 million and amortized $2.4 million.

Just a little more color, that is like a--you said capitalized $6.8 million?

Yes.

Therefore, that is a doubling of the historic rate. I'm trying to figure out, can you give us some color on what is being developed or what the product, what is going into that number?

You have a number of areas, so we have a lot of investment going into our templates. Which are specialties, specializing in specialty medicine. That is very significant. Then you have some other projects that we have been working on that are very significant to us that are future type stuff. That is stuff that we, it is more long-term in nature and we will be talking a little more about that when we get to our user group meeting, as well. Steve, you might add some color.

This is Steve Puckett. I can tell you, on the previous call, may have been the last one, too. We've been mentioning to the next generation of NextGen solution and that is something we continue to invest in. We have talked about that as a single database and a web based solution. So we have mentioned that on numerous calls before. But, that project has been ongoing for about 1.5 years and it continues to do well. And that is where we are basically listening to the clients listening to the market and producing that product. As Paul mentioned we will be talking a little bit about it at the user group going ahead, too.

I appreciate the color there. Steve, two strategic questions for you. Number one, you are talking about the M&A pipeline and how robust it is and how you guys are open to deals of all sizes. My first question is, if you look at the history of companies in this space that have been highly acquisitive, it is not a distinguished track record. So I guess, first can you tell me which have given the investors give confidence that you guys can execute this business, better than anyone else? Then from a market perspective, I would say for the position that we sit in, if you look at the class scores or if you want to look at the meaningful use rankings, you guys are the fourth or fifth -ranked ambulatory product that tends to be a high cost provider, generally perceived as having a high upfront investment which would explain the deterioration in the sales pipeline. From my perspective you are sitting at a distinct competitive disadvantage. How do you remedy that situation so the M&A question and the competitive situation, and then I'll hop off?

First, on the M&A front, as I said, we have done nine acquisitions in four years. Granted, they were smaller, we were able to well manage the integration and synergies and those acquisitions. Bringing them into our system and start making them contributors to our overall growth. You are correct, you are correct in the sense that, a lot of large acquisitions do not pay off. So that is why I said and qualified in our statements this morning, that we would consider something larger but it would have to meet a long laundry list of standards for us and be of tremendous strategic advantage for us. In an early-stage new sector or something that we could really cross sell rapidly into our organization to make it payoff.

So yes, the bottom line is make the right decision, don't be reckless, Make the right decision. Make sure you can implement and execute on the synergies and translate it into shareholder value. So, you know, we haven't made that mistake in our entire history in terms of acquisitions and I can tell you our discipline is quite stringent. We do a lot of due diligence, we have a transaction committee at the board level that is actively involved and, there is always a little bit of risk. There is always a little bit of risk when you're doing something like that.

In terms of the software, we've ranked fourth, yes, you are right, in terms of access stations. We also ranked fourth in the REC organizations. The regional extension centers, if you remember we are engaged in 62--excuse me, 58 of the 62 regional extension centers of the software that is being applied to positions through that system. We ranked fourth with about 8800 doctors that are on our software through the regional extension system. Our software historically has been a strong software base for multi-practice, and multi-modality systems. It's interesting, though, that we always seem to get a bit of a rap when it comes down to the singular dock and in spite of that, I think there is probably about 300 companies that are engaged in the REC still.

In spite of that we are ranked fourth in terms of the number of software applications under our NextGen system. So, you know, we are working on our software, as Steve Puckett indicated and one of the reasons we are consolidating our technology efforts under Steve, we want to get some well-managed--do extremely well on the vital few and be able to produce a software--continue to enhance and upgrade our software so it is more user-friendly. And certainly can meet the specifications for stages and for ICD 10 and 11. And I think at our Analyst Day, Steve will be talking in more depth about those respective areas.

Thank you. I appreciate the comments.

One minor point of correction, I told you 6.8, it is 6.3. Just want to make sure you get that right.

Thank you.

Bret Jones from Oppenheimer.

Good morning and thank you for taking the questions. I wanted to ask about the pipeline, circle back to the pipeline for a minute. I know you guys talked about cleaning it up and I thought that occurred last quarter when the pipeline was revalued down to 153. I'm just curious in terms of the 140 number you are reporting this quarter. How much of that is because of deals that you just looked out there and thought they realistically shouldn't be in the pipeline?

No, I think Bret, the pipeline difference--and I will go back. I told you guys we do about 2000 to 2100 sales transactions a quarter. That has not changed. The difference in the pipeline has to do with the deals that are in the high six figure, seven figure range. There is simply fewer of leads that are flowing into our deal flow that are in that range. A handful of deals like that can push the pipeline to $200 million. A handful of deals that you don't have in that area, keep it at that $140 million and $150 million range. That is the only difference. Our activity levels are high, our add-on sales continue to grow rapidly. Our overall deal closure system is net 2000 to 2100 transactions a quarter. It is just a vital--a handful of seven figure deals that used to be more prevalent in our lead flow and deal flow that has simply slowed down.

