NextGen Healthcare Inc (NXGN) 2017 Q3 法說會逐字稿

Welcome to the Quality Systems Incorporated fiscal 2017 third quarter conference call. Hosting the call today from Quality Systems/NextGen are Rusty Frantz, President and Chief Executive Officer, and Jamie Arnold, Chief Financial Officer. Today's call is being recorded. All lines have been placed on listen-only mode, and the floor will be open for your questions following the presentation. (Operator Instructions).

Before we start I would like to remind everyone that the comments made on this call may include statements that are forward-looking within the meaning of the Federal Securities Laws, including and without limitation, statements related to anticipated industry trends, the Company's plans, future performance, products, perspective and strategies, risks and uncertainties exist that may cause results to differ materially from those expressed in the forward-looking statements, including among others, those risks set forward in the Company's public filings with the US Securities and Exchange Commission, including the discussion under the heading Risk Factors, in the Company's most recent Annual Report Form 10-K, and any subsequent quarterly reports on Form 10-Q. Any forward-looking statements speak only as of today.

The Company expressly disclaims any intent or obligation to update these forward-looking statements. Our remarks on today's call include both our earnings results and guidance, which contain certain non-GAAP financial measures, for our earnings results the GAAP finance measures most directly comparable to reach non-GAAP financial measures used or discussed, and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our third quarter 2017 earnings press release that was filed with the SEC, and is posted to the Investor section of our website. This release also provides qualitative descriptions of how we have calculated non-GAAP financial measures contained in our guidance.

At this time I would like to turn the call over to Rusty Frantz, President and CEO of QSI NextGen. Rusty.

Thank you Operator. And thank you to everyone on the call for joining us this evening to discuss QSI NextGen's fiscal third quarter. I am pleased to report another quarter of solid results, and continued successful execution of our strategic plan. On the call today I will review some of the quarter's financial highlights, as well as provide you within an update on the progress of our strategic plan. And then I'll turn the call over to Jamie Arnold, Chief Financial Officer, to dig a bit deeper into the financial results from our fiscal third quarter.

Our total revenue for the quarter came in just shy of $128 million, compared to $117 million in the comparable quarter of fiscal 2016. Third quarter non-GAAP EPS of $0.23 increased 44% from $0.16 for the same period a year ago. With another quarter of strong financials under our belt, we remain confident in the full fiscal year outlook that we previously provided, and Jamie will be narrowing our guidance towards the upper part of our range later in the call. Taking a step back from the numbers, we continue to make progress in the build phase of our strategic restructuring plan.

Over the past year we have made major changes to our executive team, which have been thoroughly refreshed by seasoned folks with deep industry experience. And in the last quarter we largely built out the next layer of management, with the addition of industry veterans in sales, marketing solutions, and R&D, as well as a number of internal promotions to round out a diversified and energized management team. These changes are reinvigorating the organization, and giving team members at every level a sharper sense of purpose. We now turn our attention towards building and launching the cross-selling programs for the drive growth into the future. Also, as you may recall, through the restructuring effort, we streamlined the organization, and were able to cut about $14 million to $16 million of cost across the enterprise. While at the same time improving client satisfaction, and thus improving client retention.

During the quarter client satisfaction as measured by our internal voice of clients survey, seems to have stabilized around 7, based on the service improvements that we have made. Overall our internal satisfaction index was up 11% over the last 12 months. The nest expected increase will be driven by the great progress we have made on software stability, performance and usability with the latest releases. I will cover that later. The great news is that our internal results are now showing up in external data, notably from Class, which in their most recent report in December shows meaningful improvements year-over-year, for both our EHR and practice management solutions.

This uptick serves to confirm our confidence that we are on a track with our clients. Throughout the third quarter, we continued to improve our maintenance attrition rate, which as a reminder we calculate on a trailing 12-month basis. It stands at 7% today, compared to just north of 10% last March at the end of fiscal 2016. Notably we also saw a continued improvement on a sequential basis from 8% last quarter. I'm very happy about these improvements, and believe we have taken important steps to drive the success, like our re-focus on client relations and client experience.

