NextGen Healthcare Inc (NXGN) 2017 Q4 法說會逐字稿

Welcome to the Quality Systems, Inc. Fiscal Fourth Quarter and Full Year 2017 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. (Operator Instructions)

Before we start, I'd 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 law, including and without limitation, statements relating to anticipated industry trend, the company's plans, future performance, products, perspectives and strategies. Risks and uncertainties exist that may cause results to differ materially from those expressed in these forward-looking statements, including among others those risks set forth in the company's public filings with the U.S. Securities and Exchange Commission, including the discussion under the heading Risk Factors in the company's most recent annual report on Form 10-K and the 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 contains certain non-GAAP financial measures. For our earnings results, the GAAP financial measures most directly comparable to each non-GAAP financial measure 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 Investors 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 Mr. Rusty Frantz, President and CEO of QSI NextGen. Rusty?

Thank you, operator, and thank you to everyone on the call for joining us this morning to discuss NextGen's fiscal fourth quarter and full year 2017. I'll start the call this morning with a high-level overview of our fourth quarter and full year results, which Jamie will discuss in more detail. I'll then discuss our emerging Platform-as-a-Service strategy, the strategic rationale around our acquisition of Entrada, an overview of the new capabilities we've recently launched and then I'll conclude the call today with some context around our initial outlook for fiscal 2018.

To kick things off, we rounded out fiscal 2017 with another solid quarter. Our fourth quarter revenue came in at $132 million compared to $128 million a year ago, and our non-GAAP EPS of $0.21 compared to $0.19 in the fourth quarter of fiscal 2016. Our full year revenue of $510 million compares to $491 million in fiscal 2016, and our non-GAAP EPS of $0.82 compares to $0.72 last year. As we discussed on last quarter's call, we expected to see relatively flat -- we expect to see relatively flat organic revenue in FY '18, but expect to see bookings growth show up in the back half of the year, leading to accelerating revenue growth in FY '19.

Stepping back from the numbers for a moment, we continued to execute on our strategic plan during the fourth quarter, and I wanted to spend some time today discussing our emerging Platform-as-a-Service strategy, which is the natural next step in our strategic evolution. We feel the strategy builds on the work we have done to date on our technology platform and release of our new API, built around the emerging fire standard as well as our continued build-out of our commercial capabilities. We are now in a position to build, acquire or partner for new capabilities. And we also have the infrastructure and track record to integrate them quickly into our broader solution set.

We've organized our commercial infrastructure to capitalize on these opportunities and deliver them to our clients. Our recent acquisition of Entrada is a great early example of our strategy being brought to life. With our cloud-based Entrada platform, we are now delivering the power of our solutions right into the hand of the provider, the most valuable real estate in healthcare. This is not just the next logical step for us but it also showcases our commitment to investing in the provider experience to drive one of the primary metrics of our industry: physician efficiency.

Entrada enables our providers to focus on the patient, while capturing all the information they need, accessing the patients' information in the palm of their hand, enabling both automated and remote transcription capabilities to reduce their time in front of the computer and reduce hassle as they seek to improve patient care. And on top of that, enabling them to securely collaborate with other members of their care team or even other care teams to ensure the broadest possible view of the patient's longitudinal record and ensure great care. These capabilities are increasingly essential in a value-based healthcare world, where profitability is truly driven by provider effectiveness and efficiency.

Another example of our Platform-as-a-Service strategy is the expansion of our RCM offering. It is our belief that revenue cycle management must evolve to meet the expanding needs of the industry. We continue to extend our solution to cover our clients into higher revenue cycle process and receivables portfolio. For example, through partnership, we've launched the capability that ensures as charges come through our system, they are cleaned and checked for accuracy prior to claims submission to the payer. This upstream rules engine not only automates a process that is costly and manual today but at the same time, effectively reduces many of the causes of claims denials and subsequently reduces the cost decision with rework and resubmitting claims.

In addition, through another partnership on the platform, we can now deliver comparative analytics and peer-to-peer benchmarking capabilities that target claims denials, reimbursement delays and other metrics that affect an organization's bottom line. Both of these solutions represent our drive to not only broaden our solution but to leverage automation to improve our margins in this part of the business. Naturally, these capabilities and others we'll be introducing take some time to curate. But we expect these expanded capabilities to drive growth in our RCM bookings number by the back half of fiscal 2018.

Over the past year, we've made significant progress evolving the company into a more nimble, client-focused organization. We simplified our usability, broadened our solution set and increased the stability of our platform. As a result, our full year Voice of Client survey shows a score of 7.0, an increase of 11% over the prior year. Our maintenance attrition rate, which as a reminder, we calculate on a trailing 12-month basis, stands at 7% compared to 10% a year ago. Additionally, we have continued to show strong cash generation capabilities throughout FY '17. We are an organization that can take on debt for inorganic activities and retire that debt quickly. We have a strong balance sheet, an experienced management team and a robust strategy.

