NextGen Healthcare Inc (NXGN) 2015 Q4 法說會逐字稿

Welcome to Quality Systems Incorporated FY15 fourth-quarter and year-end results conference call. Hosting the call today, from Quality Systems, is Steven Plochocki, President and Chief Executive Officer. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation.

(Operator Instructions)

It is now my pleasure to turn the floor over to Mr. Plochocki. Please go ahead.

Welcome, everyone, to the Quality Systems FY15 fourth-quarter and year-end results call. With me this morning are John Stumpf, our Interim CFO; Dan Morefield, our Chief Operating Officer; Monte Sandler, our 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 anticipate industry trends, the Company's plans, products, perspective and strategies, preliminary and projected, and capital equity initiatives into the implementation of potential impacts of legal, regulatory and accounting principles. I'll provide some opening comments, and then turn it over to the team.

We are very pleased with the fourth quarter and FY15 results overall. This latest quarter represents the fifth consecutive one where we delivered increases in revenue, and which resulted in a new quarterly revenue record. Our revenue growth in the 2015 fourth quarter and fiscal year demonstrates the impact of our broad-based market offerings, which now span nearly 30 products and services, directly aimed at the evolving value-based accountable care organization modeling. As physicians strive to better manage patients, and payers seek the necessary intelligence to help control costs while emphasizing quality of care, we believe we are well-positioned to help all those stakeholders meet the challenges that will continue to unfold.

Our portfolio of products and services address the ways in which healthcare constituents communicate and manage patient populations. We believe that, as we enter into our FY16, we will be -- there will be a significant opportunity for our RCM business line, along with the Mirth interoperability and connectivity solutions that we offer. With ICD-10 fast approaching, practices seek the exact type of support QSI NextGen brings to the table. With the sales force boasting strong cross-selling capabilities across our large installed client base and beyond, as well as our enhanced marketing capabilities and seasoned implementation teams, we stand ready to meet healthcare's rapid changing needs.

Our ability to strengthen our offerings, expand our solutions and demonstrate solid growth is reflected in our agility and commitment to seamlessly serving to healthcare information technology industry. Additional information, 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 12, 2015, with an anticipated distribution date of July 6, 2015.

The $0.175 per share cash dividend is pursuant to the Company's current practice 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 the declaration and payment of each such quarterly dividend. In addition, the Company will hold its 2015 annual shareholders meeting on August 11, 2015, at 1:00 PM local time. The meeting will be held at the Center Club, 650 Town Center Drive, in Costa Mesa, California. Holders of record as of June 16, 2015 are eligible to vote and attend.

Proxy materials, and the 2015 annual report, will be made available to shareholders of record, and will also be posted on our Company's website. And, as previously announced, we will be holding our annual Analyst Day on Monday, June 8, 2015, from 8:30 PM to 1:00 PM, at the Le Parker Meridien Hotel in New York City, at 119 West 56th Street.

I will now turn the additional dialogue over to John Stumpf, who will take you through a run of the numbers and a deep dive, not just on the quarter, but on our entire year. John?

Thanks, Steve, and hello everyone. This is John Stumpf. I am pleased to present to you QSI's fourth-quarter financial performance on today's call. We are pleased to report that this is our fifth consecutive quarter of consolidated revenue growth, and our fourth quarter 2015 revenue, of $128.4 million, represents a new revenue record for QSI. Our total fourth quarter revenue reflects an increase of 11% over prior year's $115.2 million, and 4% over last quarter's $123.4 million.

The principal driver of our revenue increases, on both a year-over-year and sequential basis, is growth in our recurring and subscription and services revenue streams. This category, as a whole, grew 13%, to $105.6 million, from $93.5 million in the year-ago period. The largest contributors within this total were EDI, maintenance, revenue cycle management, SaaS, and other subscription-based revenue streams.

Other revenue, which includes subscriptions in hosting, grew by 17%, to $22.6 million, compared to $19.4 million a year ago. Our growth in this category continues to largely relate to our Mirth interoperability solutions and our patient portal user base. Our total bookings this quarter were $66.3 million, roughly flat as compared to the previously reported $67.2 million in Q3 of FY15, and approximately 6% lower than the year-ago quarter, as the year ago period had a larger than average volume of RCM deals.

Overall gross profit grew by $3.5 million, compared to last quarter, and was up $10.7 million, or 17%, versus the year-ago period. Our consolidated gross profit margin this quarter came in at 57%, versus 56% for last quarter and 54% a year ago. The improvement versus the year ago period principally reflects the generation of a positive margin in implementation and training services in the current quarter, as the result of reduced headcount, to better align capacity with near-term demand, and higher margins achieved in software, RCM and subscriptions.

SG&A, including amortization of intangible assets, remained relatively flat at $42.2 million for the current quarter, versus $42.4 million in Q3. As compared to the year-ago quarter, SG&A increased by $2.4 million, principally reflecting the fact that bad debt expense was a net credit of $1.3 million a year ago, versus an expense of $0.8 million in the current quarter. This change in net bad debt cost reflects the fact that are DSO decreased dramatically in the year-ago period, and has essentially stabilized in the current period.

R&D operating expense increased to $17.6 million, versus $15.1 million a year ago, reflecting a higher level of investment, mitigated by an increase in the software capitalization rate. Our net R&D expense, as a percentage of total revenue for the quarter, was 14%, versus 13% a year ago. Total gross R&D investment for the quarter increased to $22.7 million, as compared to $17 million a year ago, with capitalized $5.1 million in development costs this quarter, versus $1.1 million a year ago.