I am confident that we are having an increasingly positive impact on our client base every day, and these results certainly energize our NextGen team. An additional validation of our improved client experience comes from client acceptance of our latest product release. In October we released 5.8 UD3, the most recent version of our EPM and EMR software. After an extensive beta program in which approximately 20 clients participated. Feedback from the beta clients around stability, performance, and usability have been incredible, to the point that some of our larger clients have been voluntarily acting as references for other clients evaluating the implementation. Now, approximately 75 days later, we have roughly 450 clients in the process of implementing the upgrade. This is more than a 40% increase than at the same time after the last release, the UD2 release, from prior to my administration.

Our December release KBM 8.3.11 is tracking similarly, including from a quality performance and usability standpoint. As this release rolls out the combination of strong execution on both client service and software delivery, should directly contribute to continuing to increase the satisfaction scores discussed earlier. While we are happy with the progress we are making regarding client satisfaction, and we believe there is a fair amount of low-hanging fruit accessible through cross-selling, I want to discuss when material growth will show up in our income statement. At the outside of my comments, I talked about building out the Management team. As stated, with the team in place, we are moving into the final stages of the build phase in our transformation plan, which includes turning our attention to updating the offerings, and building the cross-selling programs most notably in revenue cycle management and EDI. We're a bit behind where we would like to be, which will affect the timing of growth oriented bookings. Additionally we continue to assess external factors that impact our business, namely the recent Presidential election.

While we are not terribly concerned with the outcome of the election, we have noticed some uncertainty in our client base. We believe it's unlikely that MACRA will be repealed, and while we have significant cross-selling opportunities with our client base in the next few years, we have seen some sales cycles elongate a bit post-election. So as we transition to the growth phase of our strategic plan in 2018, with the delay in launching our cross-selling programs, combined with uncertainty in the market, it may take some time for the new opportunities to show up in our reported bookings number. From there it will still take a few quarters before we begin to recognize it as revenue.

Said simply fiscal 2018 will be about bookings growth, which will translate into fiscal 2019 revenue growth. Finally, I would like to call attention to our continued strong performance on the balance sheet. Our focus on accumulating liquidity, combined with an organization that is increasingly nimble and operationally effective, has put us in the enviable position of having both organic and inorganic options for growth into the future. With that, I'll turn the call over to Jamie, for a look at the fiscal quarter 2017 financial results. Jamie.

Thank you, Rusty. Thank you to everyone for your continued interest in our Company. Before I begin discussing our financial results for the quarter, I want to remind folks that our revenue reflect the disposition of our hospital business unit, respectively from the October 2015 sales date. Previously reported quarters have not been retrospectively adjusted, and our fiscal third quarter results 2016 includes approximately one month of contributions from our hospital business.

Total revenue for the quarter of $127.9 million, 82% of which is recurring was up 9% when compared to $117 million in the third quarter of fiscal 2016. On a pro forma basis excluding our divested hospital business, and including HealthFusion for all of the third quarter of last year, our total revenue of $127.9 million this quarter, would be up 2% from $125.3 million last year. Revenue from software license and hardware was $17 million, an increase of 5% compared to the $16.2 million reported last year. This growth was driven by higher sales to new clients, offset by lower volume from the reseller channel.

Revenue from subscription services increased 93% year-over-year to $22.5 million. Primarily due to contribution from the MediTouch cloud based system acquired in January 2016. On a pro forma basis revenue from subscription services grew 19%. Support and maintenance revenue of $39.9 million in fiscal third quarter of 2017 was essentially flat, compared to the $39.5 million last year. Revenue cycle management contributed $20 million to total revenue in the quarter, which was down 7% on a year-over basis, which is in line with our previously stated expectations due to prior period attrition notices. Note also that Q3 FY16 benefited from some one-time cash basis revenue recognition.

