NextGen Healthcare Inc (NXGN) 2021 Q2 法說會逐字稿

Welcome to the NextGen Healthcare Fiscal 2021 Second Quarter Results Conference Call. Hosting the call today from 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 would like to remind everyone that the comments made on this call may include statements that are forward-looking within the meaning of federal security laws, including and without limitations, statements related to anticipated industry trends and the company's plans, future performance, products, perspectives and strategies.

Risks and uncertainties 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 form -- annual report on the Form 10-K and any subsequent quarterly report on Form 10-Q. Any forward-looking statements speaks only as of today. The company expressly disclaims any intent or obligation to update these forward-looking statements.

Our remarks on today's call include both our earnings results and guidance, which contain certain non-GAAP financial measures. For our earnings results, the GAAP 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 latest quarterly 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 NextGen.

Sir, you may begin.

Thank you, operator. Q2 FY '21 is a great example of NextGen's operational and financial strength, and our ability to continue to execute and advance our strategy during a complex time.

On today's call, we'll highlight the following: NextGen strong Q2 performance across almost every operational metric, including revenue, earnings and free cash flow as well as continuing strong growth in subscription services. How our delivery of the best overall client experience in the independent ambulatory market is showing up in commercial wins, both inside and outside the base. Our intention to further capitalize on the commercial success of our expanded solution by opening significant long-term market opportunity through bringing our client base onto the spring 2021 release, which notably includes our newly acquired patient experience platform.

And at the close of our remarks, we will provide guidance for FY '21 as we now have better visibility and understanding of the range of business impacts from COVID.

Let's start with Q2 operational performance. Our revenue for the quarter came in at $140 million, an increase of 4.3% year-over-year and 7% quarter-over-quarter. As it has been for a number of years, subscription service revenue continued its mid- to high-teens growth rate, accounting for $36.9 million and representing 17.4% year-over-year and 4.3% quarter-over-quarter growth.

We saw a gradual return of our volume-based businesses throughout the quarter. As we had forecast, our volume-driven lines, RCM and EDI, are at about 93% to 95% of pre-COVID volume levels. Additionally, we saw a spike to more classic levels on perpetual license revenue, which pushed our

software and hardware line up $3.3 million higher than in each of the 2 previous quarters.

Non-GAAP EPS of $0.3 increased $0.06 year-over-year and $0.07 quarter-over-quarter. This strong performance benefited from the $0.04 of short-term cost initiatives that have expired as of the start of Q3. Contribution from the higher-than-expected perpetual license revenue as well as excellent cost management across the organization. As we move through the balance of this year, we expect this number to move down to a more normal, fully laden run rate. Free cash flow of $23.7 million highlights another great performance by our collections team.

Based on our continuing track record and improved market conditions, we are comfortable further reducing the amount drawn on our revolver early in the pandemic, resulting in us paying down a total of $115 million in Q2. This leaves an outstanding balance of $64 million as of September 30, and we are in a net cash positive position.

Taking a deeper dive into commercial execution, we had a great quarter. Bookings of $31.2 million were up $5.7 million quarter-over-quarter, and they're down from a stellar $36.9 million year-over-year, last year did include a $5.5 million recurring deal. We are seeing some recovery of demand, and we'll discuss our forward-looking views later on this call.

Consistent with last quarter, we were successful in competitive takeaways as more than 20% of our bookings came from takeaways, showing the growing strength of our solution, coupled with an increasing brand tailwind from our clients' satisfaction. As we continue on our journey to becoming a trusted adviser to our clients and a relentless focus on delivering the solution that enables our clients' future, I expect to see our commercial success continue.

And finally, let me turn to the legacy maintenance line. Retention once again came in strong at over 90%, in point of fact, 92.9%. Given the rapid client and revenue growth in subscription services and recurring revenue and the relative stability and now lesser importance of the legacy maintenance line, we will no longer be reporting on this metric unless it trends below our forecast range of 90%. We saw continued validation of our great client satisfaction, the latest release of the class interoperability report.

NextGen was identified as, and I quote, the only ambulatory specific EMR vendor to provide a strong usability experience for all interoperability workflows measured in this report. This is a great validation of how NextGen is giving our clients the unique capability to access the patient's entire available clinical record and put that information to use in the care process. To be able to treat the whole patient and create a great patient experience, these are absolutely essential capabilities. Many have and continue to talk a big game in their marketing materials.

We are delivering. And not just delivering a lot of data. We are helping providers get to more informed clinical insights, not according to me, but according to our clients.

As we look to the future, we are focused on the early success and demand around our patient experience platform. We also see the amazing opportunities for deep integration across the broader portfolio, further separating us from both traditional competitors but also best-of-breed players. By delivering a truly integrated platform, we are both opening up further opportunity and becoming even stronger in our base.

To that end, we have been investing in significant R&D aimed at delivering this next level of integration in our upcoming spring 2021 release. At that point, we will further empower our why NextGen message across the marketplace, continuing to enhance our competitive position.

In addition to valuable cross-platform workflows and key capabilities, this release has 2 very important aspects. First, the spring '21 release will have our new patient experience platform deeply integrated. In addition, this will be the release that enables our clients to meet the requirements stemming from the 21st Century Cures Act, which come due in August 2022 and effect and are required for the vast majority of our clients.

Mr. Frantz?

Give them a second, please.

No problem. And it seems that you are reconnected.

Yes. Jamie, where do we leave off? Where do we leave our hear us?