This is Paul, like to add something to that as well. Keep in mind that this pipeline number is a lot of judgment calls being made around the timing of closure and our probabilities of success. Keep that in mind. And also the other point that I did see, we have another category in our pipeline which is a little further out, which we do not include. I did see some sequential increase in that, but it is not part of the pipeline number that we report, but it was an interesting sidebar to the pipeline discussion.

Are right. So there weren't any deals that were just pulled out of the pipeline because they weren't realistic as we did see last quarter?

No, no, no.

So the 140 number you feel very confident it's a clean number?

The140 is a typical pipeline number. Again, I think our revamped sales efforts and revamped sales organization which we will talk to you about on November 5th will show you how we are going to build the pipeline back up and actually take it to new standards with our sales efforts across the 112 sales individuals making a full pitch on multi-product cross-selling efforts. We think that is going to be an enormous X factor for us just on our core business.

Okay. Great. Can you talk about the payer contract that signed--I believe it was on the last call and whether there was any revenue recognized in this quarter?

Payer contract -- we did have an arrangement with a payer that was signed this quarter. We are not going to get into the details in terms of exact amounts of revenue or size of the deal. But it was a significant opportunity for us and we were happy to close it this quarter.

And there was revenue recognized, though? Without getting into amounts?

Yes, again how we are not getting into amounts or details but it was an opportunity that we did execute on.

Some of the sensitivities with some of our customers when we establish a relationship with them, we want to honor and respect their wishes and desires to keep certain things confidential. You know, there is a lot, there is a huge competitive environment going on out there across the board in terms of health insurance companies and payers on the activities that they are involved in. We certainly want to be there partners in those areas, but we do need to respect their desire to be confidential. But, yes, it was a great deal for us and has a lot more growth potential down the road.

We are talking to other potential customers in that arena, other payers. We would like to get more of those.

Okay. That's great. Lastly, I just want to circle back on the replacement market that you guys have talked about. There have been some large health systems that have been pretty vocal about looking to really extend their inpatient vender into the outpatient market. I was wondering if you could count on your own attrition level, to what degree you are seeing those health systems replace you in the ambulatory market?

Again, we don't have, I can't speak to anything material. Doe it happens occasionally, I am sure it does. As we replace other people. It's not really affecting us materially. I think a lot of it has to do, I would caution everybody to consider that when bold statements are made about things, give it some time to work its way through because you may find that those bold statements are not necessarily completely accurate. I think that is pretty typical of our sector right now.

So, is there some attrition? Certainly there is. We are one of the largest installed bases in the country, rolling into the stimulus. We have 4400 group practices, 80,000 doctors. There is going to be some attrition. I can tell you there is even more attrition that we are seeing in a lot of the other installed bases of that grouping of 300 out there that are starting to realize they cannot meet standards for the future.

Okay. Great thank you.

Thank you.

Sean Wieland from Piper Jaffray.

Thanks. Did you guys give the SAAS revenue for the quarter?

No, that is included in the other revenue category. We have not broken that out.

Okay. Can you or would you? I think you have in the past.

SAAS revenue $0.7 million this quarter versus $0.5 million a year ago.

Okay. So, how does, based on the percentage of new deals or contracts signed--you are at about 38% of new deals are coming in on SAAS. What segment of the marketplace is choosing SAAS? Is it small doc, medium, large hospital. Where are you seeing that? Then can you talk about the development of your true SAAS platform, which I believe is NG-7 and the timeline on the rollout for that?

Yet, this is Paul, Sean. Typically the smaller size practices will gravitate more towards the SAAS model and there maybe some of the smaller hospitals that may choose that type of model as well. So that is the first part of your question. The other part of the question,.

The new technology product that you might be referring to will be able to, completely will be able to be run in either way. It is a completely cloud orientated product. Having said that, the SAAS model will be delivered through a SAAS revenue model or through the license model that we currently have, either way. But, from a total cost of ownership, it could beat considered SAAS and good for SAAS.

When is that new product going to be available and is that what is contributing to the higher softer capitalization rate?

It is part of what we talked about the capitalization rate. We are not actually giving specifics on the deliverability right now.

But we will touch on it on November 5th. We will give more color on it. On November 5th--about all the products actually. We have a whole new series of products and service offerings that we will want to talk to you guys on November 5th.

One quick one, if I could then. RCM pricing pressure--eClinicalWorks is out talking about a 2.9% rate. How does that compare to your average price?