Electronic data interchange and data services revenue of $21.8 million increased about 6% from $20.6 million last year. It was driven by a combination of new customers largely from HealthFusion, and higher volumes from our existing customer base. Finally, professional services revenue of $6.6 million in the third quarter, a $12% decline from $7.4 million last year. During fiscal 2017 we are experiencing lower professional services, due to reduced level of new software sales in prior quarters, and an increased level of work to enhance customer satisfaction, some of which is billed at reduced rates.

In terms of quarterly bookings we saw $32.5 million in the quarter, compared to $33.4 million in the second quarter of fiscal 2017, and $35.7 million a year ago. All on a pro forma basis, including HealthFusion but excluding hospital. Continuing on down the income statement, third quarter fiscal 2017 gross profit of $73.5 million was up 16.2% compared to the $63.2 million in the third quarter of 2016. Gross margins continued to improve, and came in at 57.5% in the current quarter, compared to 56% last quarter, and 54% a year ago. This is due to a change in the mix of revenue and lower amortization of capitalized software development costs. As the capitalized software related to older products has rolled off in the current quarter.

Turning to operating expenses, SG&A decreased 4.7% to $37.5 million, versus $39.4 million last year. On a percentage of total revenue basis SG&A was 29.4% of revenue in the quarter, compared to 33.7% a year ago. While there were a number of moving parts, most important to highlight is that we enjoyed a one-time benefit this quarter from the true-up of the contingent consideration related to the acquisition of HealthFusion. R&D increased in the third quarter 2017 to $19.7 million, compared to $14.5 million last year. This was due to lower capitalized R&D cost.

Our capitalized software development costs were $1.1 million, or 5.1% of gross R&D expenditures this quarter, compared to $4.9 million, or 25.3% last year due to the timing of development. You will recall that Rusty mentioned in his comments, that we had two significant product releases this quarter. Our GAAP tax rate for fiscal 2017 to date is 22.2%, which reflects the impact of non-deductible HealthFusion fair value adjustments. Our non-GAAP tax rate remains 30.5% for the quarter and the year.

Finally, our GAAP EPS for the quarter of $0.17 compares to $0.12 for the year ago period, and non-GAAP EPS of $0.23, compares favorably to $0.16 in the third quarter of last year. Our non-GAAP EPS improvement was driven by higher revenue and improved gross profit, offset slightly by modestly higher operating costs. In terms of our balance sheet we continued to strengthen our liquidity position. We ended the quarter with $24 million in cash and cash equivalents. We continue to aggressively pay down our revolver, and closed out third quarter fiscal 2017 with just $25 million outstanding, compared to $48 million last quarter. Our DSOs were down to 54 days sales outstanding in this quarter, a decrease of two days from last quarter, and 18 days compared to last year at the same time. We expect the DSO to settle in the current range of 55 to 60 days. With respect to our previously issued guidance for fiscal 2017, and with one fiscal quarter remaining in the year, we are tightening the range for the full year revenues from $494 million to $510 million to $501 million to $507 million. For non-GAAP EPS we expect to be at or near the high end of the previously cited range of $0.75 to $0.81 for the year. This concludes my review of the third quarter's financial results.

However, before I turn the call back to Rusty, I want to thank John Stump for his service to the Company and me. Many of you know John. He currently serves as our Executive Vice President and Principal Accounting Officer. And prior to my arrival at NextGen, he served as the interim CFO. John has decided to pursue another opportunity at a larger multinational publicly traded company here in Orange County. We thank him for his contributions at NextGen. I want to acknowledge that he has been extremely helpful to me during my first year as CFO at NextGen, and I wish him well in his future endeavors. As noted in the 8-K, I will assume the role of Principal Accounting Officer. I now turn the call back to Rusty for a few closing remarks. Rusty.

Thank you, Jamie. And I just want to start by also echoing Jamie's comments, that we have great appreciation for the work that John Stump has done here, and know that he will be a great asset in his next endeavor.