As we enter fiscal '18, we plan to accelerate investment in both R&D and sales, as we move towards bookings growth in the back half of the financial year and accelerating revenue growth in FY '19 and beyond. While naturally these investments go through the P&L, we'll continue to generate strong cash flow and support further organic activities as well.

With that, I'll turn the call over to Jamie for an in-depth review of the numbers, and I'll be back with you right after. Jamie?

Thank you, Rusty, and thank you all for joining us on the call this morning. I'm very pleased with the progress we've made over the past year. Rusty covered some operational success stories of last year; I'd like to add several financial accomplishments as well.

We streamlined our operations by shifting to a functional organization structure, which had the byproduct of reducing operating expenses via a leaner organization. We substantially completed integration of previous acquisitions, which allows us to take a more holistic approach to our clients and prospects. We expanded our gross margin profile by 200 basis points. We increased our percentage of recurring revenue by 400 basis points, and we strengthened the balance sheet by paying down a significant portion of our line of credit.

Now I'd like to spend the rest of the time reviewing the fourth quarter results in more detail. Total revenue for the quarter -- for the fourth quarter was $132.4 million, a 3.5% increase compared to a year ago. Recurring service revenue was 82% of total revenue, comparing favorably to 78% a year ago. Revenue from software license and hardware of $16.6 million decreased approximately 10% compared to a year ago, and this was expected. Subscription revenue of $23.1 million increased 22% and was driven by growth in HealthFusion and organic growth in Patient Portal.

Support and maintenance revenue of $41.9 million increased just over 5% from a year ago. This revenue line item benefited from the effect of CPI increases as well as approximately $1 million of onetime items, including a customer reinstatement and a sales return reserve reversal. Revenue cycle management generated $20.5 million in the quarter and was relatively flat compared to a year ago. Revenue from electronic data interchange and data services of $23.4 million increased 12% year-over-year. During the quarter, we saw additional volume from existing customers, and we also benefited from a onetime catch-up from a significant customer. Lastly, professional service revenue of $6.8 million was down 27% to a year ago, which included a large customer go live and represented a tough comparison.

Turning to bookings, we ended the quarter with $33.8 million compared to $39.9 million in the fourth quarter of fiscal 2016. We continue to experience favorable trends in gross profit. Our $76.4 million of gross profit in the quarter increased 11% from $68.7 million a year ago. Gross margin also continued to improve and came in at 57.7%.

Taking a look at operating expenses, SG&A of $42.7 million increased $6.1 million year-over-year. On a percentage of total revenue basis, SG&A was 32.3% of revenue in this quarter, up slightly when compared to last year's 31.5%. R&D increased in the quarter to $22.1 million from $16.1 million in the fourth quarter of FY '16. Our capitalized software development cost of $1.9 million or 8% of gross R&D expenditures compared to $3.1 million or 16% of total R&D expenditures last year. Our GAAP tax rate for fiscal 2017 is 24% and our non-GAAP tax rate remains 30.5% for the quarter and the year. I'll conclude my review of the income statement with EPS. Our GAAP EPS for the quarter was $0.07 compared to a loss of $0.27 last year. Our non-GAAP EPS in the fourth quarter was $0.21 compared to $0.19 a year ago.

Turning to the balance sheet. We have made continued progress on several fronts. We ended the quarter with $38 million in cash and cash equivalents, an increase of $14 million from last quarter. We continue to reduce our debt levels, ending the quarter with just $15 million, owing down $25 million -- sorry, from the last quarter and $105 million a year ago, down from -- sorry, it's down from $25 million, so we paid down $10 million. DSOs of 57 days seems to have settled in our desired range of the high 50s or low 60s and decreased 10 days compared to last year and increased 3 days, sequentially.

To close the call today, I will provide our initial outlook for fiscal 2018. We expect revenue to be between $512 million to $530 million, and we expect non-GAAP EPS to be between $0.66 and $0.74. To provide a little additional color on the legacy NextGen revenue for fiscal year '18, we have previously talked about headwinds facing software license maintenance and RCM. This will be offset by growth in the subscription and to a lesser extent, EDI and professional services. Our EPS guidance includes the incremental investments Rusty discussed earlier in the call in both our R&D and commercial operations as well as the Entrada enhancements.

Now I'll turn the call back over to Rusty for his closing comments. Rusty?

