NextGen Healthcare Inc (NXGN) 2013 Q3 法說會逐字稿

Welcome to the Quality Systems fiscal 2013 third-quarter results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions)

This conference is being recorded today, Thursday, January 24, 2013. At this time, I would like to turn the conference over to Steven Plochocki, CEO of Quality Systems. Please go ahead, sir.

Thank you, Sadao, and welcome, everyone, to the Quality Systems 2013 fiscal third-quarter results call. With me this morning are Paul Holt, our CFO; Dan Morefield, our Chief Operating Officer; Steve Puckett, Executive Vice President of NextGen Hospital Solutions and our CTO; Donn Neufeld, Executive Vice President of Dental and EDI; 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 Securities laws including, without limitation, statements related to anticipated industry trends; the Company's plans, products, perspective and strategies, preliminary and projected; and capital equity initiatives to 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. We continue to execute on the restructuring plan we laid out and began in October 2012, which included the centralization of our sales and marketing efforts, as well as the business development and technology functions of the Organization. In addition, we've been strengthening our operational structure under the direction of recently-appointed Chief Operating Officer Dan Morefield.

All these initiatives are starting to gain traction. We are confident the anticipated benefits of these organizational changes and their impact on the top line, in our cost structure, and then that translation into the bottom line. Albeit early, we are beginning to see some impact from our reorganization as we continue to maximize and leverage our multi-product offering within the healthcare information technology marketplace.

We have set a new date for our analyst day. Originally scheduled to be held in November 2012, but postponed due to hurricane Sandy, the meeting has been rescheduled for Monday, May 6, 2013 at the Le Parker Meridien Hotel in New York City. More details will follow.

We also announced that 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, payment to the shareholders of record as of March 15, 2013 with an anticipated distribution date of April 5, 2013. The $0.175 per share cash dividend is pursuant to the Company's current policy to pay a regular 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 by the Board prior to the declaration and payment of each such quarterly dividend.

Our strategy to capture market opportunities for continued revenue and earnings growth in our marketplace is sound. We will continue to pursue significant opportunities to sell our electronic health record and complementary solutions. Industry estimates indicate that the addressable market for EHR solutions is 35% for physicians and hospitals on a greenfield basis. We are in the third year of government incentive payments to physicians and hospitals, and we anticipate continued opportunity in this market as incentive payments drive further adoption.

NextGen's ambulatory EHR currently is fourth out of 400 competitors in Medicare attestations, showing its strength and enabling our customers to demonstrate meaningful use. As the government's requirements for achieving meaningful use and receiving incentive payments become ever more stringent, with stage 2 certification and ICD10 coding compliance, we believe 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 solutions for sale to new customers. This will continue to be a major emphasis for the Company.

Over the last several years, we have sustained four business units led by experienced managers to provide focused leadership, to develop business plans, technology infrastructure required to successfully introduce new complementary software and services. At the same time, we have worked to tightly integrate many of these 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 win multi-solution deals with new customers.

QSI is at the forefront of enabling the new healthcare delivery models that are rapidly emerging, namely the accountable care organizations. 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 keep healthcare organizations meeting reporting needs for regulatory, clinical, and key financial performance indicators.

We see opportunity to grow our RCM Service business, as the industry seeks to reduce costs by outsourcing billing and 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. This will clearly be a fast-growing segment for us, and a major emphasis in the upcoming fiscal year.

With nine acquisitions in the last four years, we continually evaluate acquisition opportunities of all sizes. Our core part of the acquisition strategy is to use bolt-on acquisitions to fill a strategic gap or kick start an entree into a newer business line. For example, we recently acquired Matrix Management Solutions to expand our RCM offering, and we acquired the Poseidon Group to expand the emergency department capabilities of our hospital solution customers. We also have considered, and will continue to consider, larger, more transformative transactions. Regardless of the size of the transaction, we will continue to focus on those deals that will provide strategic benefits 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 move into our next fiscal year.

As we look ahead to capture growth opportunities, we're working to achieve cost efficiencies that will increase 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 225 technologists and engineers, significantly increasing the breadth and efficiency of our product development expertise. International expansion is another area of focus in our growth strategy, as evidenced by our first international distribution partnership that we've spoken to you about with DELL and Puerto Rico hospitals. These initiatives will allow us to move towards a successful long-term future in light of current market conditions that are changing.

I'll now turn it over to Paul.

Thanks, Steve, and hello, everyone. The Company recorded consolidated revenue of $114.5 million for our fiscal-2013 third quarter, an increase of 2% compared to a year-ago quarter revenue of $112.8 million. Our revenue results reflect growth in our recurring services revenue, including maintenance, RCI, EDI, and other services, being offset by a decline in system sales. Total services revenue grew 20% on a year-over-year basis to $85.3 million in the current quarter versus $71.1 million a year ago. Total systems sales declined by 30% to $29.2 million versus $41.6 million a year ago. Our services revenue is almost entirely recurring, and represented about 75% of total revenue in the December quarter versus 63% a year ago.

We're reporting fully diluted earnings per share of $0.26 versus $0.36 a year ago. Our earnings decline primarily reflects a mix change in revenue away from system sales to recurring services revenue, including RCM and EDI, which have lower gross margin compared to software. Our results were also impacted by investments we're making in our hospital business unit to build out infrastructure to support our growing customer base and capitalize on the opportunities in the small hospital space. While we're pleased with our growth in services revenue, we have significant opportunities to further penetrate our customer base, as many of our service offerings have not yet achieved a significant amount of penetration to date. Monte and Don will be providing more details on many of these opportunities later on our call.

