NextGen Healthcare Inc (NXGN) 2020 Q1 法說會逐字稿

Welcome to the NextGen Healthcare Fiscal 2020 First 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 the federal securities laws, including and without limitations statements relating to anticipated industry trends; the company's plans; future performance, products and perspective and strategies. Risk and uncertainties exist that may cause results to differ materially from those expressed in these forward-looking statements including, among others, those risks set forth in the company's public filings with the U.S. Securities and Exchange Commission, including the discussion under the heading Risk Factors in the company's most recent annual report on the Form 10-K and any subsequent quarterly report on Form 10-Q. Any forward-looking statements speak only as of today. The company expressly disclaims any intent or obligation to update these forward-looking statements.

Our remarks on today's call include both our earnings results and guidance, which contain certain non-GAAP financial measures. For our earnings results, the GAAP 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. And thank you to everyone, for joining us this afternoon to review NextGen Healthcare's fiscal fourth quarter and full -- excuse me, to review NextGen Healthcare's fiscal first quarter of FY '20. However, before I do, I would like to welcome Jamie Arnold back to the earnings call. As I said on the last call, Jamie had been hospitalized and discharged to a rehab facility. From what was a scary moment for all of us only 8 weeks ago to now, I can only say that I am so grateful, both personally and professionally, to have Jamie back at full speed.

Turning now to NextGen. In Q1, our revenue came in at $131.9 million compared to $133.2 million a year ago, and our non-GAAP EPS of $0.16 compared to $0.19. Bookings for the quarter came in nicely at $31.7 million versus $29.1 million in the same quarter last year. Operating cash flow for the quarter was $17 million, and NextGen generated $9 million in free cash flow as our cash generation capabilities continue to expand our storehouse of dry powder.

While we're excited to see a 9% year-over-year uplift on bookings performance in line with our expectations, we are seeing our recognizable perpetual bookings becoming a smaller-than-expected percentage of the overall bookings, which is having an impact on full year revenue. Additionally on the revenue line, one of our larger client bookings from last year has run into challenges. As we moved into this year, we expected to see that turn into recurring revenue. Unfortunately, the client has had significant operational and financial troubles, and we no longer expect to see revenue from this client, putting further pressure on our FY '20 full year top line. Jamie will dive deeper into the impacts in a few minutes.

As for EPS, our $0.16 came in in line with our expectations, and should increase nicely through the year as the benefit of both revenue growth and our focus on efficiency enable increased earnings production. Legacy maintenance retention came in at 89% over the trailing 12 months or right at our FY '20 modeled level. As we stated on the last call, we anticipate some volatility in the retention rate as we move forward and believe our modeled level is appropriate.

As we look at Q1 deal flow, 14 clients entered into arrangements over $500,000 in the quarter. These larger deals continue to show how our broader platform and all-in deal approach are driving increased deal sizes and how our cross-sell capabilities continue to support our bookings growth.

As we look into the accomplishments since the last earnings call, a number of key achievements and events stand out. From a client satisfaction standpoint, we are very gratified to once again be recognized by KLAS. In February, we were awarded Best-in-KLAS for Project Management for 11 to 75 providers. Just recently, KLAS updated their analysis, announcing that NextGen now has the top scores across all ambulatory organizations greater than 11 providers. In fact 50% of our large practice clients with greater than 75 providers reporting high satisfaction, the most among all measured vendors. We are very proud of this accomplishment but are by no means resting on our laurels.

In addition, we recently received the results of our internal voice of clients scores for our enterprise financial services solutions, which primarily include our revenue cycle management business. We have completely reinvented and replatformed this part of NextGen, a path that has great benefit as well as some risk during the transition. As we emerge from this significant change, we are very proud to see amazingly positive feedback from our clients. Our Net Promoter Score for NextGen enterprise financial services rose 33 points from a year ago, up to 46.3. In fact, 90% of our clients responded that they are likely to recommend our services. Great to see the progress and the resulting client satisfaction increases.