The glories of remote work. Okay. So I'm going to start back. Just a little bit, and I apologize for repeating for anyone.

As we look into the future, we are focused on the early success and demand around our patient experience platform. No.

We see the amazing opportunities for deep integration across the broad portfolio, further separating us from both traditional competitors but also best-of-breed players. By delivering a truly integrated platform, we are both opening up further opportunity and becoming even stronger in our base. To that end, we're investing in significant R&D aimed at delivering this next level of integration in our upcoming spring 2021 release.

At that point, we will further empower our why NextGen message across the marketplace, continuing to enhance our competitive position.

In addition to valuable platform workflows and key capabilities, this release has 2 very important aspects. First, the spring '21 release will have our new patient experience platform deeply integrated. In addition, this will be the release that enables our clients to meet the requirements stemming from the 21st Century Cures Act in August 22, which affect and are required for the vast majority of our clients.

To that end, NextGen will be investing to ensure our base is migrated onto the spring '21 release in the fully integrated patient experience platform. This effort creates significant opportunities. We have seen our attachment revenue for new capabilities grow quickly and like satisfaction is highest for clients on our latest releases. By bringing clients quickly onto the spring '21 release and by standardizing on the patient experience platform, we can contract for such high-value modules like self-scheduling for patients, virtual visits and patient pay, all integrated.

As we bring the client base into the future, we'll also be truly activating this increasingly broad market opportunity. As we accelerated into the spring '21 release, we are also seeing benefits within the R&D line from 2 primary dynamics. The first is a continued reduction in the need for sustaining activities, attacking technical debt as a result of our work on quality. The second is the continued success in becoming more efficient from an investment standpoint.

The global resource planning work we have done, the software life cycle improvements as well as the development of nimble and capable flex capacity have all combined to allow us to maintain roughly flat to slightly down from a raw dollar standpoint. We have done this while delivering increasing capacity without compromises to quality.

From an implementation standpoint, we are starting to invest here ahead of the spring '21 rollout. This cost will show up in the back half of the year, further establishing the back half of '21 as the representative baseline of how we will look entering FY '22 from an OpEx standpoint.

In a few weeks, our User Group Meeting, usually held live in person, has naturally migrated to virtual this year. While usually, we see 2,500 to 3,000 of our existing client team members come join us, along with a few prospects, this year, we already have 5,000 existing client team members, but have also created a reduced track for any ambulatory team member regardless of which other vendor they are currently on. This is not a sales presentation about NextGen, but rather a small example of the very high-value strategic and tactical content we continuously provide to all NextGen clients as part of their overall experience.

We see this as a great opportunity to continue NextGen's journey to becoming a trusted adviser to all ambulatory providers as we support a one of a kind integrated approach to the 3 pillars of ambulatory care, medical, oral and behavioral health.

Now to give more color on the financials, let's turn to Jamie for a deeper dive into the numbers.

Thank you, Rusty, and thank you to everyone on the call. Now the Q2 financial results. Total revenue of $140 million increased $5.7 million or 4% compared to the same period last year and up 7% from Q1 FY '21. In light of the circumstances that we faced entering this quarter, our results were above expectation.

Recurring revenue of $125.7 million increased $5.1 million or 4% compared to a year ago with an increase of 17% in subscription services, 4% in managed services, which was offset by a decline of 3% in maintenance and support and flat for EDI and data services.

While doing a year-over-year comparison ties the information in the earnings call to the GAAP financials in the 10-Q and press release, I believe the more informative comparison for recurring revenue is comparing the current quarter to the preceding quarter. Quarter-over-quarter recurring revenue had a net increase of $6.2 million or 5%. Subscription revenue increased $1.5 million or 4%, which is consistent with the general trend over the past several years and in line with our expectation for the future. More significantly for the quarter, volume-driven revenues rebounded after the significant COVID impact in Q1, with increases of $3.7 million or -- or 17% for managed services and $1.4 million or 6% for EDI and data services.

Volumes on the same-store basis increased consistently over the quarter to result in approximately 93% to 95% of pre-COVID levels. Maintenance and support decreased $500,000 or 1%, which is consistent with historical trends and expectations. Recurring revenue is 90% of our total revenue, in line with the prior year and the prior quarter and in line with our expectations.

Nonrecurring revenue of $14.3 million increased $600,000 or 5% over the same quarter last year. Software license and hardware revenue of $8 million declined $200,000 or 3% year-over-year, but increased $3.3 million quarter-over-quarter. The quarter-over-quarter increase reflects a catch-up of the pent-up demand from impact of COVID on our run rate or lower dollar add-on transactions as well as several large transactions, both in the base as well as outside the base.

These large dollar transactions closed as license purchase rather than subscription, making this line lumpy and somewhat hard to forecast. More importantly, it makes a significant impact on the bottom line that is disproportionate to the revenue increase. Nonrecurring services revenue of $6.3 million increased $900,000 or 16% compared to a year ago due to our efforts to close out service contracts. We believe nonrecurring services will stay in this range or moderate slightly.

Bookings came in at $31.2 million in the quarter, down 15% as compared to the same quarter a year ago. Note that last year, we had a $5.6 million contract. Two highlights of the quarter include continuous improvement in book -- or continuous strength in bookings of virtual visits and replacement wins with NGE which represented about 20% of the total bookings for the quarter, further reinforcing the wisdom on the sales management reorganization we announced last year. Cost of goods increased by $3.2 million or 5%, primarily due to higher amortization of capitalized development costs and acquired intangibles and higher subscription services and higher managed services cost associated with the return of transactional volume.