Consolidated gross profit margin came in at 59.3%, down from 66% in the same quarter of last year. Our gross margin was down primarily due to decline in high-margin software revenue, and a change in revenue mix towards recurring revenue streams that I mentioned earlier.

Our total SG&A expanse grew by approximately $2.4 million compared to last year, reflecting added SG&A expanses, primarily from higher headcount and other expenses, partially offset by lower commissions expenses. Going forward, we're going to continue to diligently manage our operating expenditures, balancing our goals of achieving high operating efficiency while maintaining our ongoing commitment to invest in the future.

R&D expense declined approximately 6% to $7.8 million this quarter compared to $8.3 million in the prior year. This decline in expense reflects a higher rate of capitalization of software development expenditures. Total development spend in the current quarter, including amounts capitalized, was up 18% over prior year at $13.8 million compared to $11.7 million a year ago.

Moving on to taxes, our effective tax rate for the December quarter came in at [32.9%] versus 34.8% a year ago. Our current period tax rate reflects a larger benefit from the domestic manufacturers' tax credit, as well as lower state income taxes compared to the prior year. It's worth noting that our current quarter tax rate does not reflect any federal research and development tax credits. An extension of the tax credit was passed in January 2013, and as a result we will be entitled to take a full year of R&D credit next quarter; however, we're not including any benefit in our current tax provision.

I'm now going to turn over to our segment revenue and operating income performance. Note that as we progress in our process of restructuring our Company, our segment reporting may change or be modified in the future, consistent with how we ultimately structure the Company.

Moving on, NextGen ambulatory revenue, $85.8 million, is flat over the prior year. NextGen ambulatory operating income, $31 million, down 12% over the prior year. QSIDental revenue, $5.1 million, up 5% over prior year. QSIDental operating income, $1.3 million, up 104% over prior year. Hospital Solutions, $7.4 million, is down 26% over prior year. And Hospital Solutions recorded an operating loss of $1.3 million. Note those results also reflect investments being made in that business unit. RCM Services revenue, $16.3 million, up 35% over prior year. RCM operating income, $2.1 million; that's up 69% over prior year.

Moving on to our balance sheet. We ended the quarter with $106.7 million in cash and marketable securities, equal to about $1.80 per share, which is down from $122 million, or $2.05 per share at the start of the quarter. Note that at the end of this quarter, we elected to pay our fourth-quarter dividend of $10.4 million prior to the end of the quarter, as opposed to immediately after the quarter, resulting in our paying out dividend payments of approximately $20.8 million, or $0.35 per share, instead of our historical $0.175 per share, or $10.4 million. In addition, our current quarter also reflects approximately $1.4 million in cash payments related to earnouts for some of our prior acquisitions.

Total accounts receivable as of December 31 was $151.5 million. Our turnover of accounts receivable was 121 days. That's down eight days versus same quarter a year ago, and up just two days versus the prior quarter. Current deferred revenue declined $63 million compared to approximately $68 million last quarter. The primary driver of this decline in deferred revenue stems from a reduced amount of deferred implementation services, consistent with the drop in system sales which we've been experiencing in recent quarters.

Finally, I'm going to provide some non-cash expenses for the quarter. Total amortization of capitalized software, $2.4 million; amortization of intangible assets, $1.9 million; total depreciation expense, $1.7 million; and stock compensation expense, $0.6 million. Investing activities for the quarter -- internally generated capitalized software $6.0 million; and fixed assets was $2.3 million.

I want to thank you all for being on our call, your interest in our company. I'm going to turn things over to Dan Morefield.

Thanks, Paul, and hello to everybody. While NextGen ambulatory revenue is flat over the prior year, we are pleased that our services revenue continues to grow at 20% over the prior-year same quarter. This is attributed to solid execution of our cross-selling efforts in EDI, annual licenses, subscriptions, hostings, and other service offerings. We are also happy to report that the pilot program with Hanger continues to go well, and we expect to start the deployment later this year.

I was pleased to announce this quarter the appointment of NextGen and healthcare IT veteran Mike Lovett as Senior Vice President and General Manager of our ambulatory business unit, NextGen Healthcare. This move is the continuation of the Company restructuring announced last year. Mike has over 25 years of healthcare IT experience, including four years as a senior member of our sales organization. Mike brings unique skill and experience sets that include intimate knowledge of our products, services, and customers. Additionally, Mike has been added to the Company's executive committee.

As discussed in the Q&A session of the last earnings call, as part of our restructuring we continue to review our overall cost structure commensurate with the decelerating pace of our earnings growth. In particular, we are closely looking at our opportunities from cross business unit efficiencies.

At our user group meeting in November, which by the way included over 4,500 attendees and was our largest user group ever, we announced the general release of our newest EHR content, version 8.1. With a new user interface, standardized framework for all templates, and streamlined navigation, the 8 Series EHR content is faster and easier to use. This version will help providers set the stage for patient-centric care and other emerging delivery models. With the launch of the revolutionary 8 Series EHR content we have provided our clients with the best possible solution to meet their medical, administrative, and financial needs while preparing them for critical industry initiatives, such as meaningful use stage II, ICD10, collaborative care, and shifting reimbursement models.

Now, for a few of our quarterly operating metrics that we normally report on this call. The Company executed 131 arrangements on a consolidated basis versus 117 last quarter. Of the new arrangements, 74 were greenfield and the rest were replacements -- 74% were greenfield and the rest were replacements. We executed 46 SAS agreements during the quarter, which are included in the total of 131 arrangements. Discounting did not materially change in the quarter. As of 12/31, there are -- we had 110 quota-carrying sales and management positions, just slightly lower than the prior quarter of 112 quota-carrying sales and management positions.

