NextGen Healthcare Inc (NXGN) 2014 Q4 法說會逐字稿

Welcome to Quality Systems Incorporated FY14 fourth-quarter and year-end results conference call. Hosting the call today from Quality Systems is Steven T. Plochocki, President and Chief Executive Officer. Today's call is being recorded.

(Operator Instructions)

It is now my pleasure to turn the floor over to Steven T. Plochocki, President and Chief Executive Officer. You may begin.

Thank you, Maria, and welcome, everyone, to the Quality Systems FY14 fourth-quarter and year-end results call. With me this morning are Paul Holt, our Chief Financial Officer; Dan Morefield, our Chief Operating Officer; Monte Sandler, the Executive Vice President of RCM Services; and Gary Voydanoff, our Executive Vice President of Sales and Marketing.

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 principles. I will provide some opening comments and then turn it over to the team.

Revenues for the FY14 fourth quarter reached $115.2 million, up 4% when compared to $111.3 million for FY13 fourth quarter. Net income for the 2014 fourth quarter was $5.2 million, up from a net loss of $4.1 million reported in the same period last year.

On a GAAP basis, fully diluted earnings per share was $0.09 in the fourth quarter of FY14 versus fully diluted loss per share of $0.07 for the 2013 fourth quarter. On a non-GAAP basis fully diluted earnings per share for the FY14 fourth quarter was $0.12, a decline of 50% from $0.24 for the comparable quarter a year ago.

During the FY14 fourth quarter, we saw increases in system sales, revenue, bookings, and pipeline when compared to the FY14 third quarter. Revenues reached $444.7 million for the fiscal year ended March 31, 2014, a decrease of 3% when compared to $460.2 million for the 2013 fiscal year ended March 31, 2013.

The recurring revenue base reached $357.9 million for the fiscal year-end 2014, where we now sit at 81% of our business as recurring. Net income for FY14 was $15.7 million, a decrease of 63% when compared with net income of $42.7 million for FY13.

On a GAAP basis, fully diluted earnings per share for the FY14 was $0.26, down 64% from $0.72 reported in the FY13. On a non-GAAP basis, fully diluted earnings per share for FY14 was $0.70, a decline of 39% from $1.14% for the comparable period a year ago. Non-GAAP fully diluted earnings per share is reconciled through its corresponding GAAP measure at the end of this release.

We ended this year with a strong liquidity position including $113.8 million of cash investments. We are greatly encouraged by the progress we are seeing this quarter resulting from our dedicated marketing and sales efforts which are now positively impacting our system sales, our revenue, our bookings and our pipeline growth.

The improvement was also fueled by our new Mirth product line and our growth and revenue cycle management businesses which both will be two growth drivers for us this upcoming FY15. We ended the year in a very strong cash position, which affords us opportunity as we look ahead to expand our business. We are confident that the programs and initiatives we have put in place over the past several quarters will further enhance the Company's position as the next fiscal year unwinds.

In other news, Jeffrey H. Margolis was named to our Board of Directors. This is effective May 28, 2014. He was also appointed to serve on the Board's transaction committee.

Margolis is a seasoned healthcare executive having dedicated more than 25 years to the industry. Currently he is Chairman and Chief Executive Officer of WellTok Incorporated, an early-stage healthcare consumer engagement and platform as a service enterprise.

He founded and served as Chairman and Chief Executive Officer of TriZetto Corporation for 13 years and 12 years respectively beginning in 1997. TriZetto, a recognized leader in the provision of healthcare IT solutions for payers and providers, became a publicly traded company in 1999 and significantly grew revenues and profitability for approximately nine years before becoming a private entity in 2008, a transaction led by Apex Partners.

Margolis concluded his role with TriZetto in 2011 and is Chairman emeritus. During 2012 and 2013, he served as a senior executive advisor to the Oliver Wyman Health Innovation Center, an organization that identifies and disseminates ideas and best practices that aim to transform healthcare. He is also a published author, including his most recent book, The Healthcare Cure.

Margolis also serves on a number of for-profit, not-for-profit boards. For-profit boards include healthcare analytics company Predilytics, an Irvine-based population healthcare management company. Nonprofit boards include Crohn's and Colitis Foundation of America and Hoag Hospital in Newport Beach, California.

Also serves as an advisory board member of the University of California at Irvine's Center for Healthcare Management Policy as well as UCI's Center for Digital Transformation. Additionally, he is a member of the Board of Governors at Cedar Sinai in Los Angeles. Jeff earned his bachelor's degree in business administration and management information systems with high honors at the University of Illinois in 1984 and holds CPA certificates currently inactive in Colorado and Illinois.

As a healthcare industry veteran, Jeff brings extensive expertise to our Board. His previous accomplishments and experience are going to bode well for our Company as we continue to play a key role in the evolving healthcare information technology marketplace. All of us on management welcome Jeff to the Board, and we look forward to working with him in the future and looking forward to the contributions he will make in his new role.

Our Board of Directors declared a quarterly cash dividend of $0.175 per share on the Company's outstanding shares of common stock payable to shareholders of record as of June 13, 2014 with an anticipated distribution date of July 3, 2014. 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 Board review and approval and establishment of record and distribution dates by the Board prior to declaration and payment of each quarterly dividend.

The Company will hold its 2014 annual shareholders meeting on Monday, August 11 at 1 PM California time. The meeting will be held at the Irvine Marriott, 18000 Von Karman Avenue, Irvine, California. And the holders of record of June 16, 2014 are eligible to vote and attend.

Proxy materials in the 2014 annual report will be made available to shareholders of record and will also be posted on the Company's website soon. We're very positive with the progress we have made to date, and I will turn it now over to Paul who will take you through a deeper dive into the financials and onto the rest of the team.

Thanks, Steve, and hello, everyone, and just want to say I'm looking forward to seeing many of you at our upcoming analyst day in New York next week. I am happy to report consolidated fourth-quarter revenue of $115.2 million, which as Steve indicated was up 4% over prior year and 6% over last quarter, $108.9 million.

The principal driver of the revenue growth on a year-over-year and sequential basis came principally from recurring service revenue streams including maintenance EDI and other services. This category as a whole grew 7% versus the prior year to $93.5 million versus $87 million a year ago.

Our other services revenue category is being bolstered by growth in Mirth-related subscription and SaaS revenue as well as growth in other recurring revenue streams of NextGen such as patient quarterly subscriptions. Our system sales revenue of $21.7 million was down 11% on a year-over-year basis compared to last year's $24.3 million. However, on a sequential basis, our system sales was up, 13% from last quarter's $19.2 million.

Our total bookings of software and services including RCM was $43.1 million, which is up $41.6 million from last quarter and down from $47.6 million a year ago. Our consolidated gross profit margin this quarter came in at 54% versus 57% a year ago.