Gross profit increased 4% to $71.1 million and gross margin declined to 50.8% compared to the prior quarter of 51%.

Turning to our operating expenses. SG&A of $42 million increased $2.9 million or 7% from the $39 million a year ago. This increase is primarily due to an increase in legal expenses and an increase in personnel costs, including stock-based compensation and salaries and benefits associated with personnel that came over from the acquisitions closed in Q3 of FY '20. This was -- these increases were offset by decreases in travel conferences and infrastructure expenses.

R&D of $17.7 million decreased $2.1 million or 11% from the $19.8 million a year ago. The decrease is due to higher R&D capitalization, which reduces net R&D expense and decreases in travel and other infrastructure expenses. Our GAAP tax rate for Q2 was a benefit of 14% with non-GAAP tax rate of 20%.

To conclude my comments on the income statement, our Q2 GAAP EPS was $0.16 compared to income of $0.09 a year ago. Our non-GAAP EPS of $0.3 increased 6% compared to the prior year.

Turning to the balance sheet. We ended the quarter with $103.4 million in cash and equivalents and $64 million balance outstanding on our revolving line -- revolving credit agreement. DSOs in the quarter were 49 days, a decrease of 8 days from last year and down 5 days from the last quarter. I want to credit our account services personnel and commercial teams for working with clients in this tumultuous time. Based on strong collections and overall market conditions, we have repaid $115 million this quarter against the revolving line of credit. Our CapEx, excluding R&D, was $100,000 for the quarter, capitalized R&D was $6.5 million for the quarter.

In closing, I am pleased with our performance this quarter and proud of the organization for their resilience and determination. I am looking forward to continued progress as we work towards the new normal. This concludes my review of the second quarter financial results, and I will now turn the call back to Rusty to provide our full year outlook. Rusty?

Thank you, Jamie, and please confirm you can hear me.

I hear you.

God, thank you. Thank you, Jamie. And now let's take that look forward. I'd like to discuss both our view of the rest of the year as well as the assumptions about the effects of the pandemic that are built into our forecast.

Looking at the path volume is taken as well as factoring in the acceleration we currently see in COVID, remodeling volume is staying in the 90% to 95% range for the back half of the year. On the bookings side, based on the progress in the first half of FY '21 and the same intensity assumptions for COVID that drive the volume estimate, we expect to see a full return to the demand environment as we move through the balance of FY '21 and into FY '22.

We expect continued strong growth in subscription services. This line continues to be the dominant growth driver for NextGen. We expect that mid-teens year-over-year growth to continue through the rest of FY '21, and we saw opportunity to further accelerate the future. Perpetual license revenue has come down overall, but remains lumpy as evidenced by this quarter. While we have modeled it moderating, fluctuation in this number has a significant impact on the EPS line, given the high-margin nature of the revenue.

On the volume-based side of our business, we look at the expansion of COVID and its potential impacts with a cautious eye. As we look at the remainder of the year, our volume estimates, 5 fewer days in the back half than the front half and patient deductible resets in our Q4 will drive a relatively flat to slightly down forecast for the remainder of the year. Legacy maintenance will continue its slow multiyear decline as we continue to add fewer perpetual licenses, given our outside and inside the base bookings are increasingly showing up in the recurring revenue and subscription sides of our business. And on the cost side, as stated earlier, we have ended the short-term cost reductions, resulting in a resumption of $0.04 of quarterly spend. Our guidance includes the first half benefit of $0.08 of cost savings that will not be repeated in the back half of the year nor in FY '22.

As discussed earlier, we will invest ahead of the significant deployment of spring '21 with our new patient experience platform, and that investment will first show up in Q3 and Q4 and extend through next year. Importantly, we've been able to avoid the need to expand R&D investment through the aforementioned increased cost efficiency and effect and robustness of the underlying software. We will be able to support our strategy at current spend levels.

That says, increased -- that being said, increased commercial success and/or further M&A could cause us to revisit that decision as we move into future years.

Finally, we will continue to evaluate, reduce and relocate parts of our facilities footprint with an eye towards employee safety, a great percentage of remote team members in the future and the most favorable geography from a location, talent and cost standpoint. That process is and will be ongoing as we are now aggressively evolving NextGen into our future state. Based on these dynamics, we expect to see revenue for FY '21 coming in between $535 million and $551 million, with EPS coming in between $0.83 and $0.93. To deliver this kind of year in the face of the pandemic, overcoming significant impact from patient volume drops, delivering key new capabilities like virtual visits at scale, winning competitively with virtual selling, all the while extending our capabilities and client satisfaction, it's just an amazing performance by our NextGen team.

As we look past '21, we'll leave it at this. While much of this year's recurring revenue number has already been booked, we must continue to execute commercially as we set up next year's growth, most notably in subscription services. More to come as we move towards year-end and FY '22 begins to take shape.

In closing, I want to start by thanking our entire client base. We are proud to be an important supporting actor in the great work you do. We're delivering financially, both in results and cash generation. Our primary growth driver, subscription services, is delivering enviable growth at significant scale and positive margin, all within the broader profitable cash-generating framework of NextGen.