The increase in gross R&D expenditures, both in absolute terms and as a percentage of revenue, reflects our commitments to concurrently enhancing our legacy product portfolio, developing a new technology platform, and our intent to remain at the forefront of market demands for product offerings that support the migration to value-based healthcare, including interoperability, analytics, and tools in support of population health management.

We will also continue to identify and act upon externally developed opportunities to complement our internally developed software. Our Q4 acquisition of [Janius] serves as an example, whereby this technology will be used to enhance the analytic capabilities of our Mirth product line, and potentially our core ambulatory quality reporting. For FY16, we expect the net cost of our internally developed R&D to continue to grow as a percentage of revenue. I will discuss this expectation in more detail following my review of our quarterly performance.

Our GAAP effective tax rate for the quarter was 13.5%, compared to 28.5% a year ago. This decrease in rate is primarily due to the impact of state tax planning initiatives in the current period, as well as certain deductions that benefited from the year-over-year growth in taxable income. On a GAAP basis, fully diluted earnings per share for the FY15 fourth quarter was $0.18, an increase from $0.09 per share reported in the year-ago quarter. On a non-GAAP basis, fully diluted earnings per share for the FY15 fourth quarter was $0.21, compared to $0.12 for the comparable period a quarter ago.

Our year-over-year increase in both GAAP and non-GAAP earnings per share was primarily driven by the increase in revenue and margins, both growth operating and the favorable tax rate in the current period. On a sequential basis, GAAP earnings improved by $0.07 per share, and non-GAAP earnings improved by $0.05. In both cases, the majority of the improvement resulted from higher revenues and expanded growth and operating margins. The GAAP earnings improvement also benefited from a particularly low tax rate in the fourth quarter, as I mentioned a moment ago.

With regard to the balance sheet, we are continuing to focus on working capital management. Our turnover of receivables decreased to 77 days this quarter, representing a slight decline sequentially, and a substantial decline from prior year. Our cash and cash equivalents, plus marketable securities, ended the quarter at $130.6 million, up $16.8 million from the start of the year. This increase reflects the impact of significant decline in DSO, coupled with the benefit of tax receivable positions that existed as of the start of the year.

Product revenue, by business unit, is as follows. Ambulatory, for Q4 2015, $96.8 million. That represents a 6% improvement over $91 million, a year ago. RCM was $21.8 million in the current quarter, a 31% improvement over the $16.6 million a year ago. Dental reported $5.1 million in the current quarter, an 8% improvement over $4.7 million a year ago. And hospital division reported $4.7 million, a 60% improvement over $2.9 million a year ago. And again, the consolidated total, $128.4 million, representing an 11% improvement over $115.2 million a year ago.

With regard to the improvement in revenues within the hospital business unit, approximately $1.1 million of the year-over-year increase is the result of favorable movement in sales return reserves. Specifically, reserves were increasing in Q4 of FY14 and declining in Q4 of FY15 in that business unit, as a result of facts and circumstances applicable to each period. The balance of the increase in hospital reserves -- revenues, excuse me -- is largely due to incremental collections from customers who are on a cash basis of revenue recognition.

I will now move on to a recap of select non-cash expenses for the quarter, which are as follows. Amortization of capitalized software, $2.6 million. Amortization of intangible assets, $1.8 million. Depreciation expense, $2.6 million. Stock compensation expense, $0.8 million. Our Investing activities for the quarter were as follows. Internally generated capitalized software, $5.1 million, and investments in fixed assets, $1.1 million.

This concludes my review of our financial performance for the quarter. With respect to the question of formal guidance that has arisen on previous earnings calls and Q&A sessions, we have given this topic serious consideration. At the present time, we are not prepared to provide formal guidance. What we are prepared to highlight is that we continue to expect strong revenue growth from Mirth related subscriptions, revenue cycle management, EDI and patient portal product.

Our expectation is, however, that FY16 will reflect very limited system sales revenue within our hospital business unit. Further, we feel that the continued and growing market saturation within the traditional ambulatory EHR and EPM markets will continue to weigh on sales trends for those products. The aggregate effect of these trends suggests a revenue growth rates for FY16 that is somewhat lower than we experienced for FY15.

While on the topic of revenues, I also want to point out that we are planning to present our revenue components in an improved format, commencing Q1 of FY16. This new presentation is intended to better group like-kind products and services, as we acknowledge our other category of revenue has continued to become a larger percentage of total revenue. Of course, we will provide comparable prior-period data.

Our intent is to issue a separate press release prior to the end of the quarter that presents the FY15 quarterly data in the new format. With regard to non-GAAP earnings per share, we want to reiterate our commitment to a level of research and development investment sufficient to ensure higher levels of client satisfaction. And the robustness of our full product suite, inclusive of legacy products within our ambulatory, hospital and dental business units, and of newer products such as Mirth Analytics and Mirth Care Enterprise.

These investments will principally be reflected as higher core R&D spend, the result of which is a level of net R&D expense expected to be (technical difficulty) [15%] of revenues. I want to thank all of you for being on the call, and for your interest in the Company. I will now turn things over to Dan Morefield, EVP and COO of Quality Systems.

Thanks, John, and hello everybody. For the quarter ending in March, I can again announce that the ambulatory division finished with another record revenue performance. The division grew roughly 4% over the prior period, and over 6% when compared to the fourth quarter in FY14.

A number of revenue categories made significant contributions to the results this period. Increased system sales were highlighted by large transactions with accelerated rehabilitation, and another expansion with Gila River Health Center. Gary Voydanoff will offer more commentary on these and other transactions during his remarks.