Year-over-year gross margin declined, primarily due to a combination of less higher-margin software versus prior year, higher amortization cost related to prior capitalized software development -- that is related to the release of our version 5.8 which happened last quarter -- as well as negative margins and implementation and training tied to a build out of resources we performed in anticipation of higher demand for services related to upgrading our customer base on our ICD-10 compliant version of our software 5.8.

Lack of demand for such services was partly due to an extension of time granted to convert to the new billing code set resulting in less demand than anticipated. Beginning in April, we adjusted our internal resources to more closely align to current demand levels which is expected to significantly improve profitability in this category.

Our SG&A expense increased slightly by $0.4 million to $38.7 million compared to $38.3 million a year ago. This increase was driven primarily by salaries benefits and marketing expenses, which is partially offset -- the majority offset by a reduction in bad debt expense.

Contributing to our lower bad debt expense was a significant improvement in the turnover of our Accounts Receivable as well as an overall improvement in our hospital unit in this area. Our turnover of Accounts Receivable days outstanding declined to 87 for the current quarter versus 122 days a year ago.

Our R&D expense increased to $15.1 million versus $8.2 million a year ago. This large increase in net expense primarily reflects a reduction in the amount of development costs being capitalized, which declined by approximately $7.7 million compared to a year ago. The decline in capitalized software development cost was driven by several factors including the use of Agile Software development which are generally not capitalizable, the timing of projects reaching technological feasibility after our major version release last quarter, and the secession of capitalization of software development in the hospital unit due to the impairment of intangible assets which we recorded last quarter.

Our commitment to continued investment in product development is going to expand along with our Mirth acquisition, opening up emerging strategic opportunities to accelerate product development efforts. We're excited about the strategic opportunities surrounding our operability, Population Health management and cloud-based applications.

We would like to note that we believe in general analyst estimates for our Company will likely fail to consider the extent of our current R&D investments and corresponding expense levels which currently represent approximately 13% to 15% of revenue. This level far exceeds the levels we have been reporting in prior years.

As a result, we think the earnings per share may be overstated by consensus estimates in the near term. However as we continue to execute on the growth and technology strategies we have outlined on this call, we believe we will be able to deliver stronger results for shareholders in the long term.

To be clear, these comments are forward-looking statements and not intended as guidance. The Company does not have a practice of providing guidance to its investors or providing comfort with recent analyst estimates. These comments reflect our current expectations about the business, and we will not be providing updates to these comments or any forward-looking statements whether as a result of new information, future events or otherwise.

Moving to our taxes, our effective tax rate for this quarter was 28.5% compared to 19.1% a year ago. The increase in our effective tax rate relative to last year was primarily due to the impact of the reenactment of the R&D tax credit last year, which is retroactively reinstated last year, which would significantly reduce our tax rate in that year-ago period.

On a GAAP basis, our fully diluted earnings per share was $0.09, which is an increase compared to a loss of $0.07 per share we reported a year ago. Our year-over-year increase in earnings per share was primarily driven by the fact that we had an impairment charge in our hospital unit in the prior-year quarter, which was somewhat offset by large system sales and increased R&D expenses.

On a non-GAAP basis, our fully diluted earnings per share for the fiscal fourth quarter was $0.12, a decline of 50% from $0.24 we reported a year ago. This is principally related to a decline in system sales and higher R&D expenses, partially offset by increased recurring services revenue.

Our cash and cash equivalents plus marketable securities ended the quarter at over $113 million, which is up about $20 million from the $94 million we recorded at the start of the quarter. This is principally a result of outstanding performance in driving our DSOs down this quarter which added to our cash flows from operations.

Our turnover receivables improved 87 days versus 106 days last quarter and 122 days a year ago. I would like to note that cash flows from operations grew to $34.1 million this quarter compared to $23.3 million a year ago.

Moving on to our segment results, I'm going to report the -- each of our four segments revenue and operating profit or loss. NextGen ambulatory, $91 million and an operating profit of $31.4 million. Our dental business unit $4.7 million in revenue, operating profit of $0.2 million; hospital unit $2.9 million in revenue, operating loss of $5.9 million; and RCM unit as a whole $16.6 million, operating profit of $0.5 million.

For those of you who are tracking this, I will provide a non-cash expenses for the quarter. Amortization of capitalized software $3 million, amortization of intangible assets $2 million, depreciation expense $2.2 million, and stock compensation expense $0.7 million. Investing activities for the quarter as follows: $1.9 million for capitalized software and $0.5 million for fixed assets.

So thank you again for your interest in our Company. We will see you next week. I will turn things over to Dan Morefield.

Thanks, Paul. And good morning, everybody. I am pleased to report that the ambulatory division finished Q4 with the highest revenue in five quarters before the inclusion of Mirth. Including Mirth, the total revenue increased over 8% quarter over quarter and over 6% over the prior year.

All major revenue categories reported in divisions were up quarter over quarter, mostly attributable to higher software sales, higher training and installation revenue combined with higher consulting and maintenance. In particular, the maintenance revenue was up 4% over the prior period, and up approximately 5% year over prior year.

The professional consulting group booked approximately $2 million in new engagements during Q4 and just over $9 million in new bookings for the year. That represents a 36% increase year-over-year. We believe the revenue in FY15 will be positively impacted as we fulfill those engagements and the consulting sales continue to increase.

During Q4, we saw the pace of clients upgrading to the latest version of the application accelerate. We have not seen a material change in the pace of upgrades due to the delay of ICD-10 or various meaningful use changes. As such, utilization rates of our implementation and consulting teams continue to rise.

In February, we announced a bilateral agreement with Cerner certifying that our systems will have bidirectional data interoperability. This agreement is one example of our commitment to creating a real data fluidity throughout the healthcare delivery organizations. Our investment in Mirth and our pursuit of close relationships with other vendors such as these are key elements in providing solutions that integrated -- that deliver integrated networks ACOs and other healthcare providers require.

Regarding Mirth, during Q4 we completed a Mirth Connect project for Bio-Rad, a global laboratory company servicing life science research in clinical diagnostic markets, which contributed over $700,000 implementation revenue for the quarter. Also during the quarter, the Mirth team focused development efforts on achieving compliance as an ONC 2014 edition EHR module for hospitals. This certification was awarded just after the close of the quarter.

Now that Mirth has been part of QSI for two full quarters, we are seeing the acceleration of the incorporation of their product offerings with ours. Those of you who attended our investor conference in New York next week will hear more on the subject from a number of our customers.

On the separate subject, we had previously announced our restructuring of the Company operations to be more efficient and provide for the acceleration of investments into areas of growth and into our technology. As an example of this initiative, over the last year we impacted well over 160 positions. We continue to focus on cost rationalization throughout the organization.

Moving on to hospital solutions. There are four main areas of note regarding operations in the past quarter. First the division made good progress in upgrading current clients to NextGen inpatient clinicals version 2.6 as part of helping clients to attest to Meaningful Use stage two. In addition to regulatory requirements, version 2.6 also represents additional improved functionality in several key areas of clinical workflow that will help physicians and nursing staff provide better care for their patients.