We have moved from fixing technical deficiencies to delivering a broad, highly robust, strategically positioned solution. We have an increasing addressable market for our solutions across those 3 pillars of ambulatory care: medical, oral and behavioral, both internal to our client base as well as in less satisfied client bases with less capable vendors. We have an employee culture that shows up every day in our clients' feedback and gratitude. Thank you to the entire NextGen team that I get to be a part of. We look forward to a bright future together.

And now I'll take questions. Thank you all.

(Operator Instructions)

Your first question comes from Jeff Garro with William Blair.

I want to ask about the move to more subscription deals in bookings. I know that was a point of emphasis last quarter. You called out the bolus of license revenue in the most recent quarter. So if you could give any background on those discrete deals in this quarter, that would be helpful. And then an update on how the outlook is for the push to subscription going forward?

Yes. So first of all, Jeff, great question. As we -- the actual shift to subscription started happening really almost within about a year of me joining the organization. So it's been going on for a number of years. We haven't talked about it as much. But it's been quietly and very rapidly building into a very significant portion of our revenue and one that continues to grow, really, as we see for the foreseeable future.

Now what we said was we are actually now removing kind of the incentives for our team to sell perpetual and really balancing that neutrally or even slightly towards recurring. And with the thought that we're just going to let the natural kind of organic demand for perpetual licenses happen, but we're always going to be leading with subscription. Now what we found is, is that certainly, as demands come back, first of all, there was some pent-up demand in our base, but also, there are clients who absolutely prefer that model. What I would say is because it's really based on discrete pieces of demand, for example, there was 1 very large deal that came in, in September that had a significant amount of recurring -- of perpetual revenue in it. These things are going to happen. And because the number is pretty small now, it's going to be a little bit lumpy. And the reason I call it out in the call is only because when that lumpy revenue comes in, sometimes it has some very accelerating effects on the EPS line compared to maybe some other pieces of revenue.

Got it. Very helpful. And one more for me is on the spring '21 release. It sounds like a little bit more emphasis on one of your new product releases than we've heard historically. And it also sounds like this release could have a positive impact on several fronts. And it might be from specific add-on products or more competitive displacements or better retention. So I'd just love to hear more comments on kind of where and how you see that new release play out positively and how we should think about the potential timing of that impact?

Yes. Sure. I mean, first of all, the reason we talk about this release is we've been doing a tremendous amount of work behind the scenes to build out all of the different capabilities necessary to truly empower an ambulatory organization's success. And we have built a lot of these things, but the real proof in the pudding for the client and the thing that makes you a one-stop shop is when 1 plus 1 equals 3 across the assets and capabilities of the portfolio, and that's really platform integration.

That means that workflows span from one part to another and that it's a consistent experience for the practice. And so this release really is the culmination of a number of years of work, and we've been doing a great job cross-selling various capabilities of the platform to both existing and new clients. But as that platform gets knit together, we stop having as many of the best-of-breed conversations, we really start having a best-of-platform conversation.

Now as we roll out through next year, first of all, I mean, the release comes to release in spring.

So you'll really see the meat of the migration really starting, my guess would be towards the end of the summer. Now as we bring people in the new patient experience platform, for the portal itself, that's not a revenue event. But when they start adding new capabilities like self-scheduling and the like, that also becomes a revenue event. And then on top of that, it opens up the opportunity for us to continue to bring new patient-facing capabilities to the table that enable our practices to create a great patient experience, but it also enable that constant collaboration between a patient and a provider that truly delivers the right result, which is so much more important in risk-based arrangements.

Excellent. And one more follow-up there. Just on your comment on [left] best of 3 type conversations. Does this become a catalyst for even a greater amount of all-in deals at some point?

Absolutely. I mean, that's really what we're seeing. We're seeing clients come in and really looking at the entire platform. And that really, I think that is a testament to just some of the work we've done to date, but the spring release really brings that up to a whole nother level.

Your next question is from Sean Wieland with Piper Sandler.

And just want to follow up on Jeff's question. So could we get a little bit more specific on the requirements of the CARES Act as it pertains to the spring '21 release? Like, what are some of the specific deliverables that need to be installed in your client base by August of '22 that are driven by regulatory requirements from the -- I'm sorry, the Cures Act. No, the CARES Act.

From the Cures Act. Yes, it's very much around data blocking and data sharing. I'm actually not prepared to get that deep into it, Sean, on this call. But it is something that we can certainly provide more guidance on, especially as we get closer simply because it's just not something that we're not that close to release yet. But what I will say is that when our regulatory team looks at our client base, the vast majority of our client base will need to comply with this -- with the regulations in the act. And at this point, based on the scope of the government and the timing, we're on a good path to get them there.

Okay. And for your existing customer base, is that a bookings opportunity for you to upgrade them to the spring '21 release or no?

It's not a bookings opportunity, but what we do have the opportunity to do is pull-through a lot of other capabilities that they would not have had access to and has integrated a fashion before they were on the new patient experience platform. But it also is an opportunity to come into them during the upgrade and really walk through all the benefits if they also acquire PopHealth. If they also acquire managed financial services and those type of things. And what I'd say is we've already seen a good bit of attachment of our acquired and new assets to existing clients. And our feeling is that as we go through this cycle, we'll continue to see that attachment rate increase.

Great. I missed why -- what's the reason behind the spike in the perpetual license in the quarter?

