NextGen Healthcare Inc (NXGN) 2018 Q3 法說會逐字稿

Welcome to the Quality Systems, Inc., Fiscal Third Quarter 2018 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 laws, including and without limitations, statements relating to anticipated industry trends, 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 policy (sic) [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 the Form 10-K and any subsequent quarterly report on Form 10-Q. Any forward-looking statements speak only as of today. The company express 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 financial -- the GAAP financial measures for most directly comparable to each non-GAAP financial measure used or discussed and any reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our fourth 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 Mr. Rusty Frantz, President and CEO of QSI/NextGen. Rusty?

Thanks, operator, and thank you to everyone for joining us this afternoon to review QSI/NextGen's third quarter results.

We are pleased to be at another solid quarter where we continue to make progress and execute our strategic plan. We saw revenue of $131.7 million in the quarter compared to 127 9 -- $127.9 million in the third quarter of fiscal 2017 and non-GAAP EPS of $0.15 compared to $0.23 a year ago, reflecting the investments we have made over this year as well as enabling us to continue to confirm our guidance range.

Most indicative of our progress, however, is the $30.5 million of bookings in the quarter, which reflects a 17% increase sequentially. We expect this trend of sequential increases to continue into the third quarter -- into the fourth quarter as well.

Before I dive into more of the third quarter details, I wanted to share some of my perspectives on the company from where we stand today, 3 quarters of the way through our fiscal year. So far this year, we've acquired and integrated 2 acquisitions that align our solution with the key areas of focus of our clients: the transition to value-based care and physician efficiency. We've introduced a simplified business model and billing approach that's aligned with our client success and makes us easier to do business with. We've broadened and enhanced our leadership team, and we've transformed our sales force to a disciplined solution-selling organization.

These accomplishments, along with many others, have begun to manifest in the financial results and the sequential bookings growth we delivered in the third quarter. Based on the pipeline growth, I'm confident that the early signs of delivery from our new fully staffed sales team but recognize that it does take some time for the full effects of this invigorated and more capable team to flow through the pipeline. Before Jamie goes deeper into the quarterly results, I wanted to provide some color on a couple of areas: the swift uptake and interest from our user base around EagleDream, early signs of our cross-selling success and an update on our sales force transformation along with a few other items.

The third quarter represents the first full quarter in which EagleDream is incorporated into our solution, and we're already experiencing both deal flow and some significant interest in the solution in that short period of time. EagleDream offers a tangible ROI for physicians and physician groups regardless of where they are on the transition from fee for service to fee for value. That message has resonated strongly with our client base.

In fact, during the quarter, we closed 10 deals across a broad spectrum of accounts, both by specialty and geography. Furthermore, we built a meaningful pipeline of interest within our base of clients as evidenced by the number of folks participating in webinars around the new offering. And while the bulk of our efforts are focused in our current client base, of the roughly 15% of our effort focused outside the client base, we're also seeing some additional promise and progress.

Beyond EagleDream, positive trends in -- positive trends and peaked interest from our client base could be seen throughout our broader suite of solutions during the quarter. In terms of RCM, where fewer than 10% of our own clients use our solution, we signed 9 new RCM deals in the quarter, 2 of which were entirely net new clients to NextGen as a whole.

The early stage pipeline continues to grow nicely, and we expect continued progress as we move through the next few quarters. Additionally, Entrada has experienced sequential growth in both pipeline and bookings, and EDI revenue increased 6% compared to last year as clients realize the efficiencies we can now offer to them.

Our interoperability framework delivered some notable success in the quarter. As of December 31, we had well over 100 clients integrated into the national care quality framework for interoperability and are adding more every month as clients upgrade to the new release. In addition, we're bringing clients live onto our cloud-based, FHIR-compliant API. We continue to bring our clients into the national interoperability framework, all to ensure that patient data is transportable not just within the NextGen client base but also across the industry. In an area -- in an era where data blocking for competitive reasons has been an inhibitor to seamless interoperability and enhanced patient care, we are proud to be on the forefront of open and seamless data exchange.

You've heard me say this plenty of times in the past, but we remain acutely focused on realizing the significant opportunity present in our current client base by demonstrating the value of our comprehensive and enhanced platform. In my opinion, one of the biggest factors that plays into keeping our clients happy is a smooth upgrade process, enabling them to leverage our latest technology and all of the investment that we've put in to delivering solutions for them.

This is an area where we've made significant strides lately. Some of our largest clients have upgraded to our latest release just released in September and all came back with glowing remarks about the progress, not just to us but also to each other.

Anecdotally, over a recent weekend when our teams completed 22 upgrades, we experienced no notable increase in call volume on Monday morning. In fact, of those who've upgraded, we've some substantial improvements in client satisfaction across all aspects of the solution, including the EHR. Over the last 2 years, we've taken 80% of the effort out of the upgrade process, leading to significantly increased uptake of our new robust releases. It's important for us to keep our clients happy but also relevant to note that happy clients on the latest version are always more receptive to exploring the breadth of our new solutions.