Our pipeline is approximately $138 million, in line with last quarter's $140 million. That includes ambulatory, RCM, and inpatient. I'd 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 our industry.

With that, I'm going to turn the call over to Steve Puckett.

Thank you, Dan. The Hospital Solutions division sold another five hospitals this past quarter, and also had add-on sales of our ancillary systems, including our surgical product suite and new emergency department systems. We continue to see our customer base growing well past 200 hospital clients now, and most of the non-speciality hospitals have purchased our ambulatory product suite, as well. We now have about 60% of our installed hospital base installed side by side with our ambulatory product. Speciality hospitals continue to be a great match for our product portfolio, and they provide us opportunities to expand into urban and metropolitan markets, as well as our traditional rural areas.

Notably this past quarter is the release of a new version of our hospital product suite with additional functionality that will allow us to enter the greater-than-100-bed hospital market. We are currently implementing this version with our first community hospital of this size, and expect to have them live this year in order to obtain their meaningful use incentive payments. This marks a significant achievement in the evolution of the product line, and we're excited about the potential of entering this expanded market.

I mentioned last quarter that we were on track for all of our qualifying hospitals to achieve their meaningful use incentive payments, and I'm proud to report that we currently have a 100% attestation rate for all of those that qualify and have attempted attestation. Currently we are working with these same hospitals to allow them to achieve their stage 2 incentive payments at the end of this calendar year.

So, in closing, we continue to focus on the rural and community hospital market, and speciality hospitals, and we have now started the cross training between the hospital sales force and the established ambulatory ones. With the addition of more and more feet on the street, we believe we'll be included in many additional new opportunities than ever before.

Thank you for your time and attention, and now I'd like to turn it over to Donn.

Thank you, Steve. Good morning, everyone. We had continued success selling NextGen electronic dental record with the NextGen EHR and EPM, adding 10 new joint clients in the quarter. The quarter was also aided by the expansion of our large dental practice management company clients. The QSIDental pipeline is approximately $6.8 million.

EDI had record revenues in Q3. We continue to grow our core products of claims and statements, and have continued acceptance of our newer offerings across all of our business lines.

I'll now turn things over to Monte Sandler.

Thanks, Donn. Good morning, everyone. RCM Services revenue for the third quarter was $16.3 million, representing a 35% growth over the prior-year quarter. Operating income grew 69% over the same period. We continue to grow operating margin through revenue enhancement and cost reduction initiatives, led in large part to increased adoption of automation and the evolution of our best practice methodology that is focused on continuous improvement of service delivery to our customers.

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 not fully implemented remains strong, and our sales pipeline is yet again the highest it has been to date, thanks in large part to our growing sales focus and recent sales reorganization.

We continue to see that practices are concerned about their financial future as a result of pressures from ACA reforms and ICD10, 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 healthcare reimbursement models. I'm confident that we remain well positioned to help our providers navigate the changing environment, and optimize their revenue cycle with our full-service, all-payer, best-practice solution that's built on NextGen's industry-leading software platform. Thank you for your time and interest in our Company.

Sadao, we'd like to take questions at this time.

Thank you.

(Operator Instructions).

Our first question is from the line of Michael Cherny with ISI Group. Please go ahead.

I just want to dig in a little bit on the software weakness, it seemed to come down another 8% sequentially. As you look ahead to business, as you focus particularly on the reorganization of the Company, how do you get some clarity or visibility around a return to growth, particularly within system sales metrics?

Well, the initiatives that we rolled out beginning in October by combining our leadership under sales and marketing under one individual was to try to create a more enhanced ability to develop leads through a series of new initiatives.

Now, we know that there's a number of issues that are going to be facing the sector that the high end of the market, whether it be hospital or it be physicians, is pretty much made purchasing decisions already, so we're dealing with the mid-size to lower end of the markets in both of those categories. And I think some of the initiatives that we'll be rolling out that we'll be talking to you about very specifically in May will get us back on track in terms of at least upgrading our capabilities to be involved in more of these deals.

Now, what's happening on the tail end of this, though, is that we now also have an enhanced marketing expansion because we're dealing with two issues. We're trying to get the rest of healthcare electronically based. At the same time, ACOs are exploding all over the country. We've got -- I think there's 225 ACOs now. At the beginning of the month there were 125 and at the tail end of last quarter I think the first four reached certification.

So if you want to see a fast-moving area it's accountable care organizations and we're deeply engaged in providing software and product for them because, as you know, the physician base is going to be the key to a successful ACO. Managing patients in low-cost settings, keeping them out of higher-cost settings is going to be the key.

Many of our large group practices are either ACOs themselves or are highly instrumental and important in ACOs that are being formed today. So we think that we're going to see an expansion in terms of our capabilities to sell software as these ACO models continue to expand. There's still 35% of the market that has not yet adopted.

Great. Just along those lines, you talked a bit about investing as you refocus the Company and reorganization. As you think about some of the restructuring plans you do, are there any cost cut targets that you're focused on? Or is it more of an offset of investing in growth versus rationalizing some of the less necessary costs? Any specific financial target from that front you could give would be great.

We are not providing any specific targets associated with cost cutting or efficiencies. Cost cutting and efficiencies and cost rationalizations is really a culture. From our perspective I really look at the three Cs associated with these, which is the culture of expending and being prudent in your expenditures, following by putting in good controls within the organization, both of which we have really moved the needle on.

Then the third one is really looking at the cross-division efficiencies. And consistent with the restructuring of the Company from an organization that was really run as four independent business units to one efficient organization where we can get not only the cost efficiencies but the revenue efficiencies that come from cross-selling and selling multiple products every time we interact with a client. So, again, we have stated no and don't plan at this point to outline specific cost reduction targets.