Implementation revenue had a material increase over the prior quarter, as our billable work increased during the quarter. We also completed a fixed fee implementation at Mirth that contributed to that result. EDI revenue continues to expand. This is a category we are excited to watch, as we offer our clients additional services that directly impact the efficiency of their practices.

Lastly, we saw an increase in our subscription revenue, with our patient portal being a key driver. The patient portal passed the 23 million patient mark, and delivered over eight million personal health records to patients during the quarter.

During the quarter, the Mirth team closed deals with Healthcare Exchange of Southern [Pennsylvania] and also Solano County, for the HIE solution. They also closed a Mirth match opportunity with [Egenia], which is part of the Capital Blue Cross family in Harrisburg, Pennsylvania.

Finally, we were very excited to close our first Mirth Care Enterprise opportunity with Health First Network in Florida. Gary will have much more to say about that deal during his comments, as well.

Just after the end of the quarter, we released the UD2 version of our core application, and the 8.3 -- 8.10 version of the KBM. These releases focus on our continued commitment to improve physician experience and quality improvements.

The feedback from our beta clients has been positive. Improving the physician/patient experience is a core tenet of our development effort, and these releases represents another positive step in our product evolution.

As we have discussed in prior calls, and during various analyst meetings, the most important valuable -- or the most valuable part of QSI NextGen is our large, progressive client base. As they continue to execute our plans to improve the services we offer to our clients, two important initiatives were launched during the fourth quarter.

The first was a major change in the way we deliver client support. In February, we began to move from a traditional linear tiered call center model to a more modern model known as intelligence forming and knowledge centered support. This methodology is used by numerous large software companies across various industries, in order to provide improved services for their complex solutions.

In addition to the change in methodology, we are also replacing our help desk technology. We have entered an agreement with SalesForce.com to implement their cloud -- or service cloud solution. This implementation will span several quarters.

We have already received a great deal of positive feedback on the new support model. And when combined with the new technology, we believe our client experience will be dramatically improved. Both of these initiatives are relevant for this call, because they will impact the cost of sales and OpEx for the ambulatory division in FY16.

Moving on to hospital solutions. Hospital solutions continue to stabilize revenue and reduce cost. The group ended the year with a revenue increase over FY14 of more than $2 million, in a significant reduction in operating expenses.

As we continue to move to a shared services model, the hospital system implementation services and IT resources have been moved into a corporate structure. This model provides coverage for our hospital customers, and provides additional cross-trained resources to support other product lines.

Increases in cash collections, as well as additional sales of our emerging department module, offset the declines in overall implementation module -- overall implementation revenues. Operating losses also continued to decline, as part of our ongoing strategy to aggressively manage overall G&A excesses, while still supporting our existing installed base.

Our dental operations contributed to the success of the quarter as, as we were able to recognize over $1 million in revenue on a contract executed earlier in this year. This revenue was tied to specific deliverable enhancements to our QSI dental web product in the quarter. With that, I will turn it over to Monte Sandler.

Thanks, Dan. Good morning, everyone. It was another strong quarter in RCM services. Revenue for the fourth quarter was relatively flat to last quarter, at $21.8 million, which is positive, considering the first calendar quarter of every year tends to be (technical difficulty) deductible resetting. When deductibles reset, payment responsibility shifts to the patient, thereby delaying our collections 30 to 45 days. More importantly, Q4 revenue was 31% over the prior-year quarter.

FY15 revenue was a record $80 million, resulting in 17% growth over the prior year. Our organic growth continues to be strong, as we remain focused on helping our customers optimize their revenue and achieve their goals. We had a strong quarter of bookings, including an expansion of our new tenant relationship, as well as the addition of Southwest Eye, a large ophthalmology client that was once a customer of a leading RCM competitor.

The Southwest Eye story is a great one. They were an existing NextGen EHR customer that transitioned off of a leading RCM competitor two years go, and onto the NextGen EPM platform, where they attempted to manage the revenue cycle internally. We supported them every step of the way, and were there for them when they decided that they were not achieving their desired results on their own. We have already deployed our RCM services with them, and are excited to be working with them to achieve their goals.

We are seeing momentum from earning the top overall RCM performer in the first-class study on RCM services last quarter, resulting in a growing pipeline, and leading us to invest in additional RCM domain experts for operational sales support, as the focus in volume of RCM opportunities continues to grow. We're pleased that Congress has permanently repealed the SGR after 17 separate dock fixes since 2003, which secures Medicare reimbursement for the foreseeable future, and is a positive for our revenue model. This legislation is being dubbed as the biggest piece of healthcare legislation to come out of Congress since the High-tech Act in 2009, and the Affordable Care Act in 2010.

But also included in the legislation is the framework to shift into value-based reimbursement models. We have already begun working on our technology enabled full-service solutions, to assist our customers in transforming their businesses from fee-for-service to fee-for-value organizations. I will share more on this in future quarters, as we progress.

Because the SGR repeal did not include any delay in the adoption of ICD-10, we expect ICD-10 to be implemented on October 1. Because our recent RCM survey of hundreds of practices, across 40 states, resulted in only 21% of respondents being very confident in their ICD-10 readiness, and 29% being not at all confident, or not sure, we have released our ICD-10 guarantee, in which we guarantee that our software and services will be ICD-10 compliant, or we will defer our fees. This program serves as another way that we align our incentives with our customers' outcomes.

I am also excited to announce the upcoming launch of our new and expanded provider credentialing services, focused on helping providers properly enroll and re-enroll with government and third-party payers, in a recurring service model. We expect to grow this part of the business as a standalone offering, and to be a lead generator for our full-service RCM services. I am proud of everything we accomplished this year in RCM services.