On a similar note, as we move into calendar 2018, leaving some of our technical and stability challenges behind us, we look to open up R&D spend to focus on new capabilities. In addition, we also continue to invest in our core platforms as we focus in on patient and physician workflow efficiency. We'll deliver 2 significant workflow releases this year, streamlining the top 60 workflows that our clients use 90-plus percent of the time as well as adding key capabilities to support more complex specialties and client types.

We're very excited about what this will mean for our clients and look forward to walking them through the impact of the great workflow enhancements to our EHR and significant expansion of our Patient Portal capabilities and what effect those will have on their physician and patient populations. We're excited to introduce the first step at HIMSS this year and looking forward to moving forward from there.

As I mentioned in our last call, we've experienced the sales force attrition area -- era and at the time of the 2 -- second quarter call, have already filled the vacant spots in our team. About a quarter later, I wanted to share with you how pleased I am with the progress being made by our refreshed and enhanced sales team. Looking at sequential billings growth -- sequential bookings growth, the swelling pipeline and the number of deals we've closed on our newest asset, EagleDream, it's clear to see that our sales force problem is primarily one of the past.

I had the opportunity to sit in our sales quarterly business review last week. The level of discussion, understanding of the industry and quick grasp of our solutions was quite impressive and a new level for NextGen. I'm excited and eager to watch this team take our clients into a great future.

The last thing I want to comment on this afternoon is our client attrition. In the third quarter, which is calendar fourth quarter for our clients, attrition did tick up slightly to 7.4%, reaching the higher end of our anticipated range. There's a couple factors at play here, but I don't see this as indicative of a reversal in the trends we've been seeing or the progress we've made over the last 2 years.

During the third quarter, we did plan for anticipated departures by a couple of longstanding clients, but the somewhat anticipated element came from the delays caused -- from the delay of MACRA and MIPS, which has allowed some of our clients who were facing that regulatory upgrade to cycle out while they have a year to go. Given the activity and energy in our business this past quarter, we're confident in achieving our guidance range for fiscal 2018.

Looking forward, the positive trends in the sales pipeline continue to validate our confidence in our longer-term outlook from low- to mid-single-digit nonleveraged growth in FY '19 and high single-digit top line growth with meaningful margin expansion in fiscal 2020. Naturally, we have to continue to close the deals in our pipeline and convert those bookings into revenue. But from my vantage point, I'm very confident in our ability to execute.

With that, I'll turn the call over to Jamie to review the financial results in greater detail. Jamie?

Thanks, Rusty, and thank you all for joining us on today's call. I will start by echoing Rusty's sentiment that this was another solid quarter for QSI/NextGen. Our results are starting to show the hard work of our team members over the past 2 years.

Turning to our third fiscal quarter's financial results. Total revenue of $131.7 million increased 3% compared to a year ago and was roughly flat sequentially. Revenue from software license and hardware of $13.1 million was a 23% decrease year-over-year. As we mentioned on our last couple of earnings calls, software license and hardware revenue continues to be under pressure, and we expect it will be down year-over-year in Q4. Subscription revenue of $24.7 million was up 10% year-over-year. The growth was primarily driven by continued growth in MediTouch as well as the contribution from the 2 recent acquisitions.

Support and maintenance revenue of $40.4 million was basically flat compared to last year due to maintenance on new license transactions and CPI increases offset by attrition. The decline from last quarter was due to last quarter benefiting from a onetime maintenance true-up.

Revenue cycle management and related service revenue of $21.9 million increased 9% year-over-year. The growth comes from penetrating our MediTouch customer base as well as -- sorry, on the last earnings call, we indicated that we expected headwinds this quarter due to multiple hurricanes. Not only did we not experience the headwinds, we were able to generate modest growth. In Q4, we expect normal beginning-of-the-year headwinds due to resetting deductibles on health insurance, which has the effect of reducing collections from payers.

Regarding the attrition exposure related to the one large client we previously discussed, we continue to have discussions with the client and do not expect this to have a material impact this quarter. The net of these comments is that we expect modest decline in RCM revenues this quarter.

Revenue from electronic data interchange of $23.1 million in the quarter was up 6% year-over-year and was in line with our expectations. Professional services revenue of $8.5 million in the quarter was up 29% year-over-year due to the contributions from Entrada's transcription services.

To conclude my comments on revenue, our subscription-based recurring revenue accounted for 84% of our total revenue this quarter compared to 80% -- 82% last year. Recurring revenue grew 5.5% year-over-year to $110 million. I continue to be encouraged by the growth of this portion of our revenue, which offsets the decline in perpetual licenses and related services. It's trending in the right direction and gives us increasing confidence in our future growth curve.

Gross profit of $70.1 million and gross margin of 30 -- $53.2 million were down year-over-year due to a general shift to lower-margin subscription revenue, compression in margins for our software and hardware revenues due to relatively fixed expenses against lower perpetual license revenue, and a shift to lower-margin subscription revenue and RCM margins being compressed as we invest for future efficiencies, and also, we have had some headwinds this quarter from one-off personnel expenses.