Secondly, we have seen an uptick in bookings of approximately $2 million from additional products and service related to such upgrades. Each iteration of Meaningful Use program expands the level of functionality and data exchange needed and in many cases has resulted in add-on sales for new software modules, interfaces and consulting.

Third, the division has had renewed success around its emergency department application as punctuated by a large deal closed in the quarter with DaVita Health. Renewed focus on this application has resulted in an increased pipeline of opportunities both for existing clients and another competitor installation.

Lastly as I mentioned before, the Company has made an investment this last year in personal to accelerate the completion of pre-existing backlog of implementation and improved client satisfaction. We have made progress to the point where we have now started to reappoint staff and resources elsewhere. With that, I will turn the call over to Monte Sandler.

Thanks, Dan. Good morning everyone. RCM services revenue for the fourth quarter was $16.6 million, resulting in flat growth over the prior year, largely driven by accounting treatment of certain revenue and an inordinate amount of increment weather this winter and a continued shift of payment responsibility to patients thereby elongating the collection cycle as deductibles reset at the beginning of the calendar year.

FY14 revenue of $68.1 million represents a 6% growth over prior year. As we previously discussed, we have managed through the loss of HMA, a historically large RCM client this past year. But for the loss of this account, we believe that RCM growth would have exceeded 20% for the fiscal year.

Additionally, we realized a 29% growth in FY14 bookings and continue to see strong interest in the market for multiple product sales bundled as a part of our recurring RCM service offering. Our backlog of signed deals not implemented continues to grow over the prior year, giving continued confidence in the direction of the business.

Our RCM pipeline continues to grow as our customers and the overall market learn about our comprehensive service offerings. We continue to invest in the marketing of RCM Services both to our existing ambulatory customer base and the market at large, and our overall Company messaging now includes RCM as a key component of our products and services.

Finally, I am pleased to report that we are close to executing our first hospital RCM contract where we will be providing revenue cycle outsourcing services to our hospital customer base. I'm excited to bring the service to market with a focus on helping our hospital customers optimize their revenue and maximize the use of our hospital software similar to what we have accomplished on the ambulatory side.

I remain optimistic about the direction of the RCM business and continue to feel confident that our tailored RCM services driven by people process and technology make us a great solution to help our customers successfully navigate the complex and ever-changing healthcare environment.

Thank you for your time and interest in our Company. I look forward to seeing many of you at our analyst a in New York on Monday. I will now turn it up to Gary.

Thanks, Monte. Good morning everyone. Nice to be with you all again.

FY14 presented a variety of external challenges to vendors in the HIT space, but it's exciting to see our repositioning and focus on areas such as RCM, Population Health and interoperability are having a positive impact on sales and marketing efforts in both net new deals and cross-selling into our client base. Despite the delay in the adoption of ICD-10, our RCM and professional consulting services enjoyed solid results in the sales of those service lines in Q4.

Our diversification of service offerings and the inclusion of our full-line software products in RCM sales have played a big part of our growth in these areas. With the ICD-10 deadline being pushed back, we still see the demand from clients moving to our 5883 platform and MU2 related products such as patient portal along with the consulting services related to the upgrades.

Our fiscal year-end ended with a very positive Mirth growth story. The synergy between the two companies is even better than anticipated. Their teams are working closely now with a NextGen sales team talking about how the Mirth technology stack can solve interoperability issues for current NextGen clients and net new prospects.

The Mirth tools were instrumental in helping close one of our significant NextGen ambulatory deals in Q4 that I will talk about shortly. Within a few short weeks after we introduced Mirth to the Behavioral Health Information Network of Arizona, we were able to leverage the NextGen and Mirth technology to successfully power the first statewide behavioral health exchange in the country. We're looking forward to a great NextGen Mirth story in FY15 as we drive new marketing campaigns to tell the story -- the Mirth story of both next generation and net new prospects.

As we introduce our new cloud enabled solutions late this fall, what you all know currently as NG7, the importance of the Mirth technology will become even more evident as interoperability will be as integrated as practice management and EHR are today. We're at the beginning of a move toward value -based medicine, and likewise we are seeing interest level in our Population Health and collaborative care tools on the rise.

The underlying Mirth technology integrated with NextGen EPM EHR will give us a superior platform for collaborative care solving one of the major issues in the market, which is cross-platform interoperability. Mirth care, along with the Mirth results CDR provides a vendor-neutral enterprise-class care coordination and chronic disease management platform that can be purchased standalone today.

NextGen share powered by Mirth will be in general release in June and will provide the ability to exchange data between NextGen systems and non NextGen EHRs that are MU2 certified and connected to a certified [hisp]. NextGen share will solve a fundamental interoperability problem that currently plagues third-party Population Health vendors, and you can't collaborate if you can't connect. With less than 1% of our client base using Population Health management tools today, we have a huge Greenfield opportunity that's beginning to ramp up much like the early days of EHR deployment.

Our product road map for collaborative care is aggressive, filled with new product releases for the fall and our fourth quarter. New beta clients are excited about the collaboration with us and the products they will be road testing toward a general release near our national user group event this coming November. Clients are learning of our road map now and making plans to budget for the new products.

Our marketing efforts continue to ramp up to support the brand awareness of all of our business units. Messaging and a variety of campaigns are underway or about to be kicked off to drive awareness of our collaborative care Population Health management solutions, the Mirth product line, our inpatient ED solution, and increased RCM penetration, which is still at only 6% of our client base today.

We continue to see solid lead activity fueling new opportunities as a result of the tireless work and creativity of our marketing team. The combined division pipeline is stable and sits at $155 million today, and increase over Q3.

We finished our quarter with positive results, and I would like to mention a few of the notable success stories as we always do. The RCM sales effort resulted in signing important contracts with Centegra Primary Care, Cherokee Health Systems and Growing Child Pediatrics.

The Mirth team signed an order with the state of Utah HIE. The sales team renewed our contract with the state of Michigan Department of Corrections, signed new contracts Western Psychological and Counseling Services and Aveta Health.

Aveta Health is a system of two critical access hospitals with nearly 1000 employees as well as over 50 physicians serving Crawford and Richland counties in Ohio. This deal is particularly significant in that it was a cross sell of our ambulatory EPM and EHR as well as our ED solution, was a strategic replacement sale, and the Mirth Connect capabilities influenced the solution architecture.

And finally, the Company executed 102 new arrangements on a consolidated basis versus 100 last quarter. 73% of the new arrangements were Greenfield and 27% were replacements. This [counting] did not materially change in the quarter, and as of 3/31/2014, there are 134 quota carrying sales and management positions. There was no material increase in the ambulatory staff over Q3.

With that, I'd like to thank you for your time and continued interest. Maria, I'd like to turn it over to you for questions.

(Operator Instructions)

Michael Cherny of ISI Group.

This is Elizabeth Anderson in for Michael Cherny. I was just wondering, I know obviously with the start of 2015, if you could provide any color or things to keep in mind for 2015 on the gross margin line. Your comments on the OpEx were helpful.