Thanks, Jamie. In closing, as we move into FY '18, we are confident in our ability to lean forward into this year with increased investments, both organically and potentially, inorganically, as we bring our Platform-as-a-Service strategy to life. We expect to see the signs of increased revenue growth show up in the form of bookings growth in the back half of this year, leading to sustained revenue growth as we move through FY '19 and beyond. It's our goal to get to high single-digit to low double-digit revenue growth in FY '20, and we feel like we are on a good path to get there.

Finally, I'd like to thank our team members, who have been so pivotal in getting this organization to this point in our transformation, and our clients, whose mission of healthcare keep us inspired to do well by doing good. Thank you.

We'll now open the call up for questions. Operator?

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

So I'd like to hear you on the Entrada acquisition. Just wanted to understand more strategically how it fits into your growth strategy. What does the customer base of Entrada look like today? What's the overlap onto the NextGen base? And how does that cross-sell strategy work? And then also, what do you think that's going to contribute in the -- what portion of the guidance does that contribute?

Great, so thanks, Sean. So lots of questions. So let me start first of all by saying, we've just gotten out of our sales meeting, our annual sales meeting and just spent time training the entire sales force on the Entrada solution. And frankly, the feedback from those folks, who are closest to our clients is this is a great win for the client base. Now this really represents -- one of the things we've talked about is getting to the cloud and creating a great provider experience. By bringing Entrada into the portfolio, we now have the capability to really enable that provider to engage with the patient's information simply when walking from one room to the next. And then within the room, to be able to have a great intimate experience with the patient, looking at them rather than the computer, while the Entrada application continues to pick up the context of the conversation, whether through automated transcription, whether through having a transcriptionist on the backend, listening to the audio after the fact or even having a remote scribe, who can launch orders and potentially prescriptions based on the conversation between the provider and the patients. As we bring this forward, we've really -- Entrada came to us, frankly, because they've made some great inroads and really delivered a great experience to some of our large and complex clients, especially in the orthopedic space. And so we saw that client value being delivered and really thought that, that would make a great addition into our platform as we really do seek to drive provider efficiency, especially as we move into more value-based care. The footprint within our client base was not that significant. It's probably about half of their revenue and their revenue was $12 million as we brought them in. But they also have footprint within other EHR client bases. Being able to bring in this capability, being able to have this really leverage the API work as we release our really first fire-based restful API into the marketplace was a great opportunity for us, simply because we've done this foundational work to be able to quickly integrate these solutions into our clients' EHR and EPM footprint. And so we were -- we really feel very bullish about being able to bring the capability in. As far as contributions to guidance, I'll turn that over to Jamie.

Thanks, Rusty. Sean, let me first say that we're not going to be breaking out Entrada revenue and reporting on it separately over the course of the coming year. But with that said, and playing off of some of Rusty's comments, he -- we've -- if you take Rusty's comment that we expect the organic to be relatively flat, it'll give you a pretty good idea then as to what we're expecting to get out of Entrada in the coming year. And part of that is just caution around what will happen with the Entrada install base that is on non-NextGen EHR.

Your next question comes from Mohan Naidu of Oppenheimer.

Rusty, you made comments around expecting booking strength in the second half of this year. Can you talk to us about what you're seeing in the market? And what your potential customers are talking about? Or what's driving their -- I guess, what's driving them to change products?

So when I talked about revenue growth in the back half of the year, I don't talk about specifically what the drivers for that are. And so changing products is an assumption. When I -- let me recharacterize it for you. As we look at bookings growth in the back half of the year, this is simply us continuing our strategy of penetrating our clients, our existing clients with the great solutions that we are making more robust and great solutions that we're bringing into the organization. And so much like we've talked about over the last 2 years, we're now at the point where we've built out the commercial capabilities. We are in the process of launching the programs that enable our clients -- I mean our sales folks to go to increasingly satisfied clients with robust solutions that can help them, not just in the fee-for-service world, but also in the pivot to the future value world. And so this really is the solution sell or the cross-sell opportunity coming to life. As I've said, in the last couple of calls, we were a little behind where we wanted to be in launching the solutions. As we've just got out of the sales meeting, in fact, last night, we've trained our teams on really how to bring an enhanced revenue cycle management offering to the table for our client base. We've brought Entrada into the platform, and we continue to make progress on organic development and partnerships as well. And so all of that is really giving our sales team a much more fulsome solution to be able to bring to the client base that builds on top of the electronic health record and practice management footprint. Does that help clarify?

Yes. That is very helpful. And maybe just a quick follow-up around the enhanced RCM solutions set. In your prepared comments, you talked about leveraging automation. Right now in your RCM services, can you talk about what portion of your RCM is really automated versus resources-driven? Any near-term goalpost that you can share to us about how you can drive automation here?