Moving down the income statement to operating expenses. SG&A of $43.6 million increased $6.1 million from $37.5 million a year ago. The increase is due to investment in sales and marketing, including incremental sales and marketing personnel, partially due to the 2 acquisitions; the 606 in legal costs and a onetime benefit last year from the true-up of contingent consideration related to the acquisition of HealthFusion.

R&D of $20.6 million increased 5%, consistent with our plans to invest this year to resolve usability issues and deliver government-mandated enhancements. Gross R&D was up $3.6 million, partially offset by an incremental $3 million of capitalized software development costs. Our GAAP effective tax rate year-to-date is 31.3%, and we're continuing to use the non-GAAP tax rate of 30.5%.

Rounding out my discussion on the income statement. Our GAAP EPS of $0.02 compares to $0.17 a year ago. Our non-GAAP EPS of $0.15 declined by $0.08 compared to a year ago.

From cash perspective, we had $23.4 million in cash and equivalents and $39 million outstanding [against] our revolving credit agreement at the end of the quarter. We remain well positioned in terms of financial flexibility with $189 million available in total liquidity. DSOs for the quarter were 55 days.

Finally, we are reiterating our outlook for the fiscal year 2018: revenues of $522 million to $530 million and non-GAAP EPS between $0.64 and $0.68.

That concludes my review of the third quarter financial results, and now I'll turn the call back over to Rusty for his closing remarks. Rusty?

Thanks, Jamie. In closing, I'm pleased with the third quarter results. Through our team's hard work and dedication, we're making steady progress on our strategic plan. NextGen has once again become a competitive player in an aggressive market, and I believe we have positioned the company appropriately to see a return to growth in the years to come.

With that, I'll open the call to questions. Operator?

(Operator Instructions) Our first question comes from the line of Sean Wieland with Piper Jaffray.

So wanted to start on the bookings side. If you could just unpack good bookings number, could you just unpack that a little bit in terms of the source of those bookings? Was it existing customers? Was it net new customers, revenue cycle versus software, whatever kind of incremental detail you can provide on that?

Yes, Sean. Well, we haven't -- we have not unpacked those bookings in the past and -- but what I would say is it was pretty balanced contribution but definitely increasing contribution from the new parts of our solution that we've acquired. From an RCM standpoint, this was a return to transaction volume that we haven't seen over the last couple of quarters. And from an EagleDream standpoint, this was going from zero to a number of deals very quickly. But what I would say is it's really kind of balanced production across the portfolio. The one thing I would say is we continue to see pressure on the perpetual license side of the bookings number and yet are still able to maintain our earnings and maintain our gross margin to a large degree as we continue to experience this mix shift.

All right. And then I think I heard you say that you expect bookings number to sequentially increase it to fiscal fourth quarter. Are you expecting it, like, at that same rate, 17%, -- a teen sequential growth rate? Or are you just saying it's up?

We're just saying we expect sequential growth. We're -- I would say, if I was to call out a percentage, that would be precision without accuracy. So we do see continued sequential bookings growth, but we haven't put a number out there on that.

Your next question comes from the line of Jamie Stockton with Wells Fargo.

I guess maybe just following up on Sean's questions with respect to the environment. Rusty, I think you threw out that attrition ticked up a little bit, but it was because maybe there were a few more deals that seemed to happen in this quarter as some of the government mandates weren't causing people to stick with their current vendors. I mean, I assume you're seeing that maybe on both sides where you're also seeing some more software deals, maybe subscription-oriented but more software deals, where you're picking people off from other vendors?

Well, I think as we said, we've -- well, first of all, let me just reframe the overall effort. As I said, about 80% of -- 85% of our effort is focused on monetizing our existing client base. So we are also out looking for competitive deals but frankly not at the same rate. That being said, this is the first time, at least I can remember in my tenure of seeing -- starting to see net new clients on the RCM side, for example. And these aren't new -- our clients that are signing up for RCM. These are clients that were somebody else's that are now signing up for our solution. Same thing with EagleDream. We are out there selling outside of our client base and are seeing some success there as well. And so from our standpoint, I think we continue to see deal flow within our client base. The replacement market is a tough place right now. I mean, a lot of folks are looking at how do they get ready now for the next January 1 and this transition to value and the implementation of MIPS and MACRA or whatever the government actually chooses to implement at that time. And so I think folks took an opportunity. We expect attrition to kind of sit in that 5% to 7% range, I think, as we go forward and feel like -- I mean, there will be quarters where it accelerates like when you get to Q4 for the clients' calendar, they're getting to the end of their own calendar year and tend to like to start the new year fresh. And on top of that, as I've said, the regulatory piece moves. So it's just something that we see in the natural ebb and flow, but we haven't -- we're well below historic levels and, frankly, we're within the levels that we're very comfortable in our multiyear guidance.