Gross margin line really again, this is Paul. That is quite a bit of a mix story as it typically is for us. Software has very high margins. Other services will have lower margins.

So we don't have a formal policy of providing guidance, so we're not going to start doing that now, but just know that the important factors there are going to be mix, and really I would say mix is the number one piece. But the level of amortization of capitalized software -- we have reached that level, that will be somewhat consistent, but outside of that, you have to look at mix.

Great, thanks so much.

Jamie Stockton of Wells Fargo.

Thanks, good morning.

Good morning.

Thanks for taking my questions. Maybe the first one, just on the inpatient business, it seems like the system sales line there is probably still negative given where the revenue shipped out. And my question is basically how long should we expect that to continue?

It seems like there is a lever for profitability to improve once that bounces back. If you could give us some color on that, that would be great.

Hi Jamie, this is Dan. Regarding the system sales line, clearly that is -- the components of the system sales line include true system sales, implementation sales, hardware sales, and various returns either for goodwill or return reserves. So it's a combination of all of those that drive that particular line over time.

As I mentioned before, there are pieces that would drive that to a greater extent, are the additional add-on sales, the emergency department sales that we are seeing more and more of, and the continued or the increased client satisfaction with the existing product mix. Some of the things that might offset that a little bit is as we continue to work down the backlog of training and implementation, and the offset of course to that is the pickup of new business associated with training implementation, consulting, for upgrades to the current version of Meaningful Use software.

Dan, is there any bucket of reversals that is essentially going to be emptied at some point?

That would be speculation at this point. That would be something as we continue to see client satisfaction, that would be a possibility, but more than that, Jamie, would be speculation.

Okay. And maybe one question for Gary just on the ambulatory business. It seems like there is going to be a pretty healthy replacement market that heats up from the numbers that you guys gave. Two-thirds of your deals are still Greenfield at this point.

Any sense for when some of these physicians that are using a product that they weren't able to ultimately attest with are going to be coming back to market in droves looking for replacement systems? Are we going to see that later this year? Is it a 2015 phenomenon? Any color would be great.

Thanks, Jamie. I can certainly tell you that there is increased interest out there. So as our reps are out talking to potential prospects, a number of them are definitely on existing systems where they have concerns about their current vendors' ability to meet the guidelines.

So as you noted, we were up a little bit this quarter in replacement sales, and that's been probably about the average for the year somewhere in that 25% to 30% range per quarter. When is the spigot going to start going full blast? It is still hard to say.

I would expect later this year we would continue to see more of that activity. The ICD-9 push has probably held it off just a little bit. I would expect a little later this year into next year that we would see more of that.

Okay, that is great. Maybe one last one for Monte. The RCM business. What is going on with the profitability there?

Maybe you're not going to give us any forward-looking commentary, but if you could help us understand what has been putting pressure on the gross margin. Obviously the revenue came down a little bit sequentially and the cost continued to build. That would be great.

This is Monte. Thanks. There is not really one particular thing to focus on. A couple things to note. Inclement weather, we had a tough winter. That certainly impacted our numbers for the quarter.

The first calendar quarter of the year also has an impact on us historically. Especially as we see more and more of payment responsibility shifting to the patient, it pushes off collections a little bit.

We also have a pretty rigid credit worthiness process where we only recognize revenue on a cash basis for customers if certain criteria are met. And so I think the important thing to note there is the expenses are in the financials. You see those -- if we have deferred revenue on the top line, you still are seeing the expense in the cost of sales, as well as SG&A.

And then finally, we are making other investments in the business that are having an impact on the bottom line. So sales and marketing expenses have increased as we continue to ramp up our efforts to grow the business, reported our entry into the hospital RCM space, we ramped up some of those expenses over the last quarter or two in preparation for that, and all those things are contributing to the quarter that we reported.

Thank you.

Ricky Goldwasser of Morgan Stanley.

Hi, good morning. You highlight population health as a significant Greenfield opportunity. Can you share with us more color on your Population Health tools? What are you selling to your clients and how should we think about the revenue model and the contribution there?

This is Gary. It's a multi tiered product, so we have baseline features that many of our clients over the past nine months or so since the inception have been looking at and purchasing. Basically what we would call cohort management, identifying patients with gaps in care and doing outreach to those patients and integrating that back in with our core applications.

Some of the new development has to do much more with taking the Mirth products and then embedding those together with the current architecture so that you can have, for example, a clinical data repository with a longitudinal view of patients not only within the NextGen world, but from external systems as well. So it could be a hospital information system or third-party EHRs, and all that data combined in the CDR and our ability to manage those patients at a much more broader scope. Those are some of the additional tools that are coming downstream along with much more powerful analytics and some additional things that we are working on today.

In terms of the revenue model, there are different revenue models out there that we support today. We can deliver it on a SaaS model, we can deliver it based on a use model, and then also a license model.

And where do think longer-term the market will settle in terms of revenue model? Or is it too early to determine?

I think it is too early to determine. We have seen a combination of those in the past year. Most of them a little more focused on licensing. Traditional license model right now.

Okay. And then I'm not sure that you mentioned this in the prepared remarks, but can you share with us how much did Mirth contribute in the quarter? I know it was around $2.6 million last quarter.

This is Paul. We have really integrated the Mirth product suite along with NextGen product suite. And so to that end, we are considering the Mirth line as inclusive of our NextGen segment.

And so we are not going to do that at this time. We will make specific references if we see some contributions out of certain product lines, like I did mention we had some nice growth in subscription revenue included in the other services revenue line, and a fair amount of that was related to Mirth.

To that end, we will make commentary on that, but we are not going to get into breaking out Mirth like it is a separate segment. But thanks for the question.

Okay, thank you.

George Hill of Deutsche Bank.

Hey. Good morning, guys, and thanks for taking my question.

Good morning.

I want to follow-up on Ricky's question a little bit and see if there is any other color that you can give us in the software revenue segment. I guess inpatient versus outpatient, practice management and Mirth versus the HER product.

And I caveat that with if you look at the class wars on the NextGen ambulatory HER product, the product doesn't seem to be faring well with consumers. Any other color that you can tell us about what is driving stability or growth in that line would be helpful.

This is Gary Voydanoff. I will take that one, George, to begin with. So it's important to note that we are very early in the lifecycle of our 5883 release. A very small portion of our clients still have that, and we see the cycle of upgrades and those of implementations scheduled throughout the rest of the year.

So we expect that to impact the client SaaS scores. That's going to be important. Also it's important to note that our clients, our executive advisory board and large client user group are really helping us with those user SaaS issues. So we understand that fundamentally right now we really have to focus on physician satisfaction, their experience using the software, and that's what the 5883 release is really geared towards.

And again, we also believe it is the cleanest release that we have had in a number of years. And so we think that will also contribute. And some of the early returns have been very positive for our clients there.

That is pretty helpful. Just a quick follow-up, one for Paul and one for Steve. Paul, historically the Company -- if you thought about Quality Systems before the inpatient business, you didn't really break out the difference between bookings and revenue because the conversion tine was so fast.