Yes. I don't think we're going to comment deep into the solutions set. What I would say is, we've got a solution set that provides an incredible value for our client base as reflected in the great feedback from the clients. But when you think about some of the things we're talking about here, one of them is making sure that as clinical information passes from the electronic health record into the practice management solution that rather than waiting all the way until it comes back as a denial for the payer, we're actually scrubbing that claim ahead of time and making sure that, that claim has the right information so that, that claim is actually accepted on the back end. Think about the cost and rework that, that avoids. And that is not done by people, that's done through automation. When we look at comparative analytics and benchmarking, this is really about providing our clients kind of the guidepost and the road map to significantly improving their own operations. Now all of this, by the way, is also a proxy for cost, and so as we continue to provide more and more information, and today, really in the revenue cycle but as we continue to move forward, extending more to the front end of the revenue cycle, which much more involves the patient, we feel like we can bring both a great broad solution to the table but that we can also, as I've said, continue to show leverage on that revenue by automating more and more of the process. And I think we've made statements that we think there is margin upside. What we're really focused on first is making sure we have the broad solution for our clients, automating along the way. And I think you'll see continued improvement as we pivot from FY '17 through FY '18 and into the growth year of FY '19.

Got it. Jamie, on the bookings number, can you give me that number again?

One second. Let me turn to the page.

Actually, while Jamie's getting to the page, let me just characterize a little more of what's going on within the revenue cycle management business. In addition, we've also brought in -- we've brought in some new talent that really has deep expertise in the RCM space. We recently hired a gentleman named Allen Plunk who comes in to run our RCM organization. We've also, within our commercial teams, really invested in folks that truly understand revenue cycle process and can help us. And these are -- all of these things are why we feel confident that we could deliver the bookings growth in the back half of this year. Naturally, that doesn't turn into revenue growth immediately because there's an implementation phase and that's really why revenue growth starts in FY '19. Got it, Jamie?

Yes. The bookings for the quarter were $33.8 million compared to $39.9 million last year.

Your next question comes from Jeff Garro of William Blair & Company.

First, want to ask, Jamie, a little bit more about the fiscal '18 guidance and the profitability outlook. And maybe you could help us understand, it sounds like more investments are coming out of operating expenses or into operating expenses versus the cost of goods sold line, where you've seen some nice momentum throughout the course of fiscal '17. So if you could just help us parse out some of that detail between gross margin and operating margin for fiscal '18.

Yes, before Jamie jumps into that, let me just characterize a little bit how we view things. As I came into the organization and my first 7 quarters here have really been about playing defense and stabilizing the foundation. I feel like we've done a great job as an organization of doing that. And now it's really time to pivot to playing offense. And so as we move forward, you're absolutely correct that the above the gross margin line, the P&L stays very intact. This is all about driving growth. We feel like we've got great opportunity in front of us. We feel like we have the capabilities to get after that opportunity. And based on that, we feel very comfortable investing. Go ahead, Jamie.

So the answer is that I expect the gross margin percentage to stay relatively where it is, even possibly a very small improvement over the course of the year, as we continue to improve margins in some of the product lines. With that said, then the investment is all -- I think, all of the change in the decrease in EPS year-over-year is because of investments in R&D. And we're increasing the amount of gross investment in R&D that will raise the amount of capitalized R&D cost. But it doesn't offset the total incremental investment we make there. We're also investing in additional sales and marketing people and marketing programs. And I guess I'd mention one other thing is that I'm sure you're all aware of the change in the rules in revenue recognition accounting, which is going to require substantial investment in our part, most of which gets expensed this year as we get ready for accounting under Rule 606.

That's very helpful. And maybe to dive into some of those operating expense investments a little more, could you give a little more detail on the sales investment? And how much of that really relates to headcount? And whether there's anything we can look to beyond booking numbers to help evaluate ROI on those investments or overall sales productivity?

I'd say from the sales side, it is almost entirely headcount. As we talked about, we are driving towards bookings and revenue growth. Bookings and revenue growth, to some degree, is a function of the number of folks you have on the street, out there fighting the good fight. And so as we look at what our expectations are and back that into a resource model, that naturally implies that investment has to precede revenue as it takes time to on board to both higher, and then on board a sales person to the point where they can really drive revenue. Go ahead, Jamie.

I agree. And I think the bookings growth that we've talked about is probably the best metric. And as Rusty has pointed out, this should -- will start appearing in the second half of the year.

Great. And then one last one, a follow-up on the R&D. Can you tell us what your expectations are for the capitalization rate and changes versus this year?

I would expect it to increase, I'm doing the math in my head. But it's -- I think we capitalized about $8 million this year. And I would expect it to go up by $5 million or $6 million next year.

And I think just to characterize that a little bit, we're really pivoting to an innovation posture. And so as we do that, we see the opportunity. We see the opportunity to bring a broader set of projects to market, which, of course, creates a larger cap rate. I think the one thing I'd like to focus really back on is, is that we are a company that generates free cash flow and, we intend to continue to generate free cash flow as we move through the FY '18 year.