I want to close our call this evening by reiterating how strongly I believe that we have taken the right steps to drive future success for QSI NextGen. While I felt confident in our decision last year to implement this strategic plan, it's incredibly rewarding to be able to speak to you today, and point to clear proof that our initiatives are making a difference. Our service satisfaction based on thousands of client interactions has increased over 30% during my tenure. Client attrition is trending favorably. Software stability performance and usability have taken significant steps forward with the latest releases. We have built-out a broad experienced and diverse leadership team with great capabilities. We have completed the difficult structural steps to create a nimble and aligned organization.

At this point in our fiscal year, we are pleased with our progress towards our full-year range of expected results. We anticipate providing insight into our fiscal 2018 results in connection with our fourth quarter 2017 earnings call in May. Finally, I would like to thank all of our hard-working NextGen team members and our loyal clients. It is an amazing opportunity to continue to work with you to truly transform the healthcare environment, and make this Company an important part of the future of healthcare. With that we will close, and open the qualitative for questions. Operator.

(Operator Instructions). Your first question comes from Sean Wieland of Piper Jaffray.

Thanks so much. So Rusty, you mentioned some uncertainty in the client base post-election. I was wondering if you could just go into that a little deeper. Maybe, what specifically are they delaying the purchases of, can you quantify what the impact was in any way, maybe some anecdotal data points there?

Yes. Thanks for the question, Sean. What I would say is we have seen a couple of processes where folks are just simply waiting to see what happens. Notice I really raised that as the second dynamic driving next year, the first one being that we're just a little behind on where we wanted to be on watching the cross-selling programs. But we have seen just a little bit of delay, I wouldn't say it's something material yet. I am more just raising it as something that we will continue to track and update you on. At this point in time, like I said we see the primary driver of next year's number, being the timing of introduction of the cross-selling programs, and not the government delays.

So why, I'm not sure I'm clear on why the delay on the cross-selling initiative, and when do you expect to be running at full speed on that?

Yes. Well, as always things take just a little bit longer than we would like them to. Building out the Management Team in the last quarter, as well as all of the software releases were of primary importance for us, and that really pushed back a little bit, the launch of some of the cross-selling programs that are necessary for the sales team to take forward. That being said, we're simply on our plan. We're just delayed back a little bit, and given the fact that bookings, especially in RCM, tend to take six to nine months to turn into revenue, and even then it's ratable revenue not licensed service. That delay, while not significant does push revenue recognition past FY18, and that's the reason why we're raising it.

All right. Got it. Thanks so much.

Yes.

Your next question is from Mohan Naidu from Oppenheimer.

Thanks for taking my questions. Rusty, I want to go back to the earlier question from Sean. I guess we are trying to find out what type of questions are your clients asking you about the new administration, the election, and what type of conversations are you having with them right now?

Yes. I would say the conversations that we're having with them right now, is they're looking for us, to us for answers about what we think this macro-environment is going to hold for them. The mere fact that they are spending time thinking about that, creates to some degree a little bit of discontinuity in purchasing activity. And when we are talking to folks about making a relatively fundamental change, for example, the business process, like outsourcing of their financial services, the revenue cycle management, folks are maybe just stepping back, and just testing the waters a little bit in the macro-environment before they move forward. Like I said, I don't think it's something that we have seen just a little bit of noise on from the client base, and therefore, felt like it was material to raise it, but when we talk about FY19, it is a factor but not the primary driving factor. Or FY18. Excuse me. It is a factor but not the primary driving factor.

Okay. Got it. That was very helpful. Maybe one quick question on the new product release that 5.8. Is this an incremental purchase for your clients, or is it included in the maintenance fees?

This is included in the maintenance stream.

Okay. Got it. One last question to Jamie. Jamie, in your prepared remarks, you talked about Q3 benefiting from one-time cash basis revenue recognition. Can you help us understand what it is, and how much it was?

That was Q3 of fiscal 2016.

Okay.

Not this quarter. That's what I was highlighting. It was something in the range of about $500,000 last year, but when it's showing a 7% decrease, not all of that is truly organic.

Got it. Thank you very much for taking my questions.

Yes.

Yes.

Your next question is from Jamie Stockton of Wells Fargo.