Okay, thanks.

Thank you. Our next question is from the line of Ricky Goldwasser with Morgan Stanley. Please go ahead.

Can you provide us an update on your retention rate with HMA customers year to date as the transition to Athena started? And then in the past I think you expected to retain some of these clients so has you thought process of this changed in any way?

The HMA, which we talked about on the last call -- just to give a little history in HMA. In 2007 we received the opportunity to work with HMA physicians, owned and affiliated, of which there are over 1,200. In that period of time we were affiliated and still continue to be affiliated with them. We have gained about 400 physicians on our software and a little over 500 physicians that were engaged in our revenue cycle management processes.

New management came into HMA, wanted to expand the offering capabilities to their owned and affiliated positions, selected Athena and they're engaged now in that process. It's early in the process. There have been some conversions. There are other physician group practices that have stayed with us and are -- I guess are resisting the move and there are some conversions taking place on the RCM side.

It's too early to tell what the full impact of this could be but, yes, we've lost some business through that transition. But I always say as in all of these deals you have to take a look at them about a year out to see where the dust settles and the smoke clears.

Okay. And then I know that on the hospital side some investment impacted profitability, but if you excluded investment what was the operating profit on the segment, or what were the margins?

Yes, this is Paul. We're not going to get down to that level of granularity. I think that business unit is in a mode of expansion and we're building out infrastructure, we're gaining efficiencies. There's work to be done there, but I think at this point we're not going to really get into that kind of pro forma discussion.

Okay. Thank you.

Thank you. Our next question is from the line of Charles Ryee with Cowen and Company. Please go ahead.

Thanks. Good morning, guys.

Morning.

Just a couple questions here. First on the NextGen pipeline, $138 million, and I think you mentioned that it includes inpatient ambulatory RCM. When did you start putting the -- just to remind me when did you start putting the RCM also into the pipeline, because if I recall that was maybe only the last few quarters? Is that right to think of it that way?

No, Charles, the RCM became part of the pipeline when we brought RCM into the system back in 2008.

Okay, so then it was always in that number then?

Yes, it was always part of our pipeline, yes. The only area we don't include in the pipeline is our dental operations.

Okay. Then when I look -- if I had looked at what you just mention for the NextGen ambulatory revenue, $85.8 million, and it sounded like you're saying the services piece was up 20%. When I think of that I should think of EDI maintenance and other. That suggests that the system sales piece of ambulatory was down, was around $24 million, is that approximately right?

Yes, that holds true. What happened there is you had a shift from system sales. What was lost in system sales was replaced by the service revenues.

Right. So then what about like the SaaS piece? Does that show up in the other revenue line, or would that still show up in software?

That's in other. There are a number of other types of recurring subscription types of services that we have in that other category.

Can you remind me what the year-ago SaaS agreements were, the number of SAS engagements? I guess I can go back and look it up, I was wondering if you had that handy.

Not handy, I would go back to the transcript of the prior call.

Last question on RCM. Can you just remind us what percent of the existing NextGen base is using your RCM services and then maybe -- yes, that's the first question -- or that is the question.

You're asking the penetration rate --

Yes.

-- of RCM into our current base?

Yes.

It still remains low; it's in the single digits. Again, with our reorganization of the sales and the Company our focus is to continue to penetrate that customer base. So we see large opportunity to continue to grow, both within the existing customer base, as well as net new customers that are out in the market looking for our services.

Do you have a percentage for the number of the new engagements in the quarter? Like how many of your new client wins include both HER practice management and RCM?

I don't know if we have that for you. I think we can take that one as a follow up. From the RCM perspective, the majority of the deals that we're working on are within the existing customer base and we continue to be part of the discussion on net new opportunities as well.

Okay, great. Thank you.

Just a follow up to that, Charles. The restructuring and consolidation of our sales organization under a singular head is specifically going to benefit us in the cross-selling opportunities and the multi-product selling opportunities.

We have been disappointed in the past in our ability do that and now we're going to see -- we believe we're seeing the beginning signs of some really strong traction in terms of our 120 salesperson organization doing a much better job of cross-selling into our large install base, as well as doing more multi-product sales. This is going to be a key part of our strategy on a going-forward basis and I'm starting to like the progress we're making as more and more of our sales organization gets cross trained in these respective areas.

Thank you. Our next question is from the line of Gavin Weiss with JPMorgan. Please go ahead.

Just to look at the sales force headcount went down slightly, but if I look at software sales per rep that's obviously down significantly and the pipeline doesn't really seem to be ticking up here. What's really holding the sales force back? Is it still customer demand is waiting for more clarity on what they choose going forward, or is it just that you're still ramping up the new sales structure?

First of all we don't see a change in commission sales person number to be material. The difference between 110 and 112 is really not a material number. It'll fluctuate depending on hiring patterns and so forth.

To your second question, we have been relatively straightforward in highlighting that the reduction in large software sales has been declining as the adoption rate or the adoption has into that specific market the penetration has continued to go up. And so the natural math will then be that we'll see a greater deal of smaller sales reflected in the sales force. I would look at it just as a macro trend from an industry as a whole and one where consistent with everything that we have said and announced.

Okay. And then in terms of your Medline partnership, will you be training their sales force, or how will that work going forward?

Yes, in Medline right now -- we're right now actively engaged with Medline in cross-training their 1,000-plus sales organization in our 112-plus sales organization, so we're right now in the throes of that cross-training both ways.

Okay, and have you seen any ramp up in that yet, or is it still to come?