Your next question comes from David Larsen of Leerink.

Can you talk a bit about the improvement in the Voice of Client score? And also a bit about your retention rates and what's driving that trend?

Absolutely. So it's been quite a year from a client-facing standpoint, both qualitatively and quantitatively. If you think about through this year, we received Most Improved Award from Class in the practice management space and large client base. We've seen significant increases in the Voice of Client score. We continuously sample our clients. This Voice of Client score is based on over 30,000 client touch points, and comes back from about 50% of our clients. So we think it's a very meaningful number. We've invested heavily. In fact, as we sit here today, 82% of our clients have a dedicated account manager, somebody who is responsible for their service experience, for the robustness and stability of their implementation. That's not a sales exec. That's simply an account manager. Naturally, some account managers have a number of clients, but as we move forward, we plan to get that number to 100%. It's about creating the partnership with our clients that enables them to pivot through this transforming time, both on the account executive side, where we're helping them with their strategic evolution, but also on the account managers side. On top of that, the last 2 releases we've put out were very, very robust, and the feedback from clients has been very positive. Naturally, there are still areas where we fall a little short of expectations. But every day, we continuously improve and start to close those off. As we move into this year, in addition, we've been able to be very transparent, very communicative with them about how we're going to take them through this pivot into the value based world as we move into the calendar year of 2018. And so with our combined release that'll come out in the fall, 5984 on the NextGen ambulatory platform, we feel like we are in great shape, that release has been on-time and on scope and on quality for the last 8 months. We feel like we're in great shape, and we communicate with our clients and make sure that they understand exactly where we are, that how we're working with them to make sure that they are successful. And all of these things, all of this proactive communication, all of this better delivery, all of this more intimate experience are adding up to create these increases in client -- in the client scores. But more than that, a ton of very positive qualitative feedback that's coming back from the clients. I've spent a lot of time with clients. I've spent a lot of time in the field. And I must say that I'm very gratified by the change in posture of the clients. And frankly, it's what gives me comfort, as we bring great capabilities, great cloud-based capabilities like Entrada to the table. It gives me comfort that we have created the relationship with our clients that allows us to bring these great and important capabilities to them and help them evolve and thrive in a world where efficiency and effectiveness becomes the primary driver of profitability.

That's great. And then just one more quick one. In terms of MIPS and also alternative payment models, can you maybe sort of touch on the solutions that you have available to your clients that basically meet those requirements?

Well, certainly -- so certainly a number of our clients are actually looking at the 365-day reporting period versus the 90, right? And so the alternative payment model clients are certainly in that wheelhouse. And we're already actually working with them. We've got a significant percentage of those clients, we're actually testing the 5984 release against their database. We are also working with them on a value-based readiness survey to make sure that they are ready to make this transition. And we are making sure that we are bringing the resources to bear to both educate them, to help them upgrade to help them report and really starting to proactively work on that transition from vendor to partner to, aspirationally down the road, trusted adviser. Your vendor sells you something, your partner solves your problems, your trusted adviser looks down the road and helps you find the problems that you may not have seen, and then bring solutions for those. We feel like we're doing a tremendous amount of work with the value-based readiness survey, with our software, the MediTouch platform, we just released the macro MIPS capability. So they're on MediTouch as well as NextGen Ambulatory, our clients are well set. And then we also have -- we'll get together with our large clients in about 3 weeks at our large client user group and certainly continue to educate them and to take their feedback and make sure that everybody is successful as we make this great transition into value-based healthcare.

Your next question comes from Jamie Stockton of Wells Fargo.

I guess, maybe to Rusty. Could you talk about where the MediTouch integration stands from a sales standpoint versus the legacy NextGen platform? And then, Jamie, if you could give us a sense for where the Entrada revenue is likely to show up on the income statement, that would be great.

Certainly. So we just got back from our sales meeting, and this was a NextGen sales meeting. That's not a NextGen Ambulatory sales meeting, that's not a MediTouch sales meeting. That is a ONE NextGen sales meeting. I'll start with some of the more academic parts of the integration. As we sit here today, we are on a single instance of Salesforce, a single instance of Service Cloud across the MediTouch and NextGen Ambulatory portfolios, which means now that we are, actually, have a full view of the client base, a full view of the service history regardless of which of our industry-leading platforms they are on. On top of that, we are continuing to expand the capabilities of the MediTouch platform from our R&D organization, not the MediTouch R&D organization, our entire R&D organization. And so we've already released, as I said, the macro MIPS capabilities, we've already released some great urgent care capabilities. Now we are actually moving down the next step in that strategic pathway, which is really starting to look at specialty expansion for smaller practices across the MediTouch platform. And so we really feel like we are managing a single sales force. We have a single R&D organization strategy, it's being set by a single organization. And that allows both the MediTouch and the NextGen Ambulatory platforms to evolve in a way that creates a great win for the clients. And as we build capabilities like Entrada -- as we bring in capabilities like Entrada across the platform, those capabilities are not only going to be applicable to the NextGen Ambulatory base, but also to the MediTouch base.