Yes. Good evening. Thanks for taking my questions. I guess maybe the first one on the revenue cycle business. While we're kind of waiting for it to really inflect again from a growth standpoint, are there any actions that you can take to try to improve the gross margin of that business right now, or can you give us any feel for maybe the magnitude of improvement that we might see in the next year or two?

Yes. I'll talk a little bit about it, and then I'll pass it over to Jamie. Certainly that's an area that we have been transparent about being focused on, we have not provided any guidance as to the magnitude of the improvements, and what kind of, and what the timeline for expectations should be, but we're already starting to put in the programs necessary, to both increase automation, improve gross margin, without impacting and frankly hopefully improving client satisfaction, which is already high with the service. Jamie, anything to add on there?

No. I think you said it. We have taken action, and I think there are small improvements that are starting to show up in the second half of this year, and I would expect them to just, you should expect them to continuously improve although it won't be probably a straight-line as usual.

Yes.

Do you think it's safe for us to assume that maybe the absolute cost base for that business is going to remain relatively flat, not just for let's say the next year, while maybe the revenue is flat, but into the year after that, when maybe growth resumes at a more normal rate?

Yes. Well, I would expect that certainly as we continue to drive automation and scalability in the underlying resource space and the underlying solution, that you should see nice leverage coming with the addition of revenue, as the addition of revenue significantly outpaces the addition of cost.

Okay. Maybe just one more quick one. The pro services business, I get that it's down year-over-year, but you guys have taken out a lot of cost there at the same time it seems. Is the level of profitability that we're seeing from that right now, what we should expect going forward, or are there more efficiencies that could be gained there? I mean I realize the margin on that business has turned around dramatically in the last couple of quarters. Have we basically seen the lift that we will?

Yes. What I would say about that business at this level of revenue, my view is we should, is that I'm expecting us to consistently reduce 10% to 15% margin, if we haven't done as good a job this year as I would like, but we have had some challenges that we have talked about, but that is what I believe a business of this size we should be able to produce.

Great. Thank you.

Your next question is from Ricky Goldwasser at Morgan Stanley.

Hi. This is Mark Rosenblum on for Ricky. Just a quick question. I missed the bookings number. What was the quarterly bookings?

One second. Let me turn back to my notes. It was $32.5 million this quarter.

Okay. Thank you. And then just going back on the ACA repeal and replace impact, I guess what is the next sign post that we should watch for, in terms of I guess getting the next piece of data in terms of whether conversion is going to slow or not?

For us?

Yes.

The next time we're going to comment on it will be at our earnings call in the next quarter.

Okay. And is there a critical time in the year where most of the renewal or booking conversion decisions are made, or is it just rolling throughout the year?

It rolls throughout the year.

Okay. Thank you.

Your next question comes from Matthew Gilmore of Robert Baird.

Okay. Thanks for taking the question. I want to ask about the cross-sell strategy, and it sounds like that will be a major focus for the next kind of calendar year, but could you maybe remind us how you view the opportunity, how large the opportunity is within RCM and EDI, and give us a flavor for how you're approaching the cross-sell strategy at this point, is this bundling product together, or are there other initiatives under way?

Yes. I want to be careful about getting too deep into the nature of it simply because of the competitive intel that generates, but I would say is, that we have been pretty explicit. That right now as we sit here today, our revenue cycle management service, which is perennially number one or two in class, has only an 8% give or take adoption rate within our client base. And so when we look at that share of wallet opportunity to take a great service forward into a broader client base, we absolutely see great opportunities there. Now it is a more complex sell than selling a software and license agreement, as well as perhaps there were some opportunities in the past to package a little more effectively in the RCM area. So we're in the process of launching those pilot programs, and taking the sales team through the training necessary, to truly position a somewhat complex, but incredibly valuable solution set with the clients.

EDI as well. There's great opportunities for our clients to leverage electronic data interchange to better integrate within the ecosystem within which they sit. While we have a great deal of penetration, I would say that our clients tends to use only a couple of the simpler transactions. We think there is great value and opportunity to bring those together into bundles, and bring them out to our clients.