Top performer recognition by class, where 100% of respondents scored us as a trusted business partner. And double-digit revenue growth, as a result of a lot of hard work by our dedicated team. I want to thank them for the great work they do everyday, focused on helping our customers achieve their goals. Our people are our assets, and none of this would be possible without them.

I am very excited about the direction of RCM services 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. I look forward to seeing many of you at our Analyst Day on June 8, and will now turn it over to Gary for his comments.

Thanks, Monte. Good morning, everyone. Our Q4 and FY15 success were predicated on our ability to sell our diverse product set into the evolving healthcare market, and across the QSI NextGen client base of approximately 85,000 providers. The rise of value-based care is changing the market dynamic, creating new economic and clinical models, creating new customers and changing the competitive [landscape].

Our portfolio of over 28 products and services allowed us to successfully adapt in the past 12 months, and has us positioned for FY16 with some exciting new products and services. Our solutions are well positioned to take advantage of the current market trends and opportunities. Interoperability, data integration, and data aggregation are seen as the key to the promise of lowering the cost of healthcare, through the sharing of digital health records. Mirth has given us the right tools at the right time to meet this challenge, as evidenced by their continued growth and success in FY15.

Mirth has emerged as the solid choice for technology and service in the HIE market, as first-generation vendors have failed, and Mirth is grabbing the replacement market. With such premier HIEs as the Health Information Network of Arizona, the Rochester Rio, and the State of Arkansas Office of Health Information Technology, they validate Mirth as a market leader. The Mirth technology stack is the backbone of NextGen Share, our direct trust certified HISP, which now allows over 250,000 providers to share clinical information.

NextGen Share technology is connecting our providers to securely share clinical information with trading partners, such as [Enovolon] and Merge Healthcare's iConnect platform, also validating that this platform can drive incremental transaction revenue in these B2B relationships. Value-based care necessitates the need for true population health management, and FY15 saw the release of Mirth Care Enterprise and NextGen Care, to meet the needs of the NextGen client base, but more importantly, the vast non-NextGen market opportunity. Mirth Care Enterprises debuted at HIMSS, and showcased the capabilities of the platform, powered once again by the core Mirth technology.

Mirth Care Enterprise features a powerful care coordination and chronic disease management platform. Clinical data repository that aggregates clinical and financial data, from disparate sources. And finally, an advanced analytics tool, designed to provide relevant and actionable performance data across the healthcare organization.

In April, we announced the sale of Mirth Care Enterprise to Health first Network for Population Health, care coordination and risk management. Health First Network is comprised of more than 700 providers and over 200 care extenders in Northwest Florida. And Mirth Care Enterprise will be a critical component of the HIT strategy.

The HFN win validates our ability to compete in the non-NextGen population health and analytics market. And we look to continue to expand this product into the payer, hospital, ACO and ambulatory provider space in FY16. NextGen Care contributed to the ambulatory growth in FY15, with solid license growth over FY14, and we're looking forward to increased growth this year, with our most significant release of the product yet.

NextGen Care integrates with our ambulatory EHR and PM suite, as well as our patient portal and dashboard products. And it features advanced, actionable patient risk scoring, through our partnership with Milliman. Both Mirth Care Enterprise and NextGen Care represent our commitment to the patient population health market, and our determination to become a market leader.

RCM services continue to take advantage of a market looking for a more tailored and personal revenue cycle partner. One size doesn't necessarily fit all. The RCM market continues to be driven by a number of factors, including ICD-10, shrinking physician reimbursement, increasing operating costs, shortage of talent and the substantial rise in the patient pay responsibility.

We are proud that our clients recognize RCM services as a true and trusted business partner, validated by our most favorable vendor ranking for overall performance in the ambulatory RCM services category for class in FY15. RCM services growth in FY15 was fueled by notable wins, such as Tenet Healthcare and Capital Women's Care. And we were excited to see the acceleration of the trend toward longer-term contracts. RCM services will continue to be an area of growth in FY16, as we expand our product line to focus on value-based financial management and clinical services.

FY15 also saw the continued growth of our EDI division. This group continued to expand their service line beyond typical financial transactions. And going forward, they will be an integral part of the value-based services we provide the market.

FY16 will see a variety of products geared to help our clients deal with the ever-expanding patient self-pay issue, which can cripple an organization financially. Products that will make a huge difference in managing patient estimation and front end collections. Advances in technology around schedule management will lead to higher patient satisfaction, as well as maximizing the provider's schedule in the office.

Our ViaTrack EDI product continues to make inroads into the non-NextGen market, and we hope to greatly increase the visibility of this incredibly competitive product outside the NextGen base.

Q4 of FY15 was successful on a number of fronts. Mirth ended their fine year with the Solano County HIE win, and additional revenue from Harris Corporation, a strong Mirth [VAR]. Ambulatory division highlights include a very significant addition to our partnership with Gila River Healthcare Corporations. Accelerated Rehab made a long-term investment in NextGen as a partner, as they rapidly grow their footprint in the physical therapy market.

Likewise, Next Care continued their rapid expansion in the urgent care space, and made a noteworthy investment in NextGen licenses. Our growth in the community health center FQHC market continued with the addition of La Clinica de la Raza to the NextGen nation.

Our professional services group finished off the year with a large service contract with Augusta Healthcare, and our VAR group capped a fine year with additional investment by TSI, GBS and Topaz, to name a few. RCM services had notable wins, with Southwestern Eye, Grace Health, Baptist Health South Florida, and an expansion of our Tenet Health Systems scope of work.