Can you think about what we should think of as the timeframe from bookings to revenue conversion now? And just quickly, Steve, congrats on getting Jeff on the board. Maybe just talk a little bit about what you expect him to contribute?

Yes. Let me take a shot at your first question. There is no simple easy answer to that one. Because the bookings number is inclusive of some component of services that we have sold that could be implementation training, could be some RCM Services, as well as software licenses which we would be quoting revenue right away on.

So there is not a silver magic bullet there. I think that thought that we have been providing that is to give some additional color beyond just what we're calling revenue from a GAAP basis that gives you some indication of the trajectory and selling activity that is going on in our business as a whole. But that is as far as we can go with that. But thanks for the question.

George, as far as Jeff goes, I've known Jeff for 12 years. I think many people who follow the TriZetto story, which is a more recent story, understand what you did over there and how he brought that company along and had a very nice exit with the Apax Group.

Jeff is another example of our Board continually rounding out the Board efforts with talented personnel who are from our sector. The input from some of the folks that we brought on last year as well as now Jeff brings us a series of five-star athletes that give us as a management team the capability to have great sounding boards for the things that we are doing from individuals who are very near-term experienced in the sector that we are engaged in.

They understand we are going through a reinvention. They understand that the HER adoption curve is only probably two or three years out in terms of fully automated. And that we have to reinvent and move our ways into other areas like accountable care organizations, data monetization, analytics and other areas.

So Jeff is just going to be an incredible asset to us as a management team. And we're really looking forward to working with him, and I think those of you who know him know what I am talking about.

Yes. I've known Jeff a long time. Appreciate you taking the question.

You bet, thanks George.

David Larsen of Leerink.

Hi, can you talk about the NextGen7 platform? Maybe describe what exactly it will do and any commentary around when it might become generally available. And then does the 5883 solution have to get deployed throughout your entire client base before they can convert to the NextGen7 platform or can they go right on to NextGen7platform? Thanks.

Hi David, this is Dan Morefield. Let me take those questions separately. Let me first talk about NG7, and then I will talk about the 5883 platform or 83 product.

As we have mentioned before, NG7 is a platform or a technology. Pleased to announce we expect the first product to come off that platform to be a full HER positioned for the small doctor practice. We expect it to be cloud enabled, go to market with the SaaS pricing. We expect that we will demo the product at our user group in November.

It will be powered by a combination of NextGen and Mirth technologies. We will be in beta this year. We will have limited availability in 2015 with full general lease in mid-2015. The full general lease product will be Meaningful Use compliant and ICD-10 ready and will support our RCM initiatives. So that's the story on the new product coming off the NG7 platform.

You asked the question about upgrades. Again, we consider this a product, and the issue of upgrading is one that we will look at in detail over the next 12 months or so. The key will be is that we will be previewing to our existing clients what the look, feel, functionality of future -- the future of our existing 83 core HER product will look like over time.

I wouldn't consider this as a notion of having our clients convert over. But over time, we will merge those platforms so that the benefits associated with the products and the new platforms will be transformed into the existing platform that our customers have today.

Okay. That is very helpful, thank you. So the NextGen7 platform will pull data in from your ambulatory EMR, Mirth, rev cycle and inpatient, is that correct?

Again, what we are willing to announce today is that the first product coming off that platform will be a full HER positioned for the small doctor practice.

Okay, great. And then Dan, you mentioned some resources were being reallocated away from inpatient. In my mind, that is good because it seems like maybe they achieved what they wanted to achieve and now you can move them into a new direction within the business. Can you give a little more color on that? Thanks.

Sure. The major areas of expense associated with the hospital solutions include areas of training implementation, technology. So as an example, we have done a lot to integrate our training implementation teams of our hospital and ambulatory organizations, and so we are seeing the ability to reallocate some of those resources into ambulatory projects as the demand has increased there.

The technology is very much the same story. We are able to reallocate resources away from hospital solutions and help support for instance the NG7 platform.

Just one last one. You were reluctant to go and sell new inpatient products previously because you wanted to work through some of the integration. Are you now back aggressively selling inpatient product on the market? Thanks.

We have always been willing to sell products within that marketplace. I think what we wanted to make sure everybody understood is that even though our overall sales of our core clinical and financial modules continue to be down, there are other modules that we are effectively selling such as our emergency room solution, and our surgical scheduling product. All of which have good client satisfaction and good demand in the marketplace.

Thanks a lot, appreciate it.

Ryan Daniels of William Blair.

Hi guys, thanks for taking the question. Let me start with a follow-up on NextGen 5883. I think that has been in the field for six months now so maybe a threefold question.

Number one, how much of the base has been upgraded to date? Number two, you mentioned that could be a driver of improved satisfaction. Do have any more color you can provide or internal metrics on that? And third, how much of the base should we expect will be upgraded by the end of the fiscal year?

This is Gary Voydanoff. I will take that one. 5883 can be updated separately. On the 58 front, the application side, that is probably moving along at about 30% of our base rate now. That is coming along and going very well. Response from the users is very good on that one. As I mentioned before, it's very clean release, and those upgrades have been going well.

83 is the clinical content side, so that has been going a little bit slower. So clients tend to do the 58 piece and then follow on with 83. And a lot of them are retiring a lot of their old customizations and moving to the new platform. So that takes a little bit of time, and more time, and lags behind the 58. So a smaller percentage is on 83 right now.

In terms of the pace, I think it looks pretty steady over the balance of the year. I don't think we know exactly what percent is going to be done by the end of the year. I think we would hope it's a significant percentage, but a few of the clients have held off now because of some of the regulatory things pushing. So they don't feel quite the need to do it as fast. But we still expect a significant percentage by the end of the year.

Okay, that's helpful. And then a follow-up on the regulatory changes front, you indicated in April you adjusted some resource levels and that we will see some cost reduction. Can you talk about, number one, what levels of reduction we might see there, what you did internally?

And number two, I'm curious if you anticipate having to ramp that back up next year. Can you reallocate existing resources so you won't need to rehire or re-staff?

This is Dan. Let me see if I understand your question correctly. And it goes back to the comment I believe I made during the opening remarks about during the last year I gave an example of some of the cost savings associated with restructuring of the organization.

And as I had mentioned in prior earnings calls, our intent has always been to reallocate expense savings into areas of growth and into our technology initiatives. I don't think that has changed in any way. We continue to look at restructuring and operational efficiencies for the principal purpose of investing into other higher growth areas in the organization.

Okay, that adds some clarity. And then the last one I had, you talked a lot about Mirth and the momentum there. One of the capabilities you've launched that you are excited about was Next share. Curious how widely that has been rolled out and if you have gotten any feedback or utilization metrics there on some of the capabilities that that offers you could share with us.

This is Gary; I will take that one. It goes into general release in June. So we are very close to getting that out into general release.