Okay. That's helpful. And then maybe an update on MediTouch. So now that we're kind of past the earn-out period, does the integration strategy or priorities change as we enter the calendar year, and what are sort of the key milestones to look out for MediTouch this year?

Yes. First of all, absolutely. We're incredibly gratified with the performance of the MediTouch team in the last year and the founders and principals have done a phenomenal job in delivering against their promise at the deal model. At the deal time. Now, we really turn towards the next phase, which is integrating that into the organization, something that will be complete in the next couple of months, as well as really starting to ramp-up the strategic focus and investment on that platform. More to come on that as we move through subsequent quarters.

Great. Thank you very much.

Next question comes from Rob Munnings of William Blair.

Hey guys. Thanks for taking the questions. I guess first of all, can you discuss client feedback from the client base about complying with MACRA in 2017? Have you seen any change between immediately after the final rule was released and now?

We have not. We have some clients that are very focused on it, very aggressive, some of them getting into APM Plus programs, and so from the standpoint of, there are some of our clients that are very focused on it, specifically because their measurement period will start on January 1st. But we are continuing to get out and really educate the client base on the future. Our next release which will occur next fall, will bring full MACRA readiness capabilities to the client base, and it's been interesting to watch the progression of the conversation with the clients, from wondering if we were going to get there, to now being excited about the fact that we are, because we have continued to deliver to them the capabilities and the stability and performance that we have promised, which gives them an increasing amount of faith as we move forwards the MACRA release, that we are absolutely the partner not just to provide them software, but to provide them the services and education that will help them be successful under that new regulation.

Okay. Great. Thanks. That was very helpful. And then I guess I kind of want to get back to RCM a little bit. Can you discuss a little bit more your positioning in the market for your RCM offering? More specifically how is the post-ICD tenant environment, and shift towards VIA based reimbursement impacted customer perception of the value of this product? Thanks.

I got to tell you we have still seen customer perception be very strong about the value of the product. Now understand that revenue cycle management is part of our financial services offering, which will continue to evolve, as we move forward through the next couple of years, to both enable our clients to operate in the fee-for-service world, which will continue for the foreseeable future, as well as the fee-for-value world, and so I think, as we talk to them, as we walk through both the great value that the service provides today, but as we start to put together the roadmap on helping our clients sit with a foot in both worlds, I feel like we're on a really good path, and the client appetite hasn't diminished at all. The client appetite. Clients are very focused on, how do I deliver a great care experience. We have the opportunity to take something that is important but non-core off their plate, and enable them to focus on the patient, whether it's fee-for-service or fee-for-value, and I think that the breadth of our services as we move through the next couple of years, will absolutely position ourselves well to do that.

All right. Well, thanks a lot, that's all for me.

Thanks.

Your next question Steve Halper of Cantor.

Hi. When you acquired HealthFusion, you talked about taking a lot of that capability, and combining it with NextGen, moving to the cloud, and totally understand the fact that it takes time, and your newest appears to be going well. But where do you stand in terms of the expectation around that whole development cycle, you previously said, more to come on that, but can you give us some more flavor in terms of, what the expectations were in that regard, and where you stand now?

Yes. Steve, I would say that first of all we really provided the information at Analyst Day last year, just to give people a flavor for where we're going in the future. Something that we have now kind of pulled back under the covers within the organization. We're still both committed to the smaller independent end of the market with the current HealthFusion solution, and we continue to look at how do we broaden that specialty footprint, and how do we continue to take that up-market. We're not really talking too much about that in the external environment, simply because, like I said, the competitive intel nature of providing really too much guidance into that is concerning to us, but I would say that we are still on the path, we are making progress, and as we really start to release these capabilities to market, we'll provide updates at that point in time.

Right. So the practices in the mid and larger setting, do they still ask about the path to cloud?