Wrapping up our call this morning, I would like to report that our combined division pipeline, despite the drop in the hospital contribution, remains solid, and sits today at $161.3 million. The Company executed 66 new arrangements on a consolidated basis, versus 81 the prior quarter. 69% of the arrangements were greenfield, 31% were replacements.

Discounting did not materially change in the quarter. And as of March 31, 2015, there were 129 quota carrying sales in management positions. There was no material increase in the sales staff over Q3 of FY15.

And with that, I would like to thank you for your time and continued interest. Maria, I would like to turn it over to you now for questions.

(Operator Instructions)

David Larsen, Leerink.

Hey, guys. Congratulations on a good quarter and a good year.

Can you talk about the Gennius deal? What capabilities that brings to Quality Systems, and your evolving approach with regards to population health, when you go to sell to clients? Thanks.

Thanks, David, and appreciate the good words.

That transaction, we announced early in April. And what it really brings is, it enhances our enterprise analytic capabilities. And what it does is it broadens our business intelligence capabilities, especially as we are looking at new value-based care requirements, going forward, as part of our Mirth enterprise stack.

So, when we look at population health management, especially going forward, we believe that the analytical component is going to have a greater presence. And this is a core technology that we believe is important, as we go forward. We are close to finishing the integration within the Mirth stack, and are very pleased of what we have seen so far.

Great. And then, are you selling to both hospitals and physician groups with these multiple products, or is it largely big physician groups? Thanks.

We are opportunistic in nature. So, we will not be limited to one specific set of target opportunities, I guess is the right way to say it. However, traditionally we have been very, very strong in the large, multi-practice, physician-led opportunities. But again, we are opportunistic in nature, and certainly have a history of going beyond that.

Anything you would add, Gary?

Yes, traditionally NextGen has had a very large footprint with, as Dan mentioned, our large enterprise clients. Those are both hospital and ambulatory provider groups, that have a large footprint in the ACO market. And so, that fits right into the strategy with Mirth Care Enterprise. And particularly, the care coordination and chronic disease management capabilities will lend themselves very well to payers that offer those services to their physician clients.

So, it is a pretty broad base that we can bring to the market. And, again, to point out that one of the key aspects is that it is system-agnostic, vendor-neutral, however you want to phrase that. So, it is really our intention to heavily go after the non-NextGen market.

Thanks a lot.

Thank you, David.

Sean Dodge, Jefferies.

Good morning. Thanks, and congratulations on the quarter.

Monte, you've introduced the ICD-10 guarantee now. And you previously had mentioned an expectation that revenue cycle activity would begin to pick up this summer, ahead of the transition. Are you beginning to see signs of an inflection demand now? Or are providers still a little apprehensive to buy into the thought of ICD-10 actually happening this year?

This is Monte. Thanks for the question. We know that the physician market tends to procrastinate when it comes to these types of deadlines; and I think, especially as it relates to ICD-10, since it was delayed last year. So, now that the SGR has been repealed, and there was no extension of ICD-10, we are definitely starting to see a lot of mobilization, and panic is starting to set in. So, we feel like we are hitting the market at the absolute right time. Providers are ready to start talking about it, and focus on figuring out how they are going to solve it.

And so, those discussions continue to increase, and become more relevant, as part of our sales opportunities, and within our existing customer base. So, we feel like our timing is perfect. And we think we're going to have a really busy summer, making sure that we get our existing customers ready, and we are able to take advantage of all of the new opportunities, as it relates to groups that are not ready.

Excellent. And then, John, you guys have had a couple of quarters of low tax rates now. Last quarter was due to the extension of the R&D tax credit. This quarter, you mentioned benefits from state tax planning initiatives. Is any portion of these state benefits sustainable? Or is a mid-30% range still the right one to think about, going forward?

Thanks for the question. Yes, we did have great success, as far as state tax planning. This quarter benefited from some activities that had multi-year benefit. That is what compounded the benefit in the current quarter.

In future quarters and years, I would not expect quite the same level of benefit. I think we will revert more to our natural long-term tax rate. I wouldn't say mid-30%s; low-30%s.

Okay, great. Thanks again.

Jeff Garro, William Blair & Company.

Good morning, guys, and thanks for taking the question.

I want to dig a little deeper into the forward visibility that you guys have. And with 83% of revenue recurring at this point, maybe you guys could discuss, from the non-recurring part, what is forecast-able and not forecast-able there? Where is there areas that are still muddy, in terms of the forward outlook?

This is John. So, we took a look at that. And as you got from my commentary, we are not prepared to provide formal guidance. However, I did cite the areas where we thought we were going to have the most continued strength -- those product lines.

What is difficult to predict in totality, of course, is the impact of the saturation of the EHR/EPM market. While Monte has good sentiment about the opportunities for RCM, with respect to ICD-10, what is a little unclear is the timing of which the, as he put it, the panic will set in. And there is obviously a lag between the date he gets booking and the date that he is actually able to capitalize on that, in terms of revenue. So, I would say it is more about the timing of what we see, rather than the extent of it, in the long term.

Got you. So, then maybe as a follow-up, how should we think about the current pipeline? And looking at the pipeline -- I believe is up 4% year over year. How should we look at that as indicative of system sales growth in the next fiscal year?