Okay. That's great. And then maybe just some housekeeping, Jamie, and you can look this up if you don't have it on your fingertips and interject later, operating cash flow during the quarter, capital spending and then the bookings number that you guys threw out. I think you said it was up 17% sequentially, but I didn't catch a year-over-year growth number. That'd be great.

Actually, the bookings were down year-over-year because our booking number last year -- I'm trying to get to it right now. But the bookings were down year-over-year. They're down about 10%. Sorry, give me one second. Yes, bookings were down about 10% year-over-year on an organic -- that's on an organic basis. So -- and let me see, your other question was operating cash flow?

That and CapEx, if you've got it.

$18.7 million is the operating cash flow, and the CapEx was $2.3 million. You didn't ask me about software capitalization, but I can...

But we're going to tell you anyway.

Because I assume that you will want that number. It was $4 million.

Your next question comes from the line of Nicholas Jansen with Raymond James & Associates.

Question from me in terms of what level of bookings dollars do you guys need over the next, let's call it, 4 or 5 quarters to really get to that high single-digit revenue growth assumption that you guys are thinking about for fiscal '20?

We actually haven't put that number forward. That would be kind of -- that's forward-looking prior to us being ready to provide guidance. But what I -- let me give you a little color on how we constructed the plan. We started with very conservative -- as I think we've talked to a number of you about, very conservative penetration rates of the various cross-sell solutions, like, RCM and EagleDream and Entrada, et cetera. What we've now done is we've actually gone bottoms up and mapped out the sales activity as well as the client targets by rep to make sure that we can get to the number. So now there's always a little bit of a, wow, geez, we did a top-down plan, which we think is conservative, but is the bottoms up going to support that. As we've gone through and trued up top-down to bottoms up, that has only increased our confidence in our ability to deliver our guidance because we're getting that down to targets that we can deliver to salespeople as well as adoption pathways based on different type of clients to make sure we're bringing the right solution to the right client at the right time. So as we step back and we look at the integration of that top-down plan with a bottoms-up sales activity plan, we find that we're firmly committed to our guidance because, with that, with our modeling of attrition, with all of those things, we see the numbers as achievable, and not achievable at the far outside of possibility but right down the middle.

Great. That's helpful. And then maybe for you, Jamie. In terms of the gross margins in the quarter, there was a lot of puts and takes. But how do we think about the nearer-term gross margin trend? And then layer in maybe just quickly your thoughts on tax reform.

Yes, so I think the gross margins, the way I think about it, is given the shift that we've had away from the perpetual licenses, it has put a lot of pressure on our gross margin relative to last year. So I think what we're experiencing now is -- will be in the near term. There may be a little bit of improvement because we had a little bit of a onetime charge in a couple of areas, but I'm not expecting it to change dramatically for gross margin. And regarding the tax reform, we are still working our way through the impact of it because it's not quite as simple as saying that it's -- that the rate dropped. There's a number of other factors that affect our tax rate. There were changes for deductibility of qualified domestic manufacturing, foreign tax credits, R&D credits. So there's a lot that goes into it. I hate to make it sound really complicated, but like everything, it's always more complicated than the headline. Short answer is I do expect as we move in -- when we give the Q4 results, I will give the guidance for next year. I'm expecting on a non-GAAP basis that the number will be in the low 20s next year.

Percentage, not millions, to be abundantly clear for everybody on the call.

Thank you for clarifying, Rusty.

Your next question comes from the line of Mohan Naidu with Oppenheimer.

Rusty, great to hear about the traction in the EagleDream. Can you set us up with the opportunity that you have within your customer base? What portion of your customers can benefit from this? And is it fair to say the opportunity is within your large customers, not the [one two] physician practices?

Well, let me see. So what I'd say is, simply, the nature of the EagleDream platform is such that it provides incredible value both to fee-for-service clients as well as all the way up to fully capitated clients. And so regardless of where our clients are on that journey, the EagleDream platform has value and capabilities that it can deliver to them. Now, so we'd say somewhere in the -- near 100% of our clients could benefit from EagleDream. That being said, as we look at our model, we have a number very significantly south of that built into our model simply because -- just because 100% of your clients may need it, doesn't mean that 100% of your clients are going to buy it. So we've taken a very conservative approach to what that penetration should be. Yes, large clients benefit it, but frankly, so do the smaller ones. And some of the things that we're looking at is how do we continue to wrap more services around the platform so that we can provide that value all the way down to single doctors. More to come on that as we move forward. But when we look at our desired penetration metrics, they're -- let's just say they're more in kind of the 20% to 40% range, and that's kind of where we look at from a multiyear model standpoint. So we are appropriately conservative in spite of the fact of the applicability to a broad swath of our client base.

That's great. Maybe one -- couple more questions, I guess, on this one. How are you pricing it? Is it this recurring revenue based on the patients? Or how are you pricing EagleDream right now?