No, we just literally -- the ink just dried on the deal about 40 days ago and we're moving very rapidly towards the cross-training elements.

Okay.

We'll have more to report on that once we get some traction and actually get some material impact from it.

Okay. Great, thank you.

Thank you. Our next question is from the line of Jamie Stockton with Wells Fargo. Please go ahead.

I don't know if, Dan, you want to take this or someone else does -- but if you could give us an update on the new single database with a software platform. I think you guys have maybe been calling it NG7. Where does that stand? When do you think it's going go into beta? When would you expect it at this point to be released?

We are obviously very excited about that platform. We are not giving specific details out, but that platform is substantially underway and has been now for some time. One of the things I was going to mention is we are moving very forward with the new 8 Series part of our KBM product, which works with our current application, which is really fine tuned to be a predecessor right into that. So we're excited about that because it's part of a natural evolution of what we're doing between the products. So we'll give further details and maybe even some in the conference in May.

Okay. And then maybe just as a follow up to that, could you touch on your thoughts around how you're going to go through the transition? Are you going to be essentially pushing a client server version of all your solutions alongside a more true SaaS single database version at the same time? Are we going to be at a point in a year or two where the SaaS version, single database version, is going to be the main thing you're pushing?

Well, obviously we see the synergies of what you can do with that kind of a platform. I think that's also a great thing that we'll look into maybe discussing in May in more detail.

I would just add one more thing is, what we will do is look very carefully at the demand that we see from the market. And what this technology does is it gives us flexibility, and so this is -- the key would be is we will be able to provide multiple components but really focused on the demand of the market.

Okay, and then maybe one last one for Steve Puckett on the inpatient. You talked about the new functionality that was allowing you to go above 100 beds. Is there any color you can give us on that?

I'll just say in some of the acquisitions that we've done we had a great opportunity to move into the greater than the 100-bed market. When you do that, you obviously have more of a sophisticated feature set that's required when you get up to ICU units and those kind of things and the different interdepartmentals.

I think we have been spending -- we haven't talked much about it on these calls, but over the last year or so we've been enhancing the product line quite a bit on the inpatient side to be able to move up market in that capacity. So we're excited to have a partner in that process and are looking forward to having that come to fruition very shortly so that the meaningful use they're looking to do can be achieved this year.

Thank you.

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

Going back to Charles' question just to clarify, system sales within NextGen division looks like they were up about 25%, 26% sequentially?

Sequentially? We didn't discuss -- we've been talking about year-over-year results. You're asking about the just ambulatory sequential?

Movement in system sales. So $24 million -- $23.5 million, $24 million is the number that was discussed. Just wanted to clarify.

Yes, give me a little -- circle back, give me a minute to pull that up. We've been talking about year-over-year stuff and haven't gotten into sequential.

That absolute dollar number, is that correct for NextGen ambulatory system sales?

Well, you should have that -- we reported that last quarter, you should already have that number from our prior Q and you'll get it when we get the Q filed here shortly.

Okay. All right. And then, Steve, going back to the comment around five new hospitals added this quarter, I think you had added around nine this time last year, and this division I know was somewhat of a growth catalyst over the coming years and it seems like it's softening a bit. Is the saturation within the critical access up to all the way to say the 50-bed hospital marketplace increasing to the point where it's pushing you up in terms of number of beds and maybe this is a transition period and we should expect hospital solution revenues to start to reaccelerate, or any comments there?

Yes, a couple comments. First off, that market is wide open and I don't see any change and that's not impacting us in any way as far as the market availability there. I think if you look at the pure numbers that last year we brought to a live state, which was astronomical to me compared to the other folks in the industry.

Right now I think we've done -- and I haven't mentioned a lot about it -- we have a couple of SaaS deals into play and things like that. There's a lot of effort going into some different models that we have out there right now and I would say our group is heavily invested right now in getting the deals that we have actually sold, actually installed and completed out there, as well.

But I see for us -- I mentioned also that we are looking very forward to opening this up because, quite frankly, the way I feel about it is there are a lot of deals that are happening that they don't even know about us. And so that's the real opportunity that I think -- and including the market segment you're talking about, the smaller market -- as we have a lot of feet on the street over those 100-some people they're all interconnected right now and almost to touch every single hospital that's out there and there is a couple of people apart from that. So I'm looking forward to that.

We've just now got that underway where we've done the cross-training. It is a different sell between the hospital and the ambulatory so we're looking forward to seeing a lot of opportunities from that. So I don't see a significant shift to answer your question.

Okay. Is it fair to say that in your pipeline that the hospital end-market pipeline is it growing?

Well, I think you will see it growing as we get more folks on the street and we've also expanded the marketing just this last quarter in those areas, so I think you will see some of that.

All right, great. Thanks. Just last one, Steve, just thinking about your comments on potential acquisitions. Over the past year you've talked a little bit about specifically towards the revenue cycle technology side within the acute setting. Are there -- I'm assuming conversations continue to be ongoing. Any color you'd like to share just in terms of are these -- is it transitioning to smaller assets to fill the strategic holes like you've spoken about, smaller bolt-on as you had historically done? Or are you really starting to lean toward something quite transformational? Any commentary on that would be great. Thanks.

Well, Greg, in our prepared statement I think we were pretty clear on the fact that we're not going to be reckless. We have a history of doing acquisitions that we can assimilate, integrate into our organization where it doesn't create a lot of disruption. But we also have left the door open for doing something more transformational. We think revenue cycle management is going to be an explosive area because of the -- not just the ICD10 but then the movement to ICD11.