This is Gary. So, as I mentioned, the pipeline remains solid, despite the fact that the hospital side of the pipeline is off. So, those areas that John just mentioned -- RCM, Mirth, EDI -- all of those things are contributing to growth. System sales -- we have had pretty stable and solid business over the last couple of quarters, fueled by some large wins, and a lot of opportunity within our base. And our lead management, our opportunities, continue to be very stable. So, all of those things point to a stable pipeline moving into this year.

Great. Thanks for taking the questions, guys.

Michael Cherny, Evercore ISI.

This is Elizabeth Anderson in for Michael.

I had a question about your-- from your traditional EHR business. Can you talk about, over the last few quarters, how the trend has moved from subscription sales versus license sales?

Yes, I will take that one, Elizabeth. This is Gary. Good morning.

The Business has been largely the same over the last few quarters. We have had a mix of large sales, and medium and small. And so, that remains the same.

I think the replacement businesses, as of last quarter, remains about the same. About 30% or so, every quarter, are replacement systems.

I wouldn't say that our SaaS business has grown, necessarily. We still have a much higher mix of traditional license sales than we do actually SaaS, in that EHR market.

Where we are starting to see more SaaS sales, really, in the Mirth side. That business, and particularly as we talked about Mirth Care Enterprise being a big part of what we're doing in the future, that will be much more SaaS-based revenue. And so, we will see that continue to grow.

Perfect. That is really helpful.

And then my follow-up question is: Now that you have owned Mirth for a little while, can you talk a little bit more about where it stands competitively in the market, in terms of -- who you are seeing, in terms of other deals you are competing against? And how you feel that your product is standing out in that market?

Okay, this is Gary again. So, without naming specific vendors, I think what has been really exciting, in the last year, is, as I mentioned just briefly in my statement, there has been a replacement market growing of the first-generation HIE vendors. And those products have not stood the test of time. And where Mirth has really come on is that they have a solid platform, and they deliver the kind of results that people are looking for. And so, they have enjoyed a lot of success in state-wide opportunities, with smaller regional or hospital-based closed HIE networks.

And really, one of the areas that we haven't mentioned is -- we are replacing our legacy HIE, the old NextGen community health solution, with the Mirth stack. And that is going on now -- will go on over the next, probably, 12 to 16 months. And at the end of that phase, we're going to have north of 40 NextGen customers using the Mirth HIE, plus their own base today. So, it will be one of the largest and most widely used HIE products in the market.

And the other part of it we are excited about is -- their customers are very happy with it. So, again, replacement market, replacing our own, and the technology is solid, with a great customer sat. So, it has been a fun story.

Awesome. Great. Thanks so much.

Thank you.

David Francis, RBC Capital Markets.

Good morning. Wanted to shift focus to the implementation revenue and cost of goods line. I guess, first, can you tell us what the dynamic was, to cause the spike in revenues there on a sequential basis? And given that that has been a negative drag on margin for the last several quarters, tell us, beyond the headcount reductions that you mentioned, what drove the margin turn there? And more importantly, is it sustainable, as we go into FY16?

David, this is Dan. Thanks for the question, and good to hear from you.

A couple things about training implementation that we have seen over the last three years: As we have seen the downward trend, over time, of new system sales, there is a corresponding hit, or impact, on training implementation over time. And so, what we have looked at is the ability to stabilize that, and understand how to properly be able to respond to a relatively unsteady demand. And so, what you are seeing, in the difference between the third quarter and the fourth quarter, is the issue of demand and timing associated with providing of services.

In the third quarter, we regularly talk about the fact that we have a number of distractions. Three major holidays, our big UGM user group -- all of these impact our ability to deliver training implementation on a fee-for-service basis.

We go into the -- or we went into the fourth quarter with a number of contracts and requirements. Gary talked a little bit about some of the expectations, going forward, from the consulting support organization on that.

But the key issue is the timing of the demand. And a couple pieces that impact that -- there is some issues of different parts of the year. But there are other issues, such as MU2, MU3.

So, we have got a number of clients that still have not upgraded to the right level of system, in order to achieve MU2. Those folks have queued up requirements for training implementation. Gary has indicated that we are relatively stable in the number of new implementations that we are doing on the traditional services, all of which drive demand.

So, part of it, from the top end, or the revenue side, it has to do with being able to capture what is not a consistent demand, but is somewhat of a choppy demand. And then, on the profitability standpoint, is to change the support model, which I think we have done very effectively, to be able to be much more responsive on providing just-in-time cost associated with these revenue opportunities.

So, just to put a bow on it, are you telling us that we are still probably going to expect some choppiness, from a revenue perspective? But you think you have got a better handle on the throttle, relative to the expense side, of what you will see coming in, relative to revenues?

I believe that is a good summary.

Okay. And then a quick follow-up: It looks as though the software cap rate might be starting to sneak up a bit. You guys have been a little bit more conservative, relative to cap rate, over the last year or so, and have seen a couple million dollars start to hit the balance sheet, without looking at the cash flow statement. Can you tell us where -- I guess, what is driving a higher software cap rate? And there again, if that is something that we should expect, going forward? Thanks.

This is John. The cap rate for the entire FY15, I believe it was around 17%. Q4 came in high, at 22%. That had to do with the timing of the achievement of technological feasibility of a couple of our products. That is just timing; that is all it is. With respect to what that rate might be going forward, I really don't see why FY16, in total, would differ greatly from the FY15 average cap rate.

Great. Thanks, John.

Gene Mannheimer, Topeka Capital.

Good morning, and thanks. Congrats on a solid quarter and finish to the year.

Thank you, Gene.