In June, we had our large client user group. We get together with 100 to 150 of our largest clients twice a year to discuss market dynamics, our strategic response and to get feedback on how we are performing for them. It was great to get both a good bit of positive feedback but also to identify some key needs that span our clients and discuss some areas where we can continue to improve. Every user group through my tenure has been better and more beneficial than the one before, and this one was no exception.

Turning to our expanding capabilities, I'd like to discuss a few recent introductions. In April we released the spring 2019 release of our NextGen enterprise platform. With this release, our clients have seen another step forward in usability, scalability and performance. Client feedback has been very positive, and we are starting to see some meaningful uptake on their release.

In addition, in late May, we announced the release of our behavioral health suite 3.0, a major step forward as we look to be a strong part of enabling behavioral health to be a key part of improving both mental and full-body health in our country. We see opportunity in this increasingly important and growing part of our health care ecosystem, and look forward to further building out both innovation and commercial capabilities for this market.

Our population health analytic suite continues to see success in the market, both within our client base but also in new to NextGen footprint. In fact, in the quarter, we were proud to close another critical care hospital, further illustrating the broad value that our solution can provide, not only in the ambulatory segment but in others. We look forward to further success in increasingly broad capabilities as we continue to focus on enabling our clients to perform well in both fee-for-service and risk-based arrangements.

We're also starting to see success with our optimization services. As clients become much more comfortable with NextGen as a long-term partner, they are moving from a potential replacement to desired optimization. We have signed a number of value-added service engagements to come in and work with the clients to ensure that their clinical, financial and operational processes are hitting on all cylinders. More to come as this capability continues to evolve and expand and begins to show up on the nonrecurring service line.

Last quarter, we discussed a couple of areas where we're revolving our structure, investing in some areas and pulling back in others. Most notably we have chosen to expand our footprint in our Bangalore development center. We're away through that pivot and can report that it is going very well. We have nearly fully staffed our team there and are already gaining great momentum. In addition, we recently received the Zinnov Awards 2019 Jury Special Mention Award for our exceptional work in a relatively short span in India. The Zinnov Award's an important -- are very important in the India market, and it was amazing to be recognized along some very large, long-tenured companies in the India market such as PayPal, Dell, Samsung and MasterCard. This recognition increases the attractiveness of us as an employer in the market, but also validates the great work both the team has done there and the great work that our broader team has done for our clients. However, with this expansion in Bangalore we have also pulled back in select markets across the U.S. To that end, we've established a restructuring bucket as we ensure anyone leaving the organization has a smooth transition and a soft landing.

Now let me turn to Jamie for a dive into the numbers. Jamie?

Thank you, Rusty, and thank you to everyone on the call. Before I provide commentary on the numbers, I want to thank all of you who sent notes and well wishes while I was ill. During my stay in the hospitals and subsequent recovery at home, the notes brightened my spirits and provided much-needed positive energy. Over the last 8 weeks, I've learned a lot about health care and health care IT. I feel fortunate to be almost fully recovered from a very scary situation, and I'm excited to be back and part of the NextGen team. Again, thank you for your support.

As Paul Harvey used to say, and now for the rest of the story. Total revenue of $132 million declined 1% compared to the same period last year, it was largely in line with our expectations. Recurring revenue of $119.4 million was essentially flat compared to a year ago with the decline in maintenance and managed services largely offset by an increase in subscription service. Recurring revenue is 91% of our total revenue, slightly higher than the 90% in the same quarter of the prior year.

Subscription revenue of $30.1 million increased 6% compared to a year ago. The growth was primarily driven by our Patient Portal, NGE SaaS and analytics solutions. Support and maintenance revenue of $39.7 million decreased 4% year-over-year due to attrition in our legacy NGE customers partially offset by new contracts and CPI increases.