And then you've got to remember, we're less than a year away from Obamacare and nobody knows what that's going to really mean. But what we are seeing more and more in our large install base of physicians is their concern over cash flow as a result of ICD10 and maybe some of the nuances of healthcare reform under Obamacare. It's going to be an explosive area. We want to continue to grow it, we want to continue to expand it.

We've always said that we wanted to this year get into the revenue cycle management sector relative to dental, as well as hospitals, and we are engaged in discussions in those areas right now.

Okay, great. Thanks, guys.

Let me follow up with your other question, I've got the answer here. NextGen ambulatory system sales last quarter was $27 million, $24.5 million this quarter. That's your sequential system sales numbers there.

Okay, great. Thank you guys.

Thank you. Our next question is from the line of Ryan Daniels with William Blair. Please go ahead.

Hey, it's Andy O'Hara in for Ryan this morning. I had a quick question going back to the RCM Services. Can you give me more color specifically with regard to selling into the hospital market?

I'm sorry, for RCM services?

Yes, selling into the hospital market.

With our Hospital Solutions group?

Right.

Okay. So we believe that there's a lot of opportunity in that market segment in those customers. Our services and our focus are really around revenue optimization and providing services to help our customers achieve that, as well as getting the most out of our software platforms. So, we think there's a large opportunity in the hospital base to reduce costs, optimize revenue and maximize use of our technology. Again, with our sales reorganization we're starting to see a lot of growth and penetration throughout all those segments

Okay. Then of the 200-some hospital customers that you have, roughly how many are using RCM services at this point?

We don't have any today that are using our RCM services. Just for clarity purposes, I want to make sure you understand. We want to become engaged in the RCM sector for hospitals. We are not engaged in that presently, but we want to get into it. I just want to make sure that you understood that.

Okay.

We are -- Monte does have some strategic alliance relationships with RCM companies that engage in hospitals where we do co=bidding on our physician side with their hospital side to try to win deals, but we want our own opportunities in the hospital side and that's where we're engaged in discussions presently.

Okay. That's helpful. Then can you give any more color on your patient portal? Have you seen an uptick following the final stage 2 rules, or are a lot of customers still holding off because of the delay?

No, we are seeing an uptick there. That portal product, not only does it help satisfy meaningful use rules, it also creates efficiencies inside the practice and encourages greater engagement with the patient. So we have been seeing uptick and that is part of the growth that you're seeing in the other services revenue line.

All right. Thanks a lot, guys.

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

I wanted to go back to the idea of software sales and where we are in terms of them bottoming and get a sense for what you think. You've talked about ambulatory market having shifted away from -- the large physician practices is saturated. It sounds like on the inpatient side you're trying to move up market. Is this a demand issue, is the demand still there in your mind? Or if we can rank what are the issues on the demand side. Is it demand or is it the product that you need to realign or is it a service issue?

Let me paint the picture a little bit. As we all know and hopefully most of us know on this call, there's about 35% of the market on the hospital and combined physician side that have not yet adopted. The high end of the hospital market and the high end of the physician group practice market have pretty much made purchasing decisions. So we're taking out of the market these seven-figure opportunities and we're working more now with six-figure opportunities.

However, the evolution of accountable care organizations and their rapid expansion and with the fact that we have such a large installed base of large group practices around the country that are basic -- they're the primary movers of these ACOs, they're expanding and growing and adding group prac -- adding smaller practices, adding specialties, adding all the components they need to fulfill ACO requirements.

So we are continuing to capture the mid to small market, which is large -- which is just through our normal processes of responding to RFPs, our sales processes in local markets, the regional extension centers, the 62 that have been set up around the country where we're the third most applied software through regional extension center support that the government has outlined. If you take a look at the -- again, I'm going to point to the CMS reports on adastation.

There's 462 companies represented on those adastation reports. We rank fourth in terms of physicians that have attested. So we have a very strong position with over 4,200 group practices that are going to need additional products and services. So we are continuing to capture the mid to small market, which is large -- which is just through our normal processes of responding to RFPs, our sales processes in local markets, the regional extension centers, the 62 that have been set up around the country where we're the third most applied software through regional extension center support that the government has outlined.

If you take a look at the -- again, I'm going to point to the CMS reports on adastation. There's 462 companies represented on those adastation reports. We rank fourth in terms of physicians that have attested. So we have a very strong position with over 4,200 group practices that are going to need additional products and services.

Let me give you a flavor on ACOs. ACOs have five principal products that they need and we provide those; patient management, population management, analytics tools, regulatory reporting tools and clinical reporting tools. Those are the five principals that are needed in ACO systems. And for companies like us that have a large install base that's a whole new sales element for us in that market.

So as the adoption curve for the platform of electronic medical records is reaching fruition throughout the next year or two, the evolution of the accountable care organization is creating an entirely new selling opportunity for companies, particularly companies like us, that have existing install bases. And I'm going to reiterate that a lot in the next year because the installed base is the reason that we believe we're going to have a great opportunity through cross selling, multi-product selling, ACO product selling over the next year.

And it's also the same reason that those companies that don't have large install bases, the smaller providers, the ones who don't have the critical mass in their software development to meet ICD10 standards, or stage 2 certification, that's going to create an entire reselling market for large companies like us. We think there's a lot of changes coming down the path that are a little different than maybe the last two to three years, but they're all opportunities that'll benefit a company like us.

Okay, that's helpful. So just to sum that up I guess is it right to say that EHR, we should expect EHR demand to continue to soften but you expect a cross over, whether it's population management, reporting or analytics that's going to start to pick up. Is that right way to think of it?

Yes, I think as one thing starts winding down, other pieces started rolling up. Don't lose sight of the fact that because we've consolidated our organization in terms of sales and marketing, as Monte cited, revenue cycle management is going to be a huge growth area for us, huge.