We don't have a lot of feedback or metrics from the client base. I can tell you a lot of them are very interested as we completed our large client user group meeting a couple weeks back. There is a tremendous amount of interest there, and the excitement there is we are providing that as a free service to our clients.

So what they are happy about is we are providing an interoperability platform with a high feature set that isn't going to increase their cost. That has been an area in this industry in general where there's been a lot of frustration. Regulations have just caused increasing amount of cost to the practices, whether large or small. So I would anticipate that within a couple more quarters out we would have some more ideas as to the utilization rate and feedback from our clients.

Okay, thanks guys.

Thank you.

Donald Hooker of KeyBanc.

Great, great, good morning, thank you. I may have missed it scribbling down notes from your comments, but did you provide a pipeline number?

Yes, this is Gary. The pipeline sits right now at $155 million.

Okay, got you. And is there a piece of that that is Mirth? Is that included in there?

Yes. Two quarters back, we began including the entire -- the pipeline of all the divisions.

You don't break that out?

Correct, no.

Okay, that's fair. And just maybe a reminder here, did you also breakout the Mirth -- it sounds like Mirth is building up nicely. Did you give us the Mirth revenues in the quarter?

I know there is some funky stuff going on there with deferred revenues as well. Maybe for Paul if you can talk to us. How do we think about those deferred revenues rolling off and how does it do in terms of revenue in the quarter? I am sorry if I missed it.

That's okay. This is Paul. We did not provide a Mirth consolidated number. What we did do or what I did say was Mirth clearly contributed to some of our growth in subscription and SaaS services. That is included in the other services revenue category. So we will just make some color around that going forward around certain product lines that are doing well or contributing, but not talking about one all-inclusive Mirth revenue number.

And yes we did -- we are seeing some growth in deferred revenue over time. It is contributing to some of the growth that we are seeing in our balance sheet related to Mirth subscriptions and SaaS and those kinds of things. So I think beyond that though, that's as far as we are going to go on the level of detail.

Got you. And quick last question. Two real quick questions, and I will jump off and let other people ask questions. With regards to the Mirth revenue, to keep bugging you, are you going to put that in the 10-K? I would assume you would break that out.

In the revenue cycle, I think you mentioned there was some accounting changes there. If you could comment on that please as well. Thank you very much.

Okay, so the 10-K is going to be released very shortly here in the next couple of days, at the latest. Stay tuned for that. And in answer to your other question around accounting, that was -- Monte was providing some color around the RCM numbers, and he was mentioning that we do have requirements for us to recognize revenue that we have reasonable assurance of collectibility.

We are assisting customers that -- on an ongoing basis, to make sure they meet that requirement. And if we don't have good confidence that they are meeting that requirement, then we will put those customers on a cash basis revenue treatment, which does have a negative impact on your revenue because you're still recording expenses, but you are delaying the revenue.

That is nothing new; that's been a policy we've had in place for quite some time. So I would not characterize that as any kind of change in policy. It is just continued adherence to our policy.

Thank you.

Thank you.

Gavin Weiss of JPMorgan.

Hi just continuing on Mirth, I wanted to get some color on what type of customers are purchasing the Mirth solutions. Are they from primarily outside the NextGen base? And can you also remind us the structure of the sales force? Is it a dedicated Mirth team and do the NextGen sales force also sell it?

Hi Gavin, this is Gary. I will take that one. So yes, primarily the Mirth sales are outside of the NextGen base yet today. And it's a very diverse healthcare audience out there.

Everything from HIEs to hospitals to just a variety of different folks buying the Mirth solutions independently, and it is exciting to see the RFP growth and things like that coming into the organization really still without us having ramped up a lot of marketing campaigns by the NextGen team.

Now we are beginning to cross sell. I mentioned the significant sale we had with Aveta Health System. What was important there was we could use the Mirth connect tools to really help us satisfy a lot of their internal requirements. So how are they going to connect in NextGen Solutions to all the other IT solutions they already had? It was really a fundamental part of their purchase.

And so now the NextGen sales team has been training for the last month or so on their -- on the Mirth products, so we can begin to get out with feet on the street and campaigns to our NextGen client base, particularly the larger group practices, midsized practices and hospital-based clients. And there is about 300 of those to tell the Mirth story and to find opportunity for Mirth Connect, the CDR, a number of different solutions. So that is beginning to ramp up.

We also just added a couple of enterprise Mirth salespeople over the last -- I believe at the beginning of last quarter we just added those. So their headcount is starting to ramp up, and those folks are out there looking for opportunities again outside of the NextGen base in other hospital systems.

That is the makeup today. We think we are still very early in that integration process, and we are excited about the possibilities.

Okay, that is definitely helpful, and just a quick one on NG7. I was under the impression that it would GA earlier than mid- 2015. Has that development timing changed or is it just you have more clarity now in terms of the rollout?

I think in previous announcements we had always talked about it at some point in calendar 2014. I think the biggest change is we looked at and have incorporated the Mirth technologies along with NextGen, and that particular change is one that drove us to delay the implementation. We felt it was more important to come out, having it powered by both the combination of our existing technology and Mirth technologies, and that would be the reason for the slight delay.

Okay, that makes sense. Thank you very much.

Thank you, Gavin.

Bret Jones of Oppenheimer.

Good morning and thank you for taking the questions. I wanted to go back to the inpatient segment for a minute. I don't feel like I have my head wrapped around that. Maybe I am just misinterpreting what has been said on the call so far.

If we could summarize, it does sound like the software component of that was still negative. And so I'm wondering if you can -- but Dan said that it would be speculative to identify when that would reverse.

And yet on the other hand, we are also talking about reallocating resources. I want to understand where are we in terms of getting the inpatient solution fixed and getting the implementation backlog cleared, and how much work is left to be done?

Sure. Let me again address those in pieces. First of all, I remind everybody that the definition of what is in total system sales includes the sales for [astro]system implementation sales, some hardware sales, but there is also contra revenue associated with returns and returned reserves.

The question about the buckets that Jamie brought up really specifically was focused I believe around the return reserve. And whether or not that would be -- whether or not that would be reversed over time, and that's the point I really focused on speculation.

The piece that we had been fairly overt about or fairly direct about was the issues surrounding that our bookings and sales have increased. And especially in the area of implementation, training, software sales to especially our emergency department software. So we see those as positive trends.

We today have still a number of clients that are in implementation stage. So we will continue to focus on those. And as I said before, a key driver of this is client satisfaction. We see that increasing both with the stability of the software, with the upgrade to 2.6, with the investment in retraining and customer service that we've provided to date.

That is very helpful. Just to close the loop there, can you talk at all about the implementation backlog? Is that something you think you will clear in the next quarter or two, or are we talking about a year from now?

We haven't materially said that, but again, the key indicator of how much of our backlog is the issue of how many new large system sales we've had. We haven't reported many of those over the last couple quarters, so it wouldn't be a bad assumption to assume that we should be able to take care of that backlog over the next few quarters.