Steve -- sure. Steve, I wanted to ask -- or Gary, for that matter -- in your discussions with prospects, how much of the conversation is around replacing the EHRs and meaningful use? Or is it more about the next wave of pop health? And related to that, what percentage of the time are you including Mirth in your -- in conjunction with your EHR sales?

This is Gary. I will take that one.

There is a lot of conversation now, and a lot of education, I think, also, in pop health. So, it depends on who you are talking to. As you are talking to the larger provider groups and hospitals that have larger numbers of employed physicians, they're ahead of the curve in terms of knowledge, and have probably already, in some cases, been trying different population health solutions.

The mid-market and down -- there are a lot more conversations that are probably around training them to understand what they are going to need, in terms of technology. So, we will see that segment of the market trailing a little bit.

A lot of our larger, higher-end system sales -- the things we mentioned, like Gila River and those types of situations -- they generally are now going to have some component of the Mirth stack, whether it is just the connectivity tools, whether it might be the CDR. So, quite often -- or very often, I should say -- Mirth is in the conversation because interoperability is on everybody's mind. Everybody talks about how difficult it is. And so, clearly, that is one of our assets that we can bring to the table. And we can make people feel a lot more comfortable about our ability to connect to other systems, outside of their own EHR.

That makes sense, Gary. Thank you.

And, Monte, one for you: I wanted to piggyback off of the earlier RCM question, and ICD-10. I know you are not giving guidance for the year, but RCM grew about 18% in FY15. Do you expect that to be similar, better or worse than what -- for next year, versus what you achieved this year? Thanks.

This is Monte. Thanks for the question.

I think -- we continue to see a lot of momentum in the dialogue. We certainly still consider ourselves a growing business, and will continue to pursue that aggressively.

As John indicated in his comments, around unpredictability, around timing, we think there is going to be opportunity, significant opportunity, around ICD-10. But it is hard to pinpoint exactly when that happens.

Does it happen before ICD-10 is implemented -- which makes our summer really busy, and would lead to good revenue realization for this fiscal year. Or does it happen after ICD-10 implementation, when cash flow dries up, when providers are struggling, when payers are struggling? And bookings, at that point in the fiscal year, have less impact on our current fiscal year revenue realization.

So, again, we believe that we are continuing to grow, and grow aggressively. What's uncertain, really, is just what the timing is going to look like.

Thank you.

Sean Wieland, Piper Jaffray.

Thank you. In the hospital segment -- maybe some mixed messages in there with the -- can you talk a little bit about the $1.1-million favorable movement of sales return reserves? What went into that? And then, more broadly, could you update us on the number of hospital customers you have -- your commitment to those customers, as well as the -- your commitment to selling new hospital footprints?

This is John. I will talk about the revenue side of your question, then turn it over to Dan for the operational side.

So, we have a consistent sales return methodology across business units, across periods. And so, it is a function of a variety of things -- the relative returns to concessions in a given trailing period; a function of gross revenues in that period. And a year ago, the factors that went into that math, for in-patient, were driving the reserve level up. And the factors, more recently, drove it down. It is just math.

And responding to the second half of your question, we have well over 200 hospitals that we have some type of relationship within the hospital services division. We have over 300 hospitals we do business across the Company. So, I just want to distinguish those two pieces.

We have continued to state that we are committed to focusing on the satisfaction of our existing client base, and meeting our contractual obligations, while continuing to look at opportunities, within that particular division, on what might be possible to increase long-term stockholder value. We haven't really said much beyond that, other than the fact that we continue to be focused on providing a good, quality service, and meeting our contractual obligations, and doing it in the lowest-cost manner. I think we were successful last year, in both a high level of collections -- a much higher level in client satisfaction, and delivering it at a much lower cost.

Okay. Are there any plans to sunset any of those products? It doesn't seem like it is a big contributor to growth.

We are not, in any way, prepared to talk about possible sunsetting of products at this point.

Okay. Last one I will squeeze in: The Tenet RCM deal -- can you give us any sense of the contribution of that in the quarter -- when it went live? And what led to the expansion within the quarter?

This is Monte. Our Tenet relationship was signed in Q2 of FY15, and it went live in Q3 of FY15. So, we saw, certainly, a full quarter in our fourth quarter. And I think, pretty close to a full quarter in our third quarter.

We are excited about the expansion of that relationship, which were in both mine and Gary's prepared comments. Both -- the expansion is both in scope, as well as term. So, there is a lot of good stuff happening with Tenet and RCM Services.

All right, thanks. And then, the timing of NextGen Now, going into general release, is when?

The timing of NextGen Now, going into general release, is currently stated for early spring of calendar 2016.

Okay. Thanks so much.

Thank you, Sean.

Garen Sarafian, Citigroup.

Good morning, everyone. I wanted to just touch on the revenue cycle segment in a little bit different way. You emphasized growth in the segment, for multiple reasons, and you're not sharing specifics. But, of the growth that you do expect, how much of it is confirmed market growth versus share expansion?

This is Monte. Share expansion -- what do you mean by that? Within our existing --

No, just taking share from competitors -- gaining share.

I don't know that I am prepared to give you a breakdown. We continue to see growth in all areas, certainly within the existing NextGen customer base. That tends to be a big driver of growth.

We're winning opportunities in the net new market, with organizations that are using other competitive RCM products and services, as well as net new customers that are doing the billing internally, and have determined that it is no longer a core competency, or anything that they can really do as effective as we are able to do it on their behalf. So, if I had to weight, I would say certainly more is coming from the NextGen customer base. But we are winning our share of opportunities in the net new market, as well.

Got it. Fair enough.