Okay, so -- go ahead, Jamie.

Yes. And to answer your question about where the Entrada revenue will show up, it will show up in, basically, in 2 line items. It'll show up in the software-related subscription services, and it'll also show up in the services and other line.

Okay. That's great. And just on MediTouch, is it accurate for us to think about, hey, we've been taking this into smaller primary care practices up to this point and it's the MediTouch EHR plus NextGen PM or MediTouch EHR and MediTouch PM, if that's what someone wants. And we're looking to expand into specialties from here?

Yes, I think that's fair. I think, really where we're looking at now is expanding first across the smaller practice map with specialties because that's really creating that broader specialty footprint is, number one, it enables MediTouch to approach more of the market. And then, maturing and bringing the best of the capabilities of NextGen Ambulatory and MediTouch together as we move into FY '19 and beyond to start to bring that capability up market. That being said, we really have found that as we've made our NextGen Ambulatory solution much more robust, as we wrap cloud capabilities around it, which really improves the physician experience and creates that efficiency, we expect NextGen Ambulatory, our flagship platform, to have a long and fruitful life as we continue to bring capabilities to both platforms.

Okay. And then maybe just quickly, is there any difference that you're sensing in the marketplace, just as far as activity levels are concerned between larger health system and practices making decisions versus smaller independent practices? And I'll stop there.

I would say it's a pretty chaotic time right now, with this transition coming right down the pipe, the macro and MIPS and the APMs. And so I'd say that most of my conversations with clients have not been about consolidation, have been more about, "Okay, how are we going to move through this?" Now we are seeing -- we're definitely seeing consolidation in some key single specialties, where we're seeing managed service organizations, private equity organizations coming in and building out these dermatology, orthopedics, ophthalmology specialties. We haven't seen as much kind of health-system driven consolidation in our market recently, though those things tend to show up at odd times. But I would say that if you look at RCM this year, and Jamie has talked about RCM having a little bit of a pullback this year, that's really some legacy consolidation that happened, and those things will happen. It's one of the reasons why we don't forecast attrition rate. With that being said, we feel good about the continued drop in attrition rate. We really feel like we've stabilized the business, and we feel like the growth of value within our clients as well as taking some new clients around the edges are really supportive for our growth plans in FY '19.

Your next question comes from Michael Cherny of UBS.

So just quickly, I'm thinking about the bookings number and the moving pieces there. Rusty, I hear you in terms of talking about a more optimistic outlook for revenue growth. How do we think about the transition in terms of what you're seeing now in the booking side into revenue growth and particularly, as more and more of your business becomes more recurring revenue subscription-oriented? Are there any ways to think about the evolution of that bookings metric?

This is something that we have a lot of conversations about internally. Even this last quarter, we actually saw a good bit of subscription in the bookings number. And I think, if you'll remember, was it 5 quarters, 6 quarters ago, I took a bookings number that included everything from 7-year revenue cycle management deals to a single license expansions and turned that into annual contract value, simply because I was trying to get to a clear metric. It's something that we're taking under advisement. I think if you all have learned anything about me over the last 2 years, I try to be as transparent as possible and give you a good view of the business. More to come on it, as we continue to think about how to best -- how to give you the best forward-looking view of the progress we're making. But at this point in time, that's the number we have, and we're sticking with it.

Got it. And then just one quick housekeeping item. Jamie, did you say the bookings number for last year was $39 million?

Yes.

Your next question comes from Ricky Goldwasser of Morgan Stanley.

It's Mark Rosenblum on for Ricky. Just jumping on that last question, as you guys transition from traditional license-based software to a recurring revenue model, how are you thinking about the headwind, given that some of your competitors have faced some headwinds when doing a similar transition?

Yes, I think -- I'll start and then I'll pass it over to Jamie. I mean one of the things -- when I look at the license service run rate and our subscription run rate, and our subscription run rate has grown significantly over the last 2 years. I think we've already made a tremendous amount of progress here. And so certainly, I know the challenge of going from high margins license revenue to subscription revenue that has a little lower margin but a longer tail on it. And so I think we've already been managing through a lot of that. And I think we've got a pretty good handle on that. But let me turn it over to Jamie for a little more color.