Okay thank you, and one clarification also on the implementation side of the house. Got mixed messages again, I felt like Paul was saying with the MU2 delays and ICD-10 delays that is going to allow for resources to be reallocated.

Dan, it sounded like you said you are not seeing a not a slowdown in the upgrade cycle. Maybe I am parsing words here, but I want to get your sense for is MU2 and ICD-10, are those delays going to have any implementation issues on your side that you are seeing for upgrade? Or is that not the case?

I think we said last quarter that we saw a delay in the expected upturn in professional services demand. And that surprised us a bit. Since that time, we have seen acceleration of demand, as well as we have done cost rationalization associated with the resources there that will lead -- that is leading to increased profitability of [training] implementation.

We certainly have seen some clients take a pause, but we haven't seen a material decrease in the uptake of our 5883 platform. And while the changes in Meaningful Use regulations and proposed changes certainly have clouded the future for our clients, we have been very clear with those clients that they still need to get upgraded. And while there is some noise there, we still continue to see a full pace of upgrades going forward.

Great, thank you.

Greg Bolan of Sterne Agee.

Thanks for taking the questions. Did I hear you right that NextGen ambulatory revenues were up 8% year on year excluding Mirth?

No. This is Dan. I reported that the numbers were 8% year-over-year including Mirth. Including Mirth total, the total revenue increased 8% quarter over quarter and over 6% over the prior year.

Got it, great, thanks. Paul, your comments regarding Street estimates for EPS and not taking into account higher operating cost. I understand that, but can you comment on -- I know this is a little more difficult to comment on, but on the revenue side?

If you look at consensus estimates, it's around mid- single-digit revenue growth over the next four quarters. How do you feel about that?

Yes, this is Paul. That is quite a loaded question there given that we have been trying to be clear about not providing guidance. So I think I would pay attention to quite a lot of the statements that you have heard on this call, and you're going to have to take all of those into account and sort that out in terms of the future and our revenue.

But I think we believe that we have good opportunities, we believe that there are definite opportunities out there that we need to execute on. However, I'm going to have to be careful here about talking specifically about analyst estimates and revenue. I think the qualification that we intended to give was a little more limited to what is going on in that R&D expense line.

Okay, that's fair. And Steve, following on George's question, on the addition of Director Margolis. If you think about the fact that he started a company, he sold a company, obviously it is interesting that you guys are adding him to the transaction committee.

Is there a message here for the investment community? Whether it be more restructuring or maybe there is something else that we should be thinking about in the future?

No, I think as I said, the Board -- it has always been the Board's motivation to keep topgrading the board and bring in experienced and talented individuals who can aid and assist in our efforts as our sector not only continues to grow but continues to reinvent as we start moving from fee-for-service to value-based modeling and as we all know from paper to automation. So I think the great value Jeff can provide for us in that area is that he understands intimately all the different aspects of the business including all the aspects of the business directionally, where things are going.

And he will be a great addition to the transaction team because as we have always said, and we will say again on Monday, we are always interested in doing the right types of acquisitions that can complement or supplement our existing base. And keep putting us in a position to make sure that our customers continue to stay at the forefront of all the trending that is going on in this sector.

He gives us a strong element in all those areas. So we are anxious to work with him. Highly supportive of him, and we know he will be an incredible addition to the team.

Thanks, Steve, and last question for Gary. Going back to Jamie's earlier question with regards to the replacement market, how do you see it unfolding just in terms of the type of replacement opportunities?

Do see it as more going after those PHOs that are plugged into an acute system and were forced to use the incumbent acute IT vendors ambulatory solution? So moving away from a one throat to choke to a more best-of-breed approach? Or is it maybe more so on the independent physician side, those independent physicians that maybe attached their wagon to the wrong vendor and need to make a change?

I think it's a little of both because you've got -- you certainly got those you just mentioned. They made the wrong decision. It was a vendor that is not going to be able to materially improve their software because they've either got to worry about regulations and those investments or they just can't keep up anymore.

Also understand that many of our clients, group practice clients continue to grow and that there is good license sales there for us. So they are acquiring a lot of those practices that have other systems and they want to put them on a single enterprise platform. Some of the replacements will happen there. It is still a mix.

I think there are a lot of those ACOs that are continuing to either form or maybe changing their road map a little bit. Many of those would like to get on a single platform as well. Again, those will be replacement opportunities, but it's really a mixed bag, not one particular area right now that really stands out.

Just to add a little color to what Gary just stated, and he is absolutely correct. We have long said that those of us who came into this automation period in healthcare, this EHR move, those of us who came in with large installed bases would ultimately be the major benefactors as we move through this entire process.

And so the replacement market as there's over 500 vendors that provide EHR, and if you follow the class reports or any other third-party assessment group, they pretty much are all in agreement that there will be a major washing out, smaller players over the next two to three years as we move through stage two and then stage three and then ICD-10 and ICD-11. Those of us with large installed bases will be double benefactors in the sense that our install base will be gathering up many of these physician groups, hence they will be going on our software, and then the general replacement market will be another area for us to get our fair share of the business.

So I can't underscore the fact that those of us with large installed bases as we continue to move through this automation period continue to be major benefactors in terms of new product and service offerings that we can feed into the system, and in a system that is really growing. You will hear a little bit about that on Monday, those of you that are at our Analyst Day on Monday, we will have four panelists, four customers who are in varied stages with us. All of them are on our baseline software.

But all of them are expanding to our existing product and service offerings, and they're going to tell you the reasons why. And we think that will be an important part of our session on Monday morning.

That's great, thanks Steve.

Thank you.

Dave Windley of Jefferies.

Hi, following up on Greg's -- on an element of Greg's question there, in terms of common platform and install base, could you comment on the sense of your install base, the activities there in situations where the acute system that controls your client hospital -- or your client group practice wants to rollout a common system. To what degree are you still facing that kind of defense of the install base and perhaps incorporate Mirth comments and how that is changing that conversation now that you have that under roof?

This is Gary, Dave. Good question. What's important to know is we've got -- really seeing very low attrition in our client base right out, and many of those group practices are growing. And so that's been very positive sign for us.

And you asked does Mirth contribute to that low attrition? Absolutely we think it does. There are a number of our larger hospital-based clients that we have spent a lot of time with just in the last four to five months talking to them about the Mirth technology and how it will help them to be able to continue with the best of breed approach and not have to rip and replace all of the systems that they have currently.

And so that has been a very important part of the story and what we think is going to help us maintain high retention rates. So we haven't seen any kind of real attrition from or ramping up of that attrition related to hospital-based docs.

If I could I would just add to that, this is Steve, it was always the intention of the government when it rolled out stage one, stage one was basically healthcare gets automated. Stage two is now all your automated health care that are certified, start interoperating and interacting.

And it was always the view of the government, nobody has to be on a singular platform to be successful. But you have to be on a certified platform, and stage two is all about interoperability and connectivity.