What they ask about is the path to value, and the cloud is one way to get there, our managed service offering is providing a lot of value to them. There are a number of clients that want to know that we will continue to create a great physician experience and community across our client base, which are part and parcel towards continuing to evolve our cloud offerings. I would say it's to some degree receded from the client conversation, simply because people are feeling pretty comfortable with the work we're doing, on a platform that they can tailor to their workflow today. That does not change our strategy and our intent, but it does change the nature of the conversation with the client.

Got it. Thank you.

Your next question comes from Donald Hooker of KeyBanc.

Good afternoon. I was wondering as we were sort of looking ahead to the sort of growth phase, when you look at your businesses as they currently stand, what kind of growth would you expect for a company like Quality Systems at this point long-term?

Yes. We haven't really commented on what our long-term growth rates are. What I would say is I would love 100% growth, but when it comes down to it, it's something that as we start to build credibility, as we start to get our hands on the levers, on the growth levers, not just the levers where we're making the Company more robust, as we are today. At that point I think then we'll feel a little more comfortable given a little more forward-looking, kind of quantitative guidance, but at this point in time, we're really sticking to our messaging, simply because we always feel it's important to enable our shareholders to invest, based on the information that we have, and are confident in.

Got you. And maybe just one other question for me. On the EDI line item. The revenue line item. I understand you have a variety of services there. Are there, I think in the past you mentioned there are 14 specific services, and the vast majority of your clients maybe had maybe one or two of them. Can you maybe provide a little color just kind of curious if you could help educate me and us, kind of what services could potentially inflect, in terms of cross-selling in there, what are some of the services that you are thinking--?

If you think about it right, most of the EDI transactions out there today are really around clients.

Okay.

It's client to payor. That being said, there's an incredible opportunity for things like appointment reminders, there are you're starting do see in the market new risk based transactions coming back from the payors, and so there are a lot of opportunities here. It's interesting we were down at a client down in Florida, and they had 75 people calling patients, and they don't use any kind of electronic data interchange capabilities to message those patients. So we look at things like that. We see real opportunities to drive value in our client base, and make them stronger and more integrated within their ecosystem, and so bringing those together, this is just something that during the time when meaningful use was really driving behavior, both in the client and the vendor base, a lot of times these opportunities were walked past. We now see an opportunity to go back in and drive that additional level of value for the client.

Got you. Okay. Thanks so much.

Thank you.

Our next question comes from Stephanie Davis of JPMorgan.

Hey guys. Thanks for taking my questions. Given the recent HealthFusion run-rate, I'm actually calculating an implied organic growth in the quarter. If this is the case, how sustainable is it, and if not what drove the out performance in HealthFusion?

I just want to make sure we understand your question. You said that with HealthFusion, or if you excluded HealthFusion did we have organic growth?

Yes.

And the answer is yes, we had a minimal amount. 1% to 2% of organic growth.

And then so my follow-up to that was how sustainable is the organic growth? Was there any one-time helps, or is this something we could see going forward?

I don't think there was any one-time items that I need to call out, relative to the quarter. I did call out one that made for a negative adjustment, but I think in the organic area, that there's nothing to point out. I mean I think it, currently as we have talked before, there are some areas organically where we're performing well, and we have some areas where we have had the downward trends, like in the software area. We have talked about maintenance being in a slight decline. So it offsets it, but I think the 2% organic is probably, 1% to 2% is reasonable.

Yes. And I guess, Stephanie, as I would look at it what I would say is much like I said at the beginning of the year, our focus this year was both on designing the organization, starting to build capabilities, and making sure that we were continuing to accumulate dry powder by focusing on the EBITDA and EPS line. 2% organic growth I feel like is just from stronger execution, but as I said, the real growth inflection point comes from not just stronger execution on the business that we are, but on really starting to accelerate into new things, and that really hasn't appeared yet.

And I've had a second to think about your question. On the software licenses which is where we get a little bit of volatility in our revenue, because it's recognizable up front, in my comments about the revenue growth year-over-year there, we did have several new client wins there that has been higher than our past few quarters. So that pushed up the organic this quarter. Not to diminish it, we have plans, we have incentives in place for the sales force to drive this behavior, but because it was noticeable this quarter over prior quarters, that's why I singled it out, and so at this point, I can't tell you that it's a projectable longer-term trend, but we do have incentives to drive the sales organization that way.