Yes. I agree, Rusty. I think part of this is we've been -- if you look at license revenue going back 3 or 4 years, you can see it has been in decline. And so I think we're, in terms of the license side, we are working our way through that. And we don't expect all of our clients to move to a subscription offering. So I think, we're seeing the decline rates slow down a little bit, and so I think we're well into the change curve here.

Okay, got you. And any color around kind of what you're assuming in the FY '18 guide in terms of that headwind?

I mean, I'd say, well I think if you really unpack it, I mean on the gross margin line, we're talking about gross margin being flat to possibly slightly up. And so like I said, I think we continue to maintain margin as we make this pivot. And we've shown already a significant increase on subscription line, while still growing margins during that time. So I think, we're doing a nice job of managing the gross margin line during this pivot. And I expect that to continue through this year.

Your next question comes from Garen Sarafian of Citi Research. Okay, your next question comes from Stephanie Davis of JPMorgan.

Given the new Platform-as-a-Service strategy, is there anything structurally, either in the competitive dynamics and maybe your client base, that'll prevent you guys from reaching the 20% op margins that are typical in most Platform-as-a-Service strategy companies longer term?

I'm sorry, Stephanie. You broke up a little bit, can you just repeat the question? I apologize.

The question is just that most Platform-as-a-Service companies, it's typical to have a 20% plus operating margin. I was trying to see if there's anything that would prevent you guys from reaching that longer term?

We don't see anything to prevent us from reaching that longer-term. Certainly, as you see this year, we are expanding investments. But we expect to continue to show leverage as we start to drive through revenue growth. In addition, I think, if you look, Stephanie, we've talked a good bit about expanding margins in our revenue cycle management business. We've now brought in the expertise and established the road map to doing that. And we've also started to begin the process of doing that. And so when I think about the margin pools that are out there across the business and I think about the ability we've shown to maintain operational effectiveness while bringing cost down, I definitely have in my sights, as we move forward through the out years, getting to that level of operating margin and leverage.

All right. That's helpful. And then a follow-up from me on the '18 EPS. Could you help us a little bit how to think about the cadence, just given plan investments and maybe variable comp and the second-half weighting bookings expectations?

You're talking about quarterly seasonality?

More calendarization?

Yes. Just if there's any kind of planned investments in the first half of the year versus second half? Or anything like that?

Give me a second. We've spent some time thinking about it, I'm just not sure I've got that at my fingertips, Stephanie.

Let me just -- I'll proceed a little bit. Part of the investment has actually -- we've been operating on the same strategic plan for quite a while in the organization. And part of the investment has already occurred from the standpoint of we started to expand R&D as we move through the back half of last year. And so part of it is the calendarization of that, we expanded some of the sales investment last year and there's -- that rolls out over a full year as we go through this. On top of that though, we will continue to march down that road of investment as we move quarter-by-quarter. But I'm not as sure that it's a big bolus as much as it's just continued evolution as we expand our capabilities. But I'll pass it over to Jamie. I think he's got a little more color there.

I would agree. I mean if I think of it from a revenue standpoint, typically, Q1 is the weakest quarter and Q4 is going to be the strongest quarter. We've started, obviously, if you look at the R&D expense in quarter -- in Q4 of fiscal '17, you can see that we've started making those investments. So there will be a slight ramping of expenses, but -- over the course of the year. But you do have Q4 as your highest point of revenue. So I think that may help you color the quarters. Q1 will be -- should be a weaker revenue quarter for us than the other quarters.

Your next question comes from Donald Hooker from KeyBanc.

I was curious within the revenue cycle business if you noticed any sort of anomalies among physicians around collection trends and sort of payer mix or anything like that.

That's kind of been cited by other vendors and I was curious if you noticed anything with your clients on that front.

I think the thing we notice most with our clients is the impact of high deductible health plans on them. AR portfolios continue to shift more and more to the patient. And that is less around payer collection and much more around making sure that people understand what they're deductible is, what their progress is on that deductible, and what they're going to pay at the front end of the process. And so as I look at that, I'd say that's probably the single biggest shift that we see and that's one of the areas that we continue to look at as we start to expand our financial services platform.

Is it fair to think that might've been a headwind in the quarter for you guys financially in revenues and revenue cycle management?

Actually, I would say, our experience in this year was it wasn't a headwind that we've experienced in prior years. And that may have been a commentary on our Q3 number, but we didn't -- we typically do have a falloff in the first quarter as you move into new deductible years. And we didn't see as big a falloff in Q4 as we've had certainly as last year at the same time.

Your next question comes from Sean Dodge of Jefferies.

Maybe just a couple on Entrada. Rusty, you mentioned the improving customer satisfaction scores. Is Entrada or improving the way adoption phase of EHR, is that one of the bigger pain points that remain for providers? And then the motivation behind the acquisition, is that something we should think of as helping to further improve satisfaction and curb attrition? Or is this something that can really drive a lot of incremental revenue growth from here?