The reason about the spike of perpetual license was simply that we had some clients come in that just really were wedded to that type of model. And when it comes down to it, you've got a choice, either try to force them down to recurring path when they're absolutely wedded to this and have them walk or sign the business. And so while we're neutral from a sales comp standpoint and we're tilted towards recurring from a management standpoint, what I'd say is the clients are still sometimes going to buy the way they want to buy.

Cash is king.

Yes, for sure. Yes. And let me just say one other thing on it, Sean. My hope is that we've kind of gotten to the unaffected demand level on perpetual revenue. And my hope is that what we'll see is we'll see this go relatively flat into next year, simply because we're not tilting the field one way or another from a sales comp standpoint. And so because of that, you should -- I'm hopeful that you won't see major shift in margin production that comes based on a significant mix shift in perpetual.

All right. Got it. Rusty, I mean, Jamie, one quick one, R&D cap rate in the quarter?

R&D cap rate was 27%.

Your next question is from Steve Halper with Cantor.

Just a quick housekeeping question. You talked about $27 million of cash flow. Was that operating cash flow in the quarter?

That's free cash flow, I believe.

Free cash flow. Can you give us the operating cash flow number? I guess, I can back into it.

I can give it to you. Give me one second.

About 33 -- $34 million?

$30.2 million, $30.2 million.

$30.2 million?

Yes.

Your next question is from Sean Dodge with RBC Capital Markets.

Rusty, you touched on, I think, a little bit in the last part of your prepared remarks. But on the EPS guidance, the midpoint of the range implies something like 6% growth, and that's despite some amount of drag from the pandemic on the volume-sensitive businesses. Can you help bridge that to what the view was just a couple of quarters ago, which was the investments you'd be making in replatforming would keep EPS flat through fiscal '22. Is what you've laid out here just kind of in the margin of error there? Or has something changed? Or are those investments you mentioned that will ramp over the next couple of quarters? Does that cause a lot of us to just revert next year?

No, it's actually, that's -- and that's why I made the comments on our -- both our efficiency of R&D. I mean think about it. There's no travel. We had a lot of windshield time, right? People are working very effectively remotely. But on top of that, as we talked about, we've also been continuing to expand our Bangalore development center facility over time as well, which when you pull all those things together, what you're seeing and what we're seeing is that we're actually being able to deliver the capacity that we would have delivered before and yet within the same budget. And that's been really -- it's been really a market change.

And COVID, I think, it's been a lot of -- has had a lot of responsibility there. Now what I would say is, and I talked about it a little bit from a facility standpoint, I mean, we're starting to really see something not too far away from where we are as our new normal. And so based on that, I'm looking at continuing to lock in the efficiency gains of being a very virtual organization that collaborates well. But also the other thing is, as we've really seen some significant reductions in technical and defect rate out in the field, which have kind of hung in there all the way through the pandemic, that's also enabled us to focus a little more of a revenue, which would have been focused on defects more on building new capabilities, but also architectural improvement.

Not to be lost is we're continuing to refactor parts of the architecture to make the product more scalable, to make the platform more scalable and more extensible. But does that help?

Yes, yes, absolutely. And I guess -- so if we kind of stay post-pandemic and thinking maybe more demand side, you've talked before about the likelihood or the potential the pandemic really accelerates the transformation of ambulatory care. And then I'm curious is we're now another several months into this. From the interactions you've been having with clients, are you seeing more really rethink how they do business and what they're going to rely on you for? Or was that just a little bit of an initial knee jerk reaction and things are kind of going back to their old ways pretty quick?

No, I'd say the richness of the conversations about how clients are going to evolve into the future has increased by tenfold. In fact, to the point we're actually I had my CMO, Betty Rabinowitz, create -- Chief Medical Officer. Leads a group called the Pyxis -- I mean, called the NextGen Advisors, sorry. Called the NextGen Advisors. And they're actually out there acting as thought leaders, putting out very valuable content to the client base because the client base is aggressively looking towards how they compete in the future. How do they thrive in the future. And so we've been having a lot more of those kind of conversations.

But then I also -- the interesting thing, Sean, is when I look at our competitive success, it's not -- I mean, I've said this before, right? It's not single. It's not like we're selling in a little beachhead product. These are full stack replacements. And full stack replacements are really indicative of the fact that clients are needing something different. They're needing something more. And so I think when you think about the amount we've invested in the future versus maybe some of our less fortunate competitors, clients are looking at that breadth and saying, "I need somebody who can bring all of that to me." And so I think -- look, I think we are seeing people engage with their future. And then I think when they look at vendors, are looking at the vendors who have prepared for that future.

(Operator Instructions)

Your next question is from Matthew Gillmor with Baird.

I wanted to ask about the patient experience platform. It sounds like that's an area with some good momentum. Can you remind us how we should be thinking about the opportunity to deploy that platform within the base? And I know part of that's tied to the release.

And then could you help us think about what drives client decision-making for that platform? Is it the telehealth capabilities? Or does it relate to the self-scheduling, the check-in and payment?

Well, I think -- yes. So I'll start with the second one first, and then I may ask you to repeat the first one. But when I think about the second one, Matt, I think about -- what actually is empowering the patient experience platform is partially the capabilities that are there today, virtual visits, self-scheduling, patient pay, having a really good portal. Those are all important.

But it's actually -- what's driving a lot of the conversation is a fundamental realization that the way that providers need to engage with their patients must change. It must evolve. And unless they're going to a platform approach where they've got seamless integration between those things, they're not going to have the patient experience that they truly need. And so it's a -- I'd say it's much more kind of back to the question that Sean just asked, it's much more around the fact that they are realizing that they've just moved into consumer land.