Can you give us a sense of what demand you're seeing in terms of population management tools and reporting and analytics? Obviously still very early in the ACO life cycle so are they six months away from demand really picking, maybe even 12 to 18 months?

If you look at the evolution of ACOs, two months ago there were four certified ACOs. Around Christmas time there were 125 and now there's 245. So you're talking about something that's evolving extremely fast. Patient management and population management are the two key tools because the key to an accountable care organization being successful and being paid on a capitated basis is to ensure that patients are managed extremely well in low-cost settings.

So in other words, you do not want a patient to escalate into speciality care or the hospital, which means you have to do a great job of managing them at the primary care level. It's at that level that the software is the instrument by which the management of that patient will be attained. So we find this is stuff that's exploding all around us. It's growing very rapidly and, again, we're again at the very front end in early stages of ACO modeling and expansion.

Okay, great. Is there any way you can give us a sense for the demand you're seeing, whether it's in terms of revenue or maybe to early for revenue it's in pipeline in terms of these new tools?

Like I said, it's early. To be able to say that it's a material impact for a $460 million company like us we can't make that statement yet. But we see that as one of the areas that will grow very nicely for us in the upcoming 12 to 24 months.

All right, great. Thank you very much.

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

Yes, thank you for taking the questions. With respect to the RCM pipeline, I think you said that was record level. Is there any way as your business is transitioning that you could give us the percentage of the total pipeline that RCM is currently, or a rough estimate?

This is Dan. At this point in time we are not prepared to do that. And again, consistent with the fact that these opportunities continue to cross divisional lines, as Steve Puckett indicated we have a great percentage of our hospital clients also have ambulatory solutions. So when we look at the pipeline understanding that those pipeline figures go across division lines, so it's not something at this particular point in time that we think is something we're going do as to provide that level of detail.

Okay. Well since the model's transitioning from a service -- or from software to more service it would be helpful to investors and analysts if we could get some of that granularity. How about on the number of arrangements. You had 131 in the quarter, how many of those were multiple product sales?

Yes. Hey, Richard, this is Paul. At least a significant majority, high majority, say three-quarters are going to be -- when you say multi product I'm talking about both the EPM and EHR products. Is that what you are referring to?

No, I'm really referring to someone buying a practice management and ERH and they're also buying the revenue cycle services or a hospital that might be buying inpatient and ambulatory. What is the percentage of multi-product sales looking at it that way?

This is Steve Puckett. I can talk to you from the hospital side. It's almost eight out of ten times we are dealing with ambulatory because where there are hospitals there are clinics almost always associated with it. So for us I can tell you that much from our side.

Okay. Then I guess to piggyback finally on Bret's question, is there any sense in terms of magnitude of the market size of these ACO tools in terms of what the potential revenue is, as we look at the declining electronic health record opportunity and the software revenue associated from that, is the revenue potential from these ACO tools at the same size as the EHR and thus can sort of plug the hole as the boat's leaking? Just trying to get a better feel of where software potentially goes over the next year or so.

Well, I think it's difficult for all of us to predict that other than the fact that you've got one-fifth of the economy that is moving towards ACO modeling, and that's healthcare. Every one of the physician groups and hospitals and out patient facilities are going to become engaged in the 36 to 48 months in an ACO model and I just gave you the stats earlier on how fast it's evolving. Everyone of them are going to have to have these tools to participate in an ACO model. ¶ ACO modeling is just evolving now so I have not really seen -- Richard, to that point I have not seen anybody put out figures on what that can mean in terms of overall sales to sector, but venture to guess it's a multi, multi billion dollar opportunity for the sector.

And those ACO products, are those software as service or are those licensed software sales? Just trying to get a feel of if that -- all sudden you start seeing an increased demand and success selling these ACO products will it have the same margin profile as your electronic health records license margins?

Richard, this is Paul. There should be some -- may be some products that are more of a subscription type of a deal and some may be a software component so you may have some recurring type revenue opportunities there, as well as software opportunities, but it's still a little early.

Okay, thank you.

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

Maybe, Steve, just start with a big picture question. Can you tell us what the portion of the Company's NextGen system sales are coming from what I would call health system clients? And this tacks onto the question earlier whoever asked about HMA, just because we're seeing a lot of health systems move towards the integrated infrastructure you guys have. HMA is going away, [Scott & White] will likely go away, but there's still [Expander] and [Finston & Baptist], so what's the Company's exposure to health systems at this point?

We have 4,200 group practices. Many of them are part of health systems, yes. The ones that ere -- it's very difficult to assess on a moving playing field exactly where everybody's going to end up or what everybody's going to do. Our active engagement with our large customers have them all continuing to buy additional software, additional products, additional services as they're moving rapidly towards some basis of creating ACO modeling.

I imagine there's always some form of attrition. I think if we were to tell you in our replacements who we're replacing you might be a little surprised. There is a lot of movement in the market. But again, companies like us who have large install bases I would venture to guess that almost every one of our large customers are buying additional software almost every quarter.

So it's difficult to tell. I don't know. Anything's possible. But I will say, though, that we're starting -- not just starting, we're continuing to see the additional growth of our largest customers expanding and trying -- just as we are, trying to navigate the waters and figure out where they fit in healthcare and how they can get ahead of the curve to capturing a certification on accountable care so they can become actively engaged in this modern era of healthcare.

Okay, that's helpful and a couple of bean counting questions for Paul. Paul, with respect to the NextGen system sales in the quarter were there any big outliers that contributed outside to the quarter? Like Hanger was mentioned during the call. I know people are highlighting the sequential improvement in the NextGen system sales, I'm trying to figure out if there were any one-off contributors in the quarter?