At this point, it's per provider per month. We will (inaudible) a simple business model that's easy for the clients to understand. It's got predictability associated with it versus on patient volume. And on top of that, it's a new offering. And so we're -- we may evolve over time. But as we sit here today, that's where we're pricing it. Just to be clear -- just to be abundantly clear, just for everybody on the call, we are not looking to add perpetual license maintenance products to this portfolio as we move forward. We will continue to move more and more to subscription revenue.

Your next question comes from the line of Sean Dodge with Jefferies.

So maybe staying on EagleDream just for a moment. It sounds like it could be a big opportunity. How long is it until we see a NextGen or maybe a Mirth offering that integrates some of the EagleDream functionality?

You'll see that if you come to our booth at HIMSS.

So it's already out, generally available in the marketplace?

It's not generally available. What we're doing is we are giving a preview of the spring release. And look, the reality is, for years, we've had NextGen Care, which is a great outreach platform. But without an analytics platform to sit in front of it, you can't figure out who to reach out to. Now that we have the EagleDream analytics platform, all of a sudden that takes an asset that, frankly, had been somewhat marginalized in NextGen Care and now creates value with the combination of those 2 things. And so the ability to show, not just patient identification but patient outreach, and not just patient identification but inserting that into provider workflow, we feel, is the real answer. A simple population health analytics platform alone shows you problems but doesn't enable them to be fixed. Having an opportunity to treat a chronic patient or a patient with complex conditions, you have to be able to reach out to that patient and you have to make sure that when they show up, the appropriate things are done with that patient to make sure that you're generating a great outcome and either generating increased revenue in fee for service or protecting your profitability by enabling wellness in a fee-for-value arrangement.

Okay. Very good. And then so Rusty, on the 5.9/8.4 release, it sounds like that's going very well. Can you give us a sense of how many clients have been migrated now and how long you expect it'll take to get your entire base switched over?

Let's say, give or take, about 25% to 30% of our NextGen ambulatory clients have either migrated or are in test on 5.9/8.4. Some of our largest clients have migrated. In fact, one of the clients actually took the opportunity to get on the listserv and tell all the other clients that it was the single-best darn release they'd ever seen from NextGen. And so we are continuing to see uptake on the release. We're also evaluating, frankly, a push to get more and more people on the release. We expected -- we spent a lot of money meeting the government's requirements, and we expected the government to respond by actually implementing the requirements. And we expected a significant number of our clients to move forward to enable the 365-day reporting period. Unfortunately, the government backed away from the regulations. And so we're looking both on the satisfaction side, clients are starting to move to 5.9/8.4, but we're also looking at how do we continue to incent them to come up to the latest release because, frankly, it gives them the best experience, but it also enables the cross-sell to the greatest degree.

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

Want to dig in a little bit more into the reiteration of guidance. First, does the fiscal Q4 guidance reflect any benefit from a lower tax rate?

No, it does not. Because some of the analysts have not updated for it, so rather than confuse everybody with a mixed message, I -- my intention was to use the non-GAAP tax rate of 30.5% for this full year. And then when we provide guidance, we will give the guidance on an apples-to-apples basis and then show you what the impact of the tax change would be just so that...

So it's clearly identified but also so that we keep everybody on a common playing field of understanding and there's not confusing -- confusion in the investment community as is this the new model or the old model.

Understood. So -- and then second, on the guidance. Reiterating the revenue range, we've a bit of a wide range, though. Any thoughts on which end results are more likely to hit or any factors that might be contributing to a wider range?

Well, we haven't widened the range. We also have -- we actually collapsed the range last quarter. And we chose just to keep it where it is because, frankly, we are just continuing to execute the plan that we put forward and expect to hit our guidance range. We're not going to qualify whether it's upper or lower or middle. We're in the range. We're executing our plan. I think you can see the consistent performance along the year as well as the fact that we started out the year, said we're going to invest more. You're seeing that come in. And so like I said, we feel comfortable with the range. I'm just going to leave it at that.

That's fair. One last one from me, maybe a follow up on Sean's questions on bookings. Any update on the timing you imagine towards achieving year-over-year growth in bookings?

We haven't commented on that yet. Sequential growth into next quarter will certainly put us in that neighborhood. But whether we end up above or below, we'll see. As we move into next year, I would definitely expect year-over-year growth.

And just to give one point of clarification on what Rusty said. So sequential growth in Q4, we expect Q1 of next year will be a step back from Q4, but I don't think that will come as a surprise to anybody.

Yes, absolutely. We don't expect sequential growth in Q1 from Q4, but we do expect year-over-year growth in Q1.

Correct.

Your next question comes from the line of George Hill with RBC Capital Markets.

It's Stephen on for George. Just looking at the strength in professional services this quarter. It's kind of ahead of expectations. I was wondering what drove that strength.

Yes, the strength in professional services is largely driven by the Entrada transcription services, which last year would not have been in the number. So the strength there has been on the back of Entrada.

Okay. And then so far, what have you seen from kind of the eClinicalWorks issues? And then what are your expectations related to the Practice Fusion acquisition?