That has been in the market, so, I would tell you that we continue to be competitive from a pricing perspective. I also think it is important when you look at RCM services to look at scope of services. You know it will remind you that our scope of services is full service. It is tailored, it is not a cookie-cutter model and it is a true account management partner-type relationship. That being said, we are absolutely competitive in the marketplace with that offering as well as any of our competitors.

Okay. Sounds good. Thank you.

Thank you, Sean.

Steve Harper from Lazard Capital Markets.

Just to go back to one of the earlier questions. What do you make of the declining class scores for the NextGen ambulatory product and to some degree, is that sort of manifesting or is the software line sort of reflecting some of that decline in user satisfaction?

Hi, this is Dan. Let me take a shot at that one and I will ask my friends here to step in and support me as I have been here now for a month and a day. Clearly, one of the pillars that we will continue to focus on his client satisfaction across the board. Study and understanding the class scores, how they are produced, the trends on those, things that are under way today. I think we have said before that one of the places that we want to continue to enhance our product line is on it being more intuitive. And so, I think there are some components that are software related, but quite honestly, there are other components on the quality of our training and implementation, customer service, how we build them. Every piece that we touch the customer impacts client satisfaction. So I think it's part of it, but I don't think it is all. And it is something we will spend a lot more time and attention and focus on because it is clearly a pillar of what we want to do going forward. Client satisfaction at the end of the day becomes one of those critical drivers for a long-term success in a company in any product.

So do you think you have, you know, the necessary infrastructure and tools in place to measure that client satisfaction at the pace that you should be?

I think that we have many of those. Do I think we have all of them? I think that we probably don't have all of them, or at least I have not found all of them. But I believe that we have a significant, be able to understand it well and to be able to drive change.

But it sounds like there is room for improvement there.

Absolutely.

Absolutely. Then just

Steve, if I could just add--as we are consolidating our efforts under new management and sales and marketing and we are doing the same under technology. Dan is going to be making it one of his priorities, for sure, for us to create more of a balanced approach and synergistic approach in terms of implementation training and other areas, customer service, customer satisfaction. It is an initiative that we have in place. We know we have to improve their. But again, I'm not saying that many of the things we have done in the past were not correct. But what I am saying is that the compounding effect of the stimulus which created a huge growth surge in sales; detail on that is implementation, training and customer satisfaction. And I think probably as an organization we could've done a better job there in anticipating all of the needs, desires, wants, of a customer. It is an initiative now, one of our priorities in pushing it forward.

Great thanks.

Thank you.

David Larsen from Leerink Swann.

Hi guys, can you just sort of talk about your overall cost structure. Obviously revenue growth on a year-over-year basis is coming in a bit below the original guidance that was provided at the beginning of the year. Did you staff up based on your original expectations for revenue growth? If so, do you expect to reduce costs to the back half of the year or are we at a pretty good run rate based on what we've seen this quarter? Thanks.

Hi, this is Dan again. I am going to take a stab at this one as well. Clearly, one of the things that we want to continue to make sure of is that our cost structure is optimize. Then, the optimization is not only investing in the future but being at the right cost structure for the current revenue stream. So, the answer to that question is that it is a focus, it is an area that we--as we see trend lines changing on the revenue side. It is just good management practices to look at your expense methodology--you expense controls And to manage those appropriately. We are not, we have no definitive statement, we are going to specifically change costs line items. But it is absolutely a discipline that we are focused on to make sure that as we go forward our cost structure is in line with both our current revenue and sales activities as well as positioning us appropriately for future growth.

Great. Thanks very much. Just one more. As far as strategic acquisitions go, can you give us a sense, are you looking to gain market share or perhaps buy some sort of complementary technology?

Yet, as we have said in the past, and we've said again in our prepared statements, we look at complementary, supplementary type acquisitions and or something that gives us new entree into a product or service offering that we can use to cross sell within our installed base. An example would be, we have cited this in the past and I said in my statement, we want to expand our RCM capabilities beyond physician into the dental market as well as the hospital market. We are looking at opportunities to do that. We also want to add supplementation and expansion into our Hospital Solutions business. We are looking at opportunities along those lines as well.

Then there is an enormous number of new market opportunities with new early-stage product and service offering that we think would be able to enhance our capabilities to service accountable care organizations which are now in their very early stages. We are actively involved in a large number of them across the country. So that is the best way, I think, for us to summarize that.

That is very helpful. Thank you.

You bet. Thank you.

Richard Close from Avondale Partner.

I will try to keep it quick here since we are going so long. Steve Puckett, I was wondering if you could you talk a little bit about the hospital segment? I guess, revenues were down in the quarter year over year and profitability or operating profit down year over year. You called out some one times, I am not sure exactly what those are. Can you go into detail or provide more detail?