And at a higher level, I understand there is no guidance today. But you mentioned sales growth would slow versus last year. So, when you look at the Street, the consensus seems to be 6% or 7% growth, versus this past 10% growth. So, I guess, to ask in a way that you could maybe respond again this year, is this collective estimate something that you're comfortable with?

We are not going to get any more specific than my prepared remarks on that point.

Fair enough. Thank you very much.

That was John, sorry,

Thank you, Garen.

Sandy Draper, SunTrust Robinson Humphrey.

Thanks. Just a few questions -- I apologize if I missed answers to these earlier.

I can't remember -- somebody talked about -- Mirth had a fixed fee contract. And I'm not sure if this was what Sean was referring to. But so, what I'm trying to understand -- was there a one-time benefit that Mirth got in the quarter, that would be a step-down? I'm just trying to understand what was the -- what that comment was? And what the economic impact is of the Mirth fixed fee contract?

Thanks. This is Dan.

The Mirth fixed fee contract was just an example that, based upon that particular contract, the timing of the recognition of revenue for that particular contract was more heavily done at its completion, rather than at -- as it is being done. Traditional fee-for-service contract -- you would recognize revenue more over -- very much as you complete -- or as you do the work, versus a fixed fee. There are some components that you can't really recognize till the end.

So, it was just one example of how that contributed to a number of other issues that contributed to resulting in a higher training implementation revenue for the quarter. I wouldn't make much more to that. I wouldn't make anything more of that than just what that -- just what I stated.

Okay. That's helpful.

And then the second question: The commentary about, I guess, is maybe -- I can't remember if it was around cap rate or development or something. Essentially that basically -- that it sounded like the cost of goods, as a percentage of revenue, in ambulatory is likely to go up. Did I hear that correctly?

There were some comments, again, about some development things happening that said -- would impact the cost of goods at ambulatory. My interpretation of that was -- sounded like cost of goods is going to go up, as a percentage of revenue. Did I hear that right, or did I completely flip that around?

This is John Stumpf. My reference was to the cost of net R&D expense in the P&L, in relation to revenue, which, in R&D, is a separate category of OpEx. My comment was not with regard to the cost of goods sold within the ambulatory business unit.

Okay. Great. That is helpful.

And then my final question -- just looking at the -- what I would consider the Mirth business -- it is not all Mirth, but it's the implementation -- sorry, the line of the -- of NextGen that is the other line -- it looks like pretty consistently you have a higher cost of goods in the first part of the year, then lower in the second part. Is there some seasonality to the -- why the gross margin is typically stronger second half of the year? I'm just looking at -- it's happened the last two years.

So, my interpretation of that is to [make it churned out] of lower first-half margin, stronger second-half, in that other services line. What drives that, or was that just completely coincidental? Thanks.

This is John. I would say it is completely coincidental. Other services comprises quite a few things, and we have mix shift going on. We have varying rates of growth of individual products that are within there. But I could not think of a factor that would cause it to have a heavier load in the first part of a year.

Okay, great. Those were my questions. Thank you.

Thank you, Sandy.

Ricky Goldwasser, Morgan Stanley.

This is Zack Sopcak for Ricky. Thanks for the question.

I wanted to follow up on Garen's question on RCM really quick, and just ask about -- he talked about growth of RCM within the NextGen base. Is it still fair to think that is somewhere around the 10% penetration level?

Yes, I think that is still reasonable.

Okay, cool, thanks.

And then, when I look at the year-over-year growth -- and I know we've talked about a number of different drivers. Did you see any impact from an increase in utilization of the healthcare system driving some of that RCM year-over-year growth?

We know that some of our customers have benefited from the Affordable Care Act and with more of their patients being insured, and a little bit more predictability as it relates to the collection of some of those services. So, I think the answer is yes. I wouldn't tell you that it's material. I think the material growth is just the expansion of our Business and bringing on new customers, and continuing to deliver services, and find ways to help our customers optimize their revenue.

Okay, great. Thanks for the questions.

Thank you.

Steven Halper, FBR.

Just one point of clarification: On the $1.1 million of favorable sales return reserves, I assume that drops all the way down to the pre-tax line, and it is a non-cash item, correct?

Yes. This is John. It is pre-tax, non-cash. And of the $1.1 million, I will be a little bit more specific. It wasn't that one year was $1 million, and the other year was $100,000. It was probably about half and half -- one year went up by, say, $500,000; the other year, down by a like amount, just for added clarity.

All right. Fair enough. Thanks.

Thank you.

There are no further questions at this time. I would now like to turn the floor back over to Mr. Plochocki for any additional or closing remarks.

Great. Thank you, Maria. And thank you all for joining us today.

We're going to look forward to seeing you, as Gary cited, on June 8 in New York, at our Analyst Day, where we will be able to provide a much deeper dive, a lot more color, and a really strong view on all of the work that we have done to prepare for the new modeling that is emerging in healthcare. We have done a lot of work behind the scenes. We have got a lot of work to go forward.

But our customer base is continuing to expand. They are starting to become actively engaged in accountable care modeling under capitation, and different forms of shared savings. And our job is to help them with performance measurement tools, so that they can accomplish the tasks to be successful in the areas of quality, appropriateness of care, and efficiency of care.

And we look forward to sharing a lot of that with you because we believe these are all the new beginnings of bell curves, of new product and service offerings, that we are going to be selling into the market. And we think that is going to be something that we are certainly going to benefit from, because of the installed base we have in place.

So, again, thank you so much for joining us today, and we look forward to seeing you on June 8. Thank you.

Thank you. This does conclude today's teleconference. 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 46698028. 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.