And for -- and then if you look at, for example, our folks doing great work in behavioral health and in Federally Qualified Health Centers, that said, "I've got to figure out how to engage with my -- either my clients or my patients, to make sure that they are really getting to the result they need to get to." And if I don't have that patient engagement, if I don't have that road map to a future better place, I may not be able to treat them for one reason or another, right?

And so it's -- I think that's really -- like I said, it's interesting how it's kind of gone from the year of provider burnout to the year of the patient in relatively short order. And so what was the first part of your question?

Yes. Sorry, the first part was just helping us think through how we should think about the opportunity to deploy that patient experience into your base? And I guess what I was looking for was sort of where penetration is and sort of what the revenue opportunity is (inaudible).

So the great news about it is the penetration of self-scheduling is pretty much -- it's just really started. We've actually been seeing some good attachment there. Virtual visits, we've talked about, we're starting to approach 1 million visits on virtual visits. Patient pay is something that is also coming in. So it's actually -- if you think about it, we've shown in the past that we can be successful in creating satisfied clients and cross-selling to them. Think of this as opening that cross-sell up all the way to the patient.

And when it comes down to it, the patient provider interaction is the value transaction creation in health care. It is where the value of health care is created. And our absolute goal and intent is to play a very valuable role within that interaction. And that's what -- that's the opportunity embodied in the patient experience platform. Because like I said, some of the base capabilities we don't have. And so this really creates an opportunity for a huge number of providers over time.

Got it. That's really helpful. I guess I wanted to ask one numbers question, too, which was, is there a number we should think about in terms of acquired revenue that was in the quarter? Or is it sort of too messy to pull out between [the MA] what you sold to your base?

It's one of the things we look at, but we're not prepared to talk to at this point in time. What I would say is, look, as we -- and I think I really intimated on the call, expect us to start paying a good bit of attention to the subscription services revenue and the recurring revenue lines, whereas the perpetual and nonrecurring stuff kind of becomes a rider on the growth wave, right? And that's kind of the way we look at it. We really see that subscription revenue growth is really the primary indicator of both the health and the increasing value of the organization.

Your next question is from Sandy Draper with Truist Securities.

And congrats on the nice quarter. Just following up on that line of questioning from Matt. Around that -- I think last quarter, you actually sort of quantified about $4 million, I don't know if that was just from virtual visits or if it was from broader patient experience platform, but

are you willing to sort of give us an update on relative size of that?

Not at this point in time. What I'd say is that $4 million, I think, was additional bookings specifically in the quarter on virtual visits. It did not apply to the rest of it. But we are really just at the front end of rolling out, Sandy. And so what I'd like to do is I'd like to hold off until we get a little more statistically significant momentum, but then we will start sharing with you some of those -- some of the aspects of how this pull-through is working.

Okay. Got it. I certainly understand that. Next question, probably for Jamie. Just looking at the recurring revenue gross margin holding in. I'm just trying to think when I -- I maybe would have expected because you guys did better than I thought coming back with managed services and EDI. I think of those as being fairly fixed cost-ish or a decent component. So with the beat, I was sort of thinking we may have seen a little bit more flow through on recurring gross margin. So I'm just trying to think about the puts and takes longer-term about is this a line that you're trying to hold steady as you see the mix and you get scale, it can go up? Or are there going to be pressures? Just -- I didn't expect it to be flattish when you guys beat the way you did relative to my model.

Yes. Jamie, go ahead.

Yes. So the -- yes, what I would say is that EDI is a variable cost, almost 100% variable. Managed services, the RCM component is -- there is a fixed component to it. Think of our internal employees, but we do use contractors that become more variable. We can change that relationship fairly quickly. So it's -- I would probably say when I think about the margin for RCM, it's probably half as sensitive to volume, particularly in a -- when you're moving it in the short term, but if you start talking about larger increases, then our -- the need on for our employees goes up, so it probably becomes even more variable.

If that makes sense, because there's a lot of people we kept on during this period, Sandy, to continue servicing our existing clients. Even if they were only working part time, we had to keep working their accounts. And we use this as an opportunity to kind of clean up lingering things that don't get touched on. So that's what I think when I think about the cost associated with the recurring revenue streams in those 2 areas in particular. It's highly variable with EDI, less variable in the short term with RCM.

Okay. And then, of course, the subscription services component is relatively stable.

Yes, that's a really fixed spot.

Okay. Helpful. And then if I can squeeze in one more because it ties into the RCM. Rest of the year, are you having any different conversations with customers, specifically about RCM during the pandemic? Are they thinking, "You know what, given this, we've seen a shock, if we weren't outsourcing we had a bunch of fixed costs that we got stuck with. We'd rather pass it over to NextGen?" Or is it, "Hey, we were able to send our people home. They can work more remotely, go little bit more variable. So it's not as attractive." Have you seen a shift in the way the customers are thinking?

I haven't seen it shift, Sandy. Yes, I haven't seen it shift yet, but also pretty much everybody is still trying to figure out what the new normal is. And not -- and people aren't necessarily ready to run out and change that relationship. Now that being said, we've seen some volume in RCM, and we've seen some additional clients come in. But I haven't yet seen that wholesale shift. Now on the hosting side, I think we've seen a lot more of that.

Your next question is from Dave Windley with Jefferies.