So I'd say, to the back end of the question, I'd say yes. Okay. So look, I think, one of the biggest challenge is really for all of the vendors across the space, is how do you enable care to happen efficiently and effectively, how do you reduce the hassle on the provider, on the physician, and how do you make sure that they get to do the things that brought them into the industry in the first place, which is care and interact -- care for and interact with patients. And so from that standpoint, Entrada is really a capability that goes right at the heart of one of the biggest problems in our industry today, which is provider fatigue. And so as we look at that, we're very excited to be able to bring this capability and that capability drives a ton of incremental value. It's not just about the efficient experience. It's about enabling people to operate at the top of their license. It's about making sure that when a provider is in front of the patient or has a patient coming in and they see it on the schedule, they can interact with other providers, both within their organization, but also across town in a secure way to make sure that they have the best information going into that episode. In addition, it really enables them to work the way they want to work, and to be able to do all of them simply from the palm of their hand. And so when we look at that, we think that number one, it does a great job for provider satisfaction, which is one of those key go-gets as we really look to energize and enable our clients. But more than that, it also creates a ton of incremental value, which naturally, as we create value for our clients, we expect to share in that value.

So what – it's being used by providers that are on other EHR platforms. Does this provide a good, maybe kind of way to backend or cross-sell the NextGen or MediTouch platform into other parts? Or is it really just about selling Medi through the Entrada on top of other EHR platforms that cannot be replaced?

I mean I think when we think about it today, what we think about is how do we really create. I think, the biggest opportunity in front of us is to create value within our own client base today. As far as where we go in the future, we're not going to comment on that at this point in time. I think we're really on our Platform-as-a-Service strategy. We've got a tremendous amount of whitespace within our own clients as we seek to round out the solutions necessary to make them successful. And that, right now is our primary focus as an organization.

Your next question comes from Nicholas Jansen of Raymond James.

Most of my questions have been answered. But just one on free cash flow with a little bit of an earnings reset in fiscal '18 and higher cap R&D and less opportunity on AR days, with DSOs kind of stabilizing here. Jamie, I just wondering if you could give us a little bit more hard numbers on how you think free cash flow should develop in fiscal '18?

Well, it's clearly going to be down, year-over-year because you're right, we have made substantial improvements in the DSO. And as I pointed out in my comments, I think we're probably right at about where we would expect us to be, in that high 50s, low 60s DSO net range. So not expecting to see a lot of improvement there. This year, we did get a big benefit of several tax refunds, and that will not occur next year. And in fact, I would expect we'll have outflows, so that's going to further bring it down. And then from a CapEx, whether you talk -- whether it's capital expenditure for property, plant and equipment, and then the capitalized R&D, it's going to be slightly higher next year than it was this year because our capitalized R&D is up. Although I would expect our capital expenditures on furniture and fixtures and things like that will be down slightly. So but it'll still be in the $20 million to $25 million range. So I hope that will help you work through the free cash flow calculation. It is going to change significantly and it's a very good question.

Your final question comes from Matthew Gillmor of Robert Baird.

Just one question on the acquisition front, the tone seems a little more aggressive on that. And I guess that's based on the API capabilities with macro edition upgrades. But I know you may not want to tip your hand too much, but can you give us a flavor for what types of acquisitions would be attractive? Is it more focused on delivering enhanced productivity for physicians like Entrada or maybe more on other capabilities like Pop Health and revenue cycle?

Thank you. Yes, we are certainly leaning forward. And I think we've shown that we have the capability to do that and deliver great returns to the shareholders. But also we've – certainly the capability to integrate acquisitions that built this organization prior to my coming here as well. And the API certainly opens up the opportunity to quickly integrate those new capabilities in. I think we're going to follow the needs of the client base. And so certainly, as we look at this transition and this true transformation, I mean, we've been talking about the transition for value for years. It looks like the government's pretty darn serious this time. And so we expect as we get to January of '19, that you're going to see a lot of patients on value-based contracts. And so based on that, I think, I mean, you can impute that there is demand and need for our clients to be able to manage those populations of patients in a risk-based arrangement and make sure that they are doing the right thing for those patients to drive wellness in that population. And so that's certainly an area that we will look at as -- both organically and inorganically, as we move forward through this next 12 to 18 months.

All right. Well, hey, I want to say thanks to everybody. Certainly, we're excited as we look towards this year. We feel like we've worked hard to gain the right to be able to truly accelerate with our clients. And certainly, we're looking forward to continuing the conversation with the investor community as we move forward through the year. And look forward to the next call. So thanks, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's call. You may now disconnect.