Oh, wait a second. I think that's incorrect. There was not a sequential improvement in NextGen ambulatory system sales. What I mentioned earlier was prior quarter of $27 million verses $24.5 million this quarter, so I make sure that's understood. No, I don't have any large outliers to report, Hanger is still something that we're looking at in the future.

Okay,

As we had indicated on Hanger, and I think Dan alluded to, is that we anticipate getting software benefit from Hanger beginning probably late in our fourth quarter or certainly by early summer next year.

Okay. And then what is the average revenue recognition duration of the software that's being sold at this point and how has it changed as the mix of business has evolved? If I look at the software sales -- software and hardware sales in the quarter of just shy of $22 million and if I look at that compared to the year-ago period of $35 million, has the dura -- has the RevRec duration changed much given the mix of business?

Well, no, if you -- we don't have a big cha -- no, there is no change in the revenue recognition. Certain arrangements may have elements that will have you defer your revenue, but those are more on a case by case basis. You can't really get into some kind of a systematic discussion or generalization. We did have one opportunity that was structured a little differently that will push revenue out over a longer period of time but that was a more unique situation. So it's a little hard to make generalizations like that about how revenue recognition's being stretched or changing.

The number of SaaS arrangements I think is encouraging for the long term, but that kind of revenue, as I talk about from time to time, is something more of freight train. It takes a while to really get the train moving and it's still not a huge contributor to revenue. However, it is slowly growing and that is the kind of revenue that's recurring and has better visibility.

Okay, that's helpful. Thank you.

Sadao, we'll take one more question, please.

Thank you. Our last question will be from the line of Dave Windley with Jeffrey & Company. Please go ahead.

Good morning, this is [Shaun Gize] on for Dave. Recently one of your larger competitors debued a full-service RCM solution for 2.9% of collections and I'm just curious how that compares to what your current pricing is what is this factor the aggressiveness of this action does that affect your outlook on RCM at all?

This is Monte. So I think the devil's in the details. I think you really have to look at what the service offering includes and doesn't include, the level of service. I would tell you that our offering, as you've heard me speak about every quarter in my prepared comments, is a full-service tailored approach. Its backbone is our award-winning software that is high feature, high function and our service offering is very comprehensive.

That said, I will tell you that our pricing is extremely competitive in the market place and we go head to head against competitors that have scaled down offerings, cookie cutter offerings, all the time and we're winning those deals on both price service, return on investment, et cetera.

So we're very competitive. Our offering is much more comprehensive. And again, you've also heard me report that our margin expansion continues to improve every quarter. So we continue to make strides to get more efficient and effective through automation, through best practice methodology, and remain extremely competitive in the market.

Okay. And then if we look at the RCM revenue for the quarter and actually on a year-to-date basis and I back out with the contribution you guys outlined from [Matrix] it looks like organically the growth there has been pretty slow. Is that because Matrix's isn't growing as quick as you thought, or is that because the core RCM business isn't performing as expected?

Well I think we're focused on our sales and marketing efforts. We've restructured that throughout the organization. You continue to hear us talk about cross selling and multi-product sales. Again, the reorganization of that team. So I think you're going to see that continue to improve. Our pipeline has improved tremendously through those efforts and I think you're going to continue to see growth. The market is more interested every day in our offering and our ability to allow our customers to focus on achievable meaningful use, adoption of ICD10 while we take care of back office RCM services. We're making a lot of strides in our reorg, in our pipeline and we have a heavy focus on that moving forward.

And just lastly going back to the comment on your expectation for more smaller deals in the future, that suggests to me it necessities the need for a larger sales force rather than a smaller. Is some considerable hiring on the horizon there?

Well, we have -- our addressing of mid to small group practices has always been part of our pattern. We have an inside sales organization that deals directly with leads off of that. We have the -- we're one of the three primary software's that are applied through the 62 regional extension centers around the United States. If you remember, the regional extension centers were primarily set up by the government to aid and assist the stand alone or small group practice.

Then of course we have 42 reseller arrangements. In a reseller arrangement we sell bulk blocks of our licenses to resellers and majority of the application of the licenses are to small doctors and small practices. If they do engage in something larger they typically hand the ball off to us. So we've had active, proactive initiatives towards that mid- to small-practice all along. And we, of course, through our consolidation of sales and through our new marketing initiatives that we'll talk more in detail about in May, we'll be even having a stronger approach to that remaining 35% of the market that has yet to adopt.

All right, that's helpful. Thank you very much.

Thank you. All right. Well, thank you everyone for today. I think general themes to take away from the things that we're working on. First off, we began our restructuring in October, extended it into November and even Dan this morning announced an addition to executive committee of Mike Lovett in our ambulatory sector.

So we are still engaged in the process of restructuring the Company. So we're early in that process. I think the things to point to and the things we feel very confident in is that the restructuring of the sales under a singular head, selling all products and services and being cross trained in those areas will improve our growth.

Second, the areas that are being addressed through Dan and his organization and his team and the division leaders in terms of cost savings and cost efficiencies in bringing certain elements of our organization together operationally will result in a lower cost base for us and that those two combinations will enhance our bottom line. And we will give you far more detail on that on May 6 when we see all of you at the Meridian in New York. So again thank you for your support and we look forward to seeing you in our future travels. Thanks.

Thank you. And ladies and gentlemen, that does conclude our conference for today. If you'd like listen to replay of today's conference please dial 303-590-3030 or 1-800-406-7325. The access code is 4591712 followed by the pound sign. Thank you for your participation. You may now disconnect.