I'm wondering, I appreciate, Rusty, your comments on the evolution of your integrated product. Wondering what you're seeing in the competitive landscape. Are they constrained, distracted? Is there something about the competitive landscape that creates even more juicy opportunity as you bring this integrated release to market?

I think so. I mean, there's -- look, not everybody has the benefit of the financial health we have. Not everybody has the benefit of the ability to take on some short-term gross margin impact to make sure that we're maintaining our full capacity and our culture. And not everybody has the ability to invest off the balance sheet without creating leverage problems like we do. And so I think all of those things have kind of put us in a better position from a platform standpoint, but also especially the more mature clients, they're looking at who do they think has real-life ahead of them, who's got consistency. I mean, this is a 5 to 7-year, especially in the replacement market, a 5 to 7-year replacement, and people are a lot wiser.

And so I think we got way better at the right time, just in time, because as we come into this replacement cycle, I do think that -- it's just been interesting. I mean, it's the same thing really from the sales and the incoming employee side. A lot of people are joining this company because of our culture and our potential. I can assure you that was not the case 5 years ago. And so I put all those things together, they're kind of intangibles, but they're really not. And so I've been really gratified to see us, especially these full stack replacements are really gratifying. And there's -- look, I don't want to get into individual competitors, what I would say is, I mean, it's -- that you don't have to look too hard to find some stories of pressure.

Yes. And on your point on full stack replacement, you mentioned that a couple of times. You've made some acquisitions. You've talked about your R&D investment. Is there anything that you still need to add? Or are you really at kind of completely full stack now?

So I would say there's nothing that we absolutely need to add. That being said, I think there are areas that our clients would love to see us -- directions they'd love to see us continue to expand our focus on and continue to evolve in, right? And so we will continue like we have.

I mean, I guess, if I'm going to talk a little bit about M&A, what I'd say is a couple of things. Number one, I wouldn't expect us to run way up the ladder on a really growthy high revenue asset because I think there are people on the private side who will pay more than our commercial synergy case. But we've been very successful operating kind of in the string of pearls end or slightly larger and bringing in capabilities that we can put into our satisfied client base and our commercial structure that's so effective and deliver, but we've also shown we can integrate them.

And so look, right now, I mean, primary focus and a great value driver for the future is bringing everybody onto our spring 2021 release and the patient experience platform. And really bringing everybody on there. But then the question is, once that's moving under its own speed, what else can we do for our clients? How else can we create value for them, top line or bottom line and share in the value we create? I think we've shown an ability to do it, I would expect us to continue still.

Got it. And when we talked to you 3 months ago, we were all just coming out of the most severe part of the lockdown and everybody doing visits online, and you had talked about, as you mentioned earlier on this call, $4 million of virtual visits booking has without -- I know you don't want to quantify, but has the pace and the appetite for that continued? Or do you see that actually waning as some of the payers have kind of dialed back the reimbursement for virtual visits?

I'd say what we've seen is we've seen 2 things. Number one, we've seen adoption. You always go through the bubble when something crazy happens. And then you go to normal adoption. We're now kind of on that normal adoption curve, which is a nice curve for us, and it's adding ARR every year. What I also have seen though, is I've seen visit volumes drop a little bit and then stabilize as our providers who are full-service providers for patients in their communities are realizing it is a tool, and it's a tool that works in some situations, but you're seeing them continue to use it, but maybe not use it with the intensity that they did in the first part of COVID as all of us have learned how to put a mask on and go places.

Your next question is from Donald Hooker with KeyBanc.

Great. So it sounds like retention issue is in the rearview mirror. I know in prior years, there had always been the sort of sword of Damocles hanging over you with these large health systems kind of swapping you out, really no fault -- kind of no fault of your own in a way. And that was just always an overhang. Are we -- are you messaging to us that, that overhang is sort of gone now and we're through that or?

Well, so here's a question for you. We've been reporting on attrition for 5 years. I think if you added up all the numbers, it probably come to about 42% or something like that. I don't know you can go do the addition. And meanwhile, how far has the maintenance line dropped? Yes. And yes, we've been talking all about attrition on the maintenance line, which as you can see, doesn't have that materially effect on the P&L. And on top of that, to your very good point, the health system and hospital stuff is not really that much of a problem at this point in time. And there's not much opportunity life for that.

And so as I looked at it, I said, look, we can continue to talk about this perceived sword of Damocles. And look, year 1 and 2, yes, that's what it was. What we haven't talked about is was how big the rest of the base is because by extension, if you think about it, if you think about a 10% maintenance attrition number, you would expect a massive drop across the P&L. And so to some degree, look, maybe we extended a little further than we should have before I really kind of pulled this number back and started really addressing subscription revenue. But at the same time, we're always trying to be transparent and clear with the marketplace. But yes, no, I don't wake up and think about the maintenance line. I wake up and think about one thing and one thing only, and that's how do we continue growing the recurring revenue engine of this business in a way that continues to create a great strategic future and throws off free cash, which is kind of unique these days.

That's great. And then maybe one other question. Following up on the prior question, I think it was the last question of the question before around the competitive environment, the metric that jumped out to me also was the 20% replacement of the bookings, which is an interesting number. Was there any kind of 1 vendor that you picked on? Or was there any 1 theme just learning from that number? Is there anything in that number we can learn from that we can take away from this conference call?