So from an eCW standpoint, we haven't really commented specifically on competitors. We continue to see them in the field. We continue to engage in hand-to-hand combat. And we've continued to see client dissatisfaction in that patch, especially given the things that have come out of eCW. But that being said, they still have a robust solution that is relatively inexpensive, and they're a viable competitor. Do we see opportunity there? We do. But we don't really get down to commenting on specific hand-to-hand combat. On the Practice Fusion side, I think AllScripts is executing their strategy, and their strategy is different than ours. Their P&L has a different aspect -- has different aspects than ours. And it's -- I see them as bringing in a cloud-based solution, and we have a cloud-based solution. And so that's about all I can comment on it.

Your next question comes from the line of Matthew Gillmor with Robert Baird.

I wanted to ask you about the new sales hires and the productivity ramp from that cohort. Were they fully up and running and sort of productive in terms of an average sales rep for the quarter? Or are they still ramping, and so we'll see the benefit from those new folks more in the future than we did in the result this quarter?

Yes, I mean, we brought in folks that had ambulatory experience, had solution selling experience, had revenue cycle management experience, have analytic sales experience. So we brought in folks who have absolute competency and capability in the market and solution sector. They still have time to come up to speed on the specifics of the NextGen solution. So we've seen the beginnings of progress. We've seen them get engaged, frankly, much quicker than we expected, but it's still a complex market. Our clients are complex clients, and the solution is broad. So it will -- I think we're continuing to see increased effectiveness and will. And as we move into next year, it's what gives me confidence next year in the bookings rate because we're already seeing the beginnings of it. I'd map that trajectory. I'd say we still got some room to improve, and that's awesome because we're doing well and yet we still have room to improve.

Got it. And then a follow-up on the attrition comment. Were the clients that left, were those clients from quarters ago where they -- you knew that they were leaving, and they just happened to leave this quarter? Or was that a nearer-term phenomenon?

Yes. It was primarily driven by hospital consolidation that we -- that had been on the plate years ago finally coming to fruition. And that was kind of the increase. Now there's a natural attrition rate as well. So that's not the totality of it, right. But that's really -- that's what kind of drove this quarter's slight increase.

Your next question comes from the line of Ricky Goldwasser with Morgan Stanley.

It's Mark Rosenblum on for Ricky. Most of my questions have been answered. But in the RCM division, you guys had a client loss. But outside of that, can you comment on the utilization trends?

What I would say is we are seeing more revenue per physician as we move forward, so we are seeing a little bit of increase there. But as we move into course, as we move into Q1, you've got patient deductible resets and so you should see that come down. Beyond that, I'm not sure that we -- we haven't really talked about that in the past. I'm not really going to get any deeper than that, if that's okay.

Your next question comes from the line of Anne Samuel with JPMorgan.

On margins, as you move from your investment phase to your growth phase, how should we be thinking about the margin moving pieces and then the cadence as you move towards leverage?

Okay. So let me see if I understand the question. So basically, as we move forward through the growth plan on an operating margin basis, how should we see this. And I think...

Right, and then the pieces in between, yes, the growth and then the investments that you're going to be making as well. How should we think about the cadence of that?

What you should think -- how you should think about is, first of all, that next year, you may see a little bit of leverage, but you'll primarily see somewhere close to 1 to 1 from revenue to earnings growth on a percentage basis because we will continue -- next year, what you'll see is you can see us continue to expand investment in sales and marketing just in advance of an even bigger bookings number the next year. And certainly because we are primarily subscription and recurring, it takes time. Cost comes in ahead of revenue. And so that's where, as you look into next year, you see low- to mid-single-digit growth probably on top and maybe mid-single-digit growth on the bottom. But as you get into the year after that, we've really built leverageable infrastructure in this business. And so as we get past next year where we're still investing to get up to the 8% -- 8-plus percent in the out-years, you'll see us, first year, relatively nonleveraged. But as we get into FY '20, now you see higher revenue growth, but we're really at sufficiency from a internal structure standpoint. And so maybe you'll see a little bit of COLA growth or CPI-driven growth just around merit and those kind of things. But for the most part, we've built the organization necessary to deliver into the future. And so that's really how we see FY '20. We see sales flat, marketing flat, R&D flat because we've already kind of built out the structure and the capabilities. We've integrated the entire organization together. So we're getting that leverage by delivering kind of a Platform-as-a-Service strategy. Does that help?

Your next question comes from the line of David Larsen with Leerink.

Rusty, you mentioned a couple times that you're working on some new major releases that will improve, I think you said, workflow. Can you maybe talk a little bit about that? Is that -- are those major releases the 5.9/8.4 product? Or is it something else?