Let me take part of the question and I'll let Paul provide some other detail. I do want to let you know that I do not see anything as far as any trend or something like that, that is abnormal. We have 6 to 10 deals, I'd say, typically on a quarter and it is sort of what we have seen. Sometimes we are close to the 6, sometimes we are close to the 10 side. The previous quarter we had several other hospitals. I will say, we had one right on the edge that we have actually closed since then. So, I don't, just to tell you about the top-line number, I don't see a whole lot of change there at all. But I will let Paul handle the other piece you were talking about.

Hi, Richard. At times we may have different issues around timing or revenue recognition and sometimes you have some revenues that may be delayed or deferred due to various reasons that have come up from time to time and so we had some of that. We also had some credits that we did take during the quarter that we don't expect to be repeated. And so the sum of all that, this quarter should not be indicative of what is going to be happening going forward here. I think that should be the picture that you should be left with.

Okay. On the credits, any other details there? What were the credits for? Any help?

I don't want to get into the details at this time. Just understand it is not an expected going-forward issue.

Okay. Thank you.

Thank you. Operator, we will take one more question please.

David Windley from Jefferies.

Thanks for squeezing me in. So, in the reference earlier to hospitals wanting to push their inpatient vendor into the outpatient environment. I'm wondering if that is having a direct effect on the other comment that you made about not seeing the bigger deals in your pipeline and if so, can you quantify that?

I think the market condition on bigger deals in the pipeline have a lot to do with the fact that most analysts and industry reports are showing pretty clearly that the large group-practice market is being rapidly absorbed. It doesn't mean it is totally saturated but there are fewer and fewer of these opportunities made available to the marketplace. As we have seen with the large hospitals. You know, the large hospital systems are pretty much made a purchasing decision. Larger groups and mid- group practices were more sophisticated, most of them have made purchasing decisions. So, the reason that our activity levels continue to remain extremely high, but it is affecting our deal flow on the high end. It's because there is still a lot of market left, just a high end market that there is just simply less of. I think that has been pretty well established through a number of industry reports including reports out of CMS.

Steve, in your prepared remarks you talked about, or in the prepared remarks you talked about sales rep count is down, pipeline is down. There have been questions about cost structure. Is the sales force reorganization allowing you to be effective with fewer reps? Or is this a number that needs to go up from here?

You've got to remember the reorganization is less than a month old. So it is still evolving. But the future of the organization is going to be more reps, but all of the reps will be multi- product sellers. They will be selling every product line in the Company. It won't be business unit specific and hence, we believe that we will have the opportunities to do more multi-product selling. And then of course, we are developing and enhancing our internal operations to create leads for cross selling across every one of our product lines. Gary Voydanoff will be the champion of that, he was just promoted into this role less than a month ago. Again, David, if you are at our analyst day on November 5th, Gary is going to lay this out more clearly. But in the future we believe we'll be doing more multi-product selling, more cross-selling, we will be doing a better job taking advantage of the existing market and we will be doing it with more people.

Is a possible, just a dovetail on that lost thought, is the new management organization--or what about the new management organization, in a sense encourages more synergy between the inpatient division and the ambulatory division?

This is Dan, let me go ahead and take that. A couple of things. The first one is that for the first time all four of the business units report up to one person. So, from that perspective it is a lot easier for me to work with the division heads to affect basically a non-silo approach toward cross-selling. That is item number one. Number two is the development of shared services models across Steve Puckett's organization on the technology, and Gary's organization on the sales. These all cross division lines. These all provide opportunities and further enhance our ability to work together. So, we have really gone from a portfolio of company approach to a fully integrated approach. And even today, or even as early as now, we are beginning to see the results of that from enhanced cross-selling opportunities and executing against those opportunities.

Thank you. That is helpful. I appreciate it.

Okay, David, thank you. Just in summary I want to thank everyone for joining us on this call. We are extremely excited about this management team and our future. We will see most of you, I am sure, at our analyst day on November 5th. If there is a testimonial to our Company and NextGen product offering, our user group meeting which is in the middle of November, the numbers are starting to approach 5000 in terms of attendees. So there is an enormous interest level in us and what we are doing and the products and services offerings we are extending to the market. The foundation of the Company continues to be very strong.

I know we are going through a period here where we've got a lull. But I don't see that as our long-term situation. As a matter of fact, I think we are going to start seeing a pretty good reversal on that in near term. We are still a Company that has 68% recurring revenue, we have no debt, we produce a lot of cash. Our net income in operating income margins continue to sit at the top of our sector and our mission and goal is to, through our restructuring, through many of the new people you're going to meet on November 5th is to demonstrate to you that we have the right solutions a great people to build that pipeline back up. And to put the Company where it belongs, where it's historical tracking has been. And that is at the top of our sector. Again, I thank you very much and I look forward to seeing most of you on November 5th. Take care.

Ladies and gentlemen this concludes the conference call for today. Thank you for participating. You may now disconnect your line.