Okay. Good to hear. And one follow-up from me just on the attrition. You guys have talked about improving attrition up three points in the last year, I know retentions is up three points, do you think you would ever be able to reduce your attrition levels to the low single digits similar to your peers, or is there anything structurally different that would have a position in the end market?

Yes certainly that's our goal. And when you think about the improvements that we're generating on a rolling 12-month basis, because remember that attrition number is a rolling 12 months, and when you think about where we were at the end of that FY16, which was at 10.3%, I believe, I think you can impute that we're actually making real progress here. It's hard for me to forecast, there are always, there's things that you don't know about yet. There are certainly we have pressure from Cerner and Epic, and we have got pressure from a very aggressive competitor with Athena, but we are making a tremendous amount of progress, and do feel like we are on a path towards getting to a really good place.

All right. Good to hear. Thank you guys for taking my questions.

Thank you.

Your next question is from Michael Cherny of UBS.

This is Alan in for Mike. Thanks for taking the question. Regarding the elongation of the sales cycle are you just seeing this increase from new prospects, or are you also seeing it from upselling current clients as well?

I'm seeing it from upselling current clients well.

Again, let me reiterate. Our job is to give you a transparent view of the things that we're seeing in the marketplace. I'll go back and reiterate the fact that as I look at the timing of bookings, primary driver is that we're a little behind where we would have liked to be on our plan, and we're just simply raising the macro-environment as something that has got a little bit of worry, but is not the primary driver.

Got it, thanks.

Your next question is from Gene Mannheimer of Dougherty & Company.

Thanks. Good afternoon and nice quarter. I just wanted to go back to the previous question about growth. Rusty, I appreciate the directional outlook about not seeing meaningful revenue growth until fiscal 2019. So are we do assume--?

Fiscal 2018, I'm sorry, Gene. I misspoke.

So fiscal 2018. Okay. So that's coming upright around the corner here?

I'm sorry. I'm sorry. Bookings in fiscal 2018 turning into revenue in fiscal 2019. My apologies. I misspoke.

No. Understood. So how should we think about fiscal 2018 then? Are you suggesting there will not be growth, or would it be nominal growth similar to what we're seeing in current quarters here?

I think from our standpoint as we look at fiscal 2018 we see bookings growths, but we see the rest of the P&L certainly not taking a drop, but I would say it would be somewhat in line with this year with a little bit of progress.

Okay. All right. Very good. Thank you. And one for Jamie. You called out a benefit in SG&A related to a true-up from the HealthFusion acquisition. Can you quantify that, and maybe tell us what the EPS impact was on that?

It was about $0.02 on the EPS.

Okay. Okay. Great. Thank you.

You're welcome.

Your final --

I'm sorry. That is GAAP only. I want to be clear, because we excludes the acquisition costs, and this is one of the adjustments to the contingent consideration are excluded from the non-GAAP measure.

Okay. Very good. Thank you.

Your final question comes from Steve Halper of Cantor.

My question was, oh, I know what my question was. So you said that bookings in the quarter were $32.5 million, and you compared that to $35.7 million a year ago. Is that pro forma including HealthFusion and excluding the hospital business? The $35.7 million?

Yes.

Okay. Great. Thank you.

You're welcome.

Thanks, Steve.

There are no further questions.

All right. Well, thanks everybody. Appreciate you all tuning in. Looking forward to sharing further progress with you as we get together in May, and I just wanted to say a final Happy Birthday to myself, because I turned 50 on Monday, and I am waiting for my AARP card. Everybody have a great day, and we'll talk to you next time.

Thank you for participating in today's Quality Systems third quarter 2017 earnings call. This call will be available for replay beginning at 8.00 PM Eastern Standard Time today, through 11.59 Eastern Standard Time Wednesday, February 8th, 2017. The conference ID number for the replay is 56791651. Again, the conference ID number for the replay is 56791651. The number to dial for the replay is 404-537-3406.