No. These are actually -- these are the next enhancements to the 5.9/8.4 platform. So with 5.9/8.4, we worked on some usability, a lot of government regulations and a good bit of performance and continued stability. Now given the fact that we don't have another set of government regulations to chase, we're turning over investment dollars specifically on the NextGen Ambulatory product to reinventing the top 60 workflows that our clients use most. A workflow is not a screen. A workflow is from where you enter the application to where you leave the application. And so really now focusing -- we've actually been working on this for a while. We've done a tremendous amount of work with our physician clients to make sure that what we're delivering truly meets their usability and efficiency goals as we move forward over the year. We'll do a spring release. We'll also do a fall release. And at that point in time, we will really feel like we have delivered a great experience for our physician and provider clients, which is core to their ability to thrive and grow. In addition to that -- one more thing though. In addition to that, we are also significantly focusing on the Patient Portal and how do we make sure that the patient experience as well as the provider experience are both great but also enabling them to interact more effectively to team on driving the best outcome possible.

Okay. That's great. So that's the spring of '18 and the fall of '18 when these new releases will be made generally available. Is that correct? And then are there any charges or higher fees tied to those?

There are not charges or higher fees tied to those. That -- we view that as inherent in our agreement around maintenance and providing value for the maintenance revenue that we are getting. And yes, you are correct, in the spring and fall of this year.

Okay. And then just one more. I mean, I think you talked about 10 new Eagle deals. What about Entrada? Were there several new Entrada deals? Any way you can sort of size the bookings tied to those, the number of deals tied to those? Or anything around pricing would be really helpful.

No, we're not going to -- the reason we talked about EagleDream is because it's net new. It came in with almost no revenue, and we wanted to give an understanding of that increase. And RCM is so material to the cross-sell opportunity. What I'd say is Entrada continues to grow nicely. We're not going to get in the habit of unpacking number of deals by client. It's just at this point in time, given those 2 notable things, in the cross-sell and, frankly, the dependence on the investors of seeing the beginning of the ramp, we've decided to expose a little more detail, but we're going to draw a line there.

Your next question comes from the line of Donald Hooker with KeyBanc.

One of the things I didn't quite understand maybe from Jamie's comments around the subscription gross margins. Not getting too in the weeds here, but I understand an overall mix shift away from perpetual licenses to recurring revenues, which is great create lower margin but good -- better quality revenue, of course. But the subscription margins were down and you said something about a lower margin type of subscription revenue, if I heard you right. Can you unwrap that a little bit?

The -- kind of across the board when I look at all, because there's a whole bunch of small products that run through that number, and yet there was a little bit of noise in here that brought the overall margin down for subscriptions this period. So there were 2 things going on. One is the overall shift into the lower-margin business, the recurring revenue streams like subscription, RCM, EDI. But then inside of the subscription number, it's down a couple of points from the previous quarter. And so the fact that it is a bigger part of the revenue but it, by itself, had some -- there's little charges that are falling through there, it's a couple of hundred thousand dollars, but it moves at a couple of points this quarter. If I unpack it completely, I'm trying to give you complete disclosure. Sometimes, I get wrapped around the axle in the detail.

Okay. Okay. That's helpful. And maybe one last one, always curious. I guess you guys, with EagleDream, sell to physician practices that are both dealing with fee for volume and fee for value economics. And I'm just curious if you're seeing -- I understand with the MIPS delays and uncertainty. But just generally, are you seeing kind of trends toward more alternative models: ACOs, bundled payments, things like that? Kind of any trends there versus maybe last year? Or is it maybe a little slower than you thought?

It's going slower. It's going slower than the industry thought. And I think, honestly, I mean, I've been watching this trend go slowly for a lot of years now. But I would say that it is definitely present in our client's mind. There's nothing like finding yourself 4 months away from such a transition to spur a lot of thinking. And if you were -- when you were a kid, maybe you woke up and found that you didn't study for the test, but it got delayed a day and you were pretty darn happy, but you actually studied the next day. I think that's kind of the way our clients are looking at it. I mean, it's -- to some degree, it's the same shock and awe that I think many other companies have run into with 606 is all of a sudden here we are, right. That one's not getting delayed. And so the client, I think their appetite has actually increased for these kind of capabilities. The great news is, back to the point I said earlier, is this is something that's applicable on both sides of that line. And therefore, they can invest, achieve a positive ROI regardless of where they are in that journey and, frankly, regardless of what the government does in the longer term.

Your next question comes from the line of Steve Halper with Cantor Fitzgerald.

When you said fiscal '19 earnings growth will grow slightly faster than revenue, I'm assuming that does not reflect any change in tax rate yet.

That's correct. We're still looking at it -- we're just looking at it pro forma, Steve, until we truly understand the impact of the relatively complex new tax situation.

Right. But to your comment, low 20% range for fiscal '19 is sort of the range. Now just as a sort of a mechanical thing...

Yes, from a tax standpoint -- I'm sorry, from a tax rate standpoint, yes, you're correct.

Yes. Now just from a mechanical standpoint, not going to change the fourth quarter number. But will you be paying a lower tax rate in your fiscal fourth quarter?

Yes. Let me emphasize the word slightly leveraged...

Yes, slight leverage for '19, absolutely. The second you said 20%, Steve, I'm like, no, no, no. We weren't talking about 20% earnings growth next year.

No, no, no. I meant -- I was talking tax rate.