You know what? Here's what I'd say. What I'd say is we have a broad client base, and we do well for all of our clients, but there are areas where we are specifically competitively advantaged in some specialties, in some segments of the market. And in those areas, we're having a lot of success, combined with, of course, great retention and some cross-selling outside of those areas. And it adds up to be -- we're a pretty formidable shop right now.

And look, I'm not going to -- I don't want to call out individual vendors. We all have our challenges, right? But what I would say is, is that you know who the players are and everybody is in their own different situation. Ours is pretty transparent and it looks pretty good from the outside. So it probably looks good from the inside.

Your next question on queue is from Stephanie Davis with SVB Leerink.

Congrats on the quarter. I'm going to follow up on kind of an underlying theme of investing in these forward-looking solutions. You guys mentioned that M&A just doesn't seem as likely right now given some of the valuations in our space. I know it's going to get through this phase.

I'd say M&A at scale, right? I mean this thing is requiring significant EBITDA or growth revenue, that's what I mean when I say the high valuations.

Would you have a hurdle rate where you would just drop looking at a name or anything like that? And how do you kind of balance the buy versus build dynamic, given it looks like your clients are really investing right now on these forward-looking solutions to stay competitive?

It's a great question, Stephanie. And I would say we're not so tight as to focus on WACC and hurdle rates and those kind of things. But what we really do is, look, we do look at accretion and we look at accretion time lines and magnitude of accretion. But before we ever get there, to your -- actually, the back half of your question, before we're able to get there, the first thing we do is we evaluate the marketplaces and the capability groups around our solution. And then we do make buy-build partner decisions.

And quite often, we partner. Quite often, we build. About 1 out of every 10 things that we look at, we maybe even start to go to the mad end from an acquisition standpoint. But it really -- really for us -- for us, the real metric is do we think we can drop this into our commercial machine and deliver great accretion for the shareholders as well as revenue growth and most notably, subscription and recurring revenue growth.

And I think those are the things that really primarily drive it. The challenge that I see is that some of the multiples being paid, we can't get to accretion on that even with the commercial synergy case. And in that case, it's hard for me to look at the shareholders in the eye and say, "This is a good step forward," even though it's a big transaction, right? Big transactions can go big right. They can also go big wrong.

And so when I look at the success we've had kind of in this -- I mean, HealthFusion was the biggest, and that was $180 million. Medfusion was much less and most have been in kind of the $10 million to $40 million range.

I think we -- I mean, we've driven some nice accretion of those, and it's an area where, because we've got the great commercial synergy case because we've got a commercial structure and happy clients, we can actually afford to pay more than others because it doesn't come with the kind of revenue and growth that has already been put into the business.

And have you give you any thought just in broad strokes, what your top of your wish list would look like? Is it like a value-based care play? Is it something more expanding virtual care? Or is it something completely different?

Yes. Well, here's what I'd say -- I mean, frankly, if I tell you what -- if I tell you the stuff we're looking at then everybody is going to go ahead and tackle it anyway.

Could you tell us some names, evaluations?

What we're really -- what will our first offer is going to be? No, no. But I mean -- all kidding aside. Look, I mean, I think I've been pretty clear that we're investing to make sure our patient experience platform is widespread across our client base. We're doing that not just because we have virtual visits and tele and self-scheduling, we're doing it because creating a great patient experience and a great journey is essential to the client base, but also because we need to build that journey quickly and being able to plug any new asset quickly into the vast majority of our clients in a relatively frictionless way is pretty exciting.

Understood. And then one quick one. Just one more for Jamie. You mentioned there was a lot of catch-up spend, but also growth trends in the quarter. Can you talk about the balance between catch-up versus just strong macro?

Stephanie, we -- it's probably split about evenly between the 2. The increase quarter-over-quarter is what you're talking about, correct?

Yes.

And it's -- I would say the split is probably roughly even between the 2.

Yes. And Stephanie, the one other thing I would say is that we're pretty excited about the ramp that we're starting because one of the challenges that we've had in the past is whether we're underappreciated, undervalued or appropriately valued. We can have a long conversation over a glass of wine. But part of the reason why we're not chasing some of these super high-priced, high-valued assets is that we're kind of the old-fashioned generate free cash flow company, and that tends to mean that our public currency right now is not quite at the point that maybe some others are with slightly different structures in their P&L.

All right. Okay, you gave a 30x revenue 1 day.

Absolutely.

All right. Well, thank you, everybody. So operator, do we have another call?

We do have one additional question in queue.

Your final question is from Gene Mannheimer with Colliers.

And congrats on a good quarter. Certainly, a lot of discussion around the subscription revenue growth, which impressed in the mid-teens. And not looking for guidance here, but given the momentum you're seeing and your focus on growing that line, I mean, it seems to me, you'd be able to continue to grow that in the double digits for the longer term. Is that reasonable?

Yes. I mean that's -- look, our plan on subscription services, I mean, what I said was mid-teens. We expect that to continue well into the future. And also much to some of the discussions we've had in the last few questions, we have the opportunity, we believe, to accelerate further from that, given the health of our balance sheet.

Good. Excellent. Just want to make sure I'm clear on that. And finally, with respect to the competitive statistic, 20% of bookings, how does that compare to historical metrics?

I'm sorry, say that one more time. I apologize.

The 20%, Gene -- Gene, the 20% is an increase, we've historically done about in the 12% to 15% range.

All right. Well, thank you, operator, and thank you, everybody, for listening in. And I apologize for a couple of the hiccups along the way.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.