If your member early on in our prepared statements, Dan Morefield was talking about our relationship with Cerner which we announced, which says we interoperate with Cerner, they interoperate with us, there is no need to go on one or the other. And so I think that's what stage two is going to solve. It will solve all the historical rhetoric about having to be on one platform.

Do you put a number on your attrition? You say it's low, can you give us a percentage?

Immaterial.

This is Paul. We haven't provided that in the past, so I think the message that you heard from Gary is that we haven't seen any material change in that statistic to date.

Okay. Question on RCM. I think the comment was made that only 6% of your broader install base have you been able to address with your RCM Services.

Of that other 94%, can you give us a sense of what they do? Are they using another vendor for RCM or what percentage of those practices still have folks in the back room doing it in-house?

This is Gary. They have a very high percentage of folks doing it in the back room still. So very few use a third-party RCM vendor of any kind. And overall I think people see in the industry today that this move towards RCM outsourcing is going to continue marching along. And it is growing.

When we have any net new opportunity, the conversation is not around necessarily always licensing. It's about RCM Services, and if that's the best solution them that is what we are going with.

We are excited that that pipeline continues to grow particularly within our client base, and we've got a lot of opportunity still in the client base. And even folks who maybe didn't have real obvious problems with their back office, they understand that they need to find ways to be more efficient than ever, and RCM certainly helps them with that.

Last question on pipeline coming back to that, I hear the enthusiasm in your commentary about the growth on a number of metrics including pipeline. I'm looking at sequentially, it looks like it's up a couple million dollars. And if I look year-over-year where last year didn't include dental and didn't include Mirth, if I normalize for that, it looks like it's almost pretty close to flat.

Are there timing issues or other factors, leakage out or whatever that are maybe masking growth that would help to explain your enthusiasm? In other words, would it look better but for something?

This is Gary again. I would say that the one thing that we've seen, as Dan was talking about, on the hospital side we have been focusing on the backlog of implementations.

And so we've really slowed down the growth on the inpatient side in terms of new sales revenue, and that's probably been the biggest impact on that pipeline. So if that was still where it had been previously, I think you would have seen much larger growth.

That is very helpful. Thank you for the perspective.

David Francis of RBC Capital Markets.

Hi, good morning. Just very quickly, circling back to the inpatient side of the business and trying to get things fixed, I understand it the 2.6 release has gone a long way towards fixing a lot of the issues that you have been facing with the conglomeration of products that you've got there onto a single platform. Can you talk a little bit more specifically since you're talked around it on this call, what else is left for both integration and functionality perspective to get that product suite competitive with other offerings and other competitors in the market?

This is Dan. I think there are two things to consider there. Your question specifically addressed the issue of product functionality. Client satisfaction is a combination of both a product functionality as well as the training that the client goes through, the level of training, the level of support.

One of the things we have done over the last three quarters has materially increased resources in the training implementation side, not only for those clients that have not been implemented yet, and that's that backlog, but in many cases retraining clients where their use of the system has led to inefficiencies and lack of client satisfaction. And then these changes along with the product enhancements for 2.6, the hot fixes we do along the way, all take time to drive up client satisfaction. Again, I think the solution in the future is a combination of both product and service enhancements that drive the results.

I have to ask again, what is it specifically about the functionality or the integration of the disparate products that have been acquired that were still needing to get done for the inpatient side to be competitive again? You're talking about satisfaction, I guess I'm trying to get to what are the product issues that still remain to make the product competitive with others in the class?

If I take a look at and talk about the road map associated with the product, and the key issues of the road map going further is further integration on the modules that we currently have. Further functionality, especially clinical functionality. Further enhancements on the financial software to make it more intuitive to use.

Better dashboards. That would be rolling out. It's a combination of those functionalities that will help drive the competitive nature of the product suite.

Okay, all right, thank you for that. The other question I have was what drove the improvement in accounts receivable collections in the quarter?

Was that something that you are focused on a little but more acutely from a financial operations perspective? Is there a client satisfaction element to that? The cash that came in today is going down significantly, and there is obviously something driving that. Can you talk a little bit more to that? Thanks.

This is Paul. I will give you a couple quick answers to that. We have deployed an ERP system called SAP, and we really started to hit on some more core cylinders there in terms of leveraging those capabilities and driving improvement in our collections performance. There's one biggest piece I would put to that, as well as the team in my organization, they have been doing a tremendous job.

Great, thank you.

Operator, we will take one more question please.

Garen Sarafian of Citigroup.

Thanks for taking the questions, and maybe using the soccer analogy, the World Cup, we're well into injury time here, so I will only ask the tactical questions (laughter) and leave the rest for Monday. Paul, you mentioned the expense line on R&D, perhaps the sell side having not modeled correctly. Can you give any clarification, is that the midteens, is that the right number, or should it stay constant with the last quarter? Or any other call you can give to make sure we get it right this time.

I was hoping that range I gave, the percentage range would be enough to get folks thinking a little bit closer there to what expectations ought to be.

We had a little bit of technical issues on the side if you gave a range, and what was that range?

That range where we are currently at is between approximately 13% to 15% of revenue.

Oh, okay, that certainly helps. Moving on, it was asked a little bit differently before, but basically you had mentioned last call that lead generation was leading to a positive impact to the RCM pipeline. Sales were down sequentially. What were maybe the top two things that were not as good as you thought other than perhaps weather?

This is Monte. Again, the shift to patient responsibility and the deductible reset in the first calendar quarter continues to grow every year. Consumer driven healthcare, more patient responsibility, and so typically all of that resets in the first quarter.

We also saw the Affordable Care Act implemented in the first quarter. And also spoke about some of the deferred revenue.

Should we take it in that order?

No. I think those are just contributors. We didn't really give any quantification in any order. I think it is a mixed bag.

Another thing I would say is our backlog continues to grow. Our bookings are up 29% year-over-year. So I think those trends as we look at the business moving forward continue to project it in a positive direction.

Got it, and lastly I probably missed this. What was the bookings number for this quarter, and could you state if it is excluding RCM so we can do more of an apples to apples comparison versus last year?

We are providing that number, which is inclusive of RCM, and that was $43.1 million this quarter versus $41.6 million last quarter and $47.6 million a year ago.

Okay, you're not breaking it out again. All right, great, thanks again. See you Monday.

You bet. Not to extend injury time a lot further, I just want to thank everybody for being on the call. We look forward to having the opportunity to talk to many of you on Monday, where we can give you a broader view of our product road map. And I think you will enjoy the four panelists that we are going to have and their future plans and how those future plans expanding their product and service offerings with us.

Again, remember that large installed base is going to be a major benefit to companies like us. We have a lot of tailwinds for RCM, Mirth, and the replacement market which we know is going to start beginning at some point later this year.

Again, thanks for your interest, look forward to seeing many of you next week. Take care.

Thank you. If you would like to listen to a replay of today's conference, please dial 800 585-8367 and refer to the conference ID number 42101881. A webcast archive of this call can also be found at www.QSII.com. Please disconnect your lines at this time and have a wonderful day.