Yes. Yes. And so look, I mean, we may get a little bit of tailwind out of leverage, but I wouldn't expect much. I'd expect to be very close to 1 to 1.

Your next question comes from the line of Gene Mannheimer with Dougherty & Company.

On the -- I want to just piggyback off a prior question on some of the acquired businesses. So Rusty, Jamie, are you calling out or would you call out the amount of revenue that came from Eagle and Entrada in the quarter?

No. We simply -- we only disclose at the subscription line. We've talked a little bit about uptick simply because I think it's important for the investors to understand speed of integration and speed to impact. But no, those all show up in the subscription line and in the professional services line in the case of Entrada because of this transcription business.

I see. Is it fair to say though that if we were to back out those businesses, there would have been organic growth year-on-year?

Looking at Jamie. Hold on.

It's...

Be close?

I mean, it's close, yes.

It's close, yes.

Okay. All right. Good. And then question, Jamie, on the maintenance stream. I know you periodically implement some inflationary adjustments. Is that -- you do that on January 1? Or is that more on a rolling basis?

It's largely on January 1.

Okay. So we would expect, all else equal, that fiscal '19 maintenance should be higher than the prior year just based on inflation?

Here's what I -- what I'd say is when we provide maintenance attrition, we are providing a gross attrition number. What that means is that you can't just take that percentage and get to a number because also -- because not only are there CPI increases, but there's also additions of licenses. And so that's not a net dollar retention number. That is purely a maintenance attrition number from the client -- from the dollars you started with, with the clients you started with to what it is at the end of the quarter.

Gene, if you go back to the Analyst Day presentation, and I -- that -- where we indicated maintenance, I have it -- an amber color associated with it, if you will. And that the attrition, I expect it to be in a slight decline as you go forward because the software -- the new maintenance contracts because software is getting to be such a small part, is not adequate to replace what's lost in attrition even with the CPI increase.

Your final question comes from the line of Stephanie Davis with Citi Research.

Given the recent bookings improvements despite sales force turnover, could you maybe walk us through the standard ramp-up time for your average sales hire at NextGen? And if you're seeing any productivity gaps, the new versus existing hire, so how that can improve in the coming quarters.

So as far as ramp-up time, first of all, we're an evolving organization. And so I don't know that we have a absolute precise answer for ramp-up time. What I would say is, is that you're seeing -- given when attrition happened and this increase in bookings, I think you're getting an idea of ramp-up time. From a productivity standpoint, we don't disclose a varied productivity per rep. What I would say is, is that both our new reps and the reps who have been in this company for a long time that continue to commit and invest in this company, that we're seeing good balanced productivity across them. What -- the folks that are committed see the opportunity here, that are excited about all of the progress we're making, that have been here for a long time are also being very productive. What it really comes back to is folks are following sales process. They're following sales discipline. They're calling on the right clients in the right way, and from that, we're starting to see benefits. It will continue to evolve as they get more time in the job.

What I would say, I think -- my takeaway from this quarter is that bringing in experienced reps who know the industry and know how to do solution selling, we're able to close opportunities that were already had been identified. I think where they're -- so it's probably a little better than if you had somebody who maybe wasn't as well versed on the industry. But I think where they're going to behave, like you would at any new rep coming into an area, it's going to take them 6 to 9 months to build their individual pipelines because that's where you have to go out. You've got to become acclimated with your clients. And so to that part, I think you would expect them to be more like the traditional -- everywhere I've been for the last 20 years, I think the view is it takes 9 to 12 months to become fully ramped. I think we were fortunate we had some opportunities. They were able to come in and close those opportunities, and that's why we had sequential growth.

And we see much the same situation next quarter. But as we get into the next year, that's where we really start to see the beginnings of them -- of the opportunities that they are creating, especially on RCM really come to fruition.

I -- understandable. That makes a lot of sense. And a follow-up that's a little bit more conceptual, just given the recent news that Apple's aggregating EMR data and they're trying to work to become more of an intermediary between the patient and the health system, how can we think about the moat you've built around your EDI business and kind of that clinician-patient data exchange?

So I'm not totally sure I understand the question, but first of all, let me say that I don't comment on press releases. Apple can put out announcements from now to the end of time until I really understand what it is they're doing and what they're really doing versus the press release, I'm not going to comment. Have we built a moat around, I'm not sure I totally understand the...

It's like a barriers to entry sort of idea, the long-term contracts is the idea that maybe your solution offers much more than just rote data interchange?

Well, so that's not data interchange. That's the Apple Health app pulling data off of a FHIR-based API, which we already have. Yes. And so what I'd say is the moat around our clients is the fact that we continue to perform more and more effectively for them. We can drive value. We're completely focused on the ambulatory market, and we're providing a great client experience and executive intimacy as reflected in the continuing increase of our KLAS scores. And so whether it's Amazon, whether it's Apple, whether it's any introduction on a press release, I just can't comment on that. We're just executing our plan.

And ladies and gentlemen, this concludes today's call. You may now disconnect.