Managed services revenue of $25.7 million decreased 2% compared to a year ago due to an attrition within the RCM customer base as noted on previous calls, almost entirely offset by new contracts. And while we work through the challenge Rusty referenced in his comments, we remain focused on driving RCM penetration in our customer base as well as leading with new proposals to new customers.

EDI and data services revenue of $24 million was essentially flat year-over-year, with the decline in third-party data revenue largely offset by increase in EDI to clients. Note we are down relative to the prior quarter Q4 of FY '19, as last quarter, we had a onetime benefit from the signing of the Veradigm contract. Nonrecurring or onetime revenue of $12.4 million, a 6% reduction over the same quarter last year. Software license and hardware revenue of $7.1 million declined 5% year-over-year. And as Rusty noted, we've seen a measurable trend away from licenses and towards subscription.

Nonrecurring service revenue of $5.3 million decreased 7% compared to a year ago due to lower legacy consulting engagements offset by analytics-related services. Bookings came in at $31.7 million in the quarter, up 9% on a year-over-year basis. Cost of goods increased due to higher amortization of capitalized development costs and the direct charging of hosting to cost of goods sold and transfer of personnel from operating expenses to cost of goods.

Gross profit declined 7% to $66.6 million and gross margin declined at 50.5% compared to the prior year quarter of 53.6%. And this is due to the decrease in COGS just discussed above, along with modest decline in revenue.

Taking a look at our operating expenses. SG&A of $40.1 million is 10% reduction from $44.6 million a year ago. The decrease is primarily due to lower acquisition-related cost and the transfer of cost to COGS mentioned above as well as other lower cost due to cost savings initiatives. R&D of $22.1 million was flat compared to a year ago. The restructuring charge of $1.7 million is related to cost associated with the reduction of approximately 4% of our workforce primarily within research and development as we transition to more resources in India. As a part of the restructuring, we also downsized several facilities which resulted in the $500,000 impairment charge.

Our GAAP tax rate for Q1 fiscal '20 was a benefit of 43.9% with a non-GAAP tax rate of 22%. The GAAP tax benefit for Q1 is the result of federal IRS audit adjustments and excess tax benefits related to stock compensation. For fiscal year '20, we will continue to use a non-GAAP tax rate of 22%.

To conclude my comments on the income statement, our Q1 GAAP EPS of $0.02 compared to $0.04 a year ago. Our non-GAAP EPS is $0.16 for Q1 decreased by $0.03 year-over-year.

Turning to the balance sheet, we ended the quarter with $28.6 million in cash and equivalents, and $6 million outstanding against our revolving credit agreement. We paid down $5 million against the revolving credit agreement in the quarter just ended. DSOs in the quarter were 57 days, a decrease of 2 days from last year and the last quarter. All within our expected range of 55 to 60 days. Our CapEx, excluding capitalized R&D, was $3.8 million. Capitalized R&D was $4.7 million.

To close the call, I will update our initial outlook for fiscal 2020. We expect revenue to be between $536 million and $550 million. Previously we had expected revenue to be between $543 million to $559 million. This reflects the headwinds we are facing in the managed services and software areas. Non-GAAP EPS is now expected to be between $0.82 and $0.90 per share. This was previously $0.86 to $0.94 per share. Note that we see the year back end loaded in terms of growth as we are only starting to see the benefits of current client and corporate projects. Overall, I am generally pleased with our performance in Q1 as we execute on our strategic plan, and I'm looking forward to continued progress in fiscal '20.

This concludes my review of the first quarter financial results. I will turn the call back to Rusty.

Thanks, Jamie. In summary, while we were not pleased with the impacts to full year revenue and the resulting impacts for earnings, we are gratified with the great progress the organization is making, our continued solid bookings performance and the continuous improvements to client satisfaction and organizational capabilities we're delivering. We have confidence in our ability to execute, and look forward to continued progress throughout the year towards our goal to mid- to high single-digit revenue growth in FY '21, leading to significant operating leverage in FY '22.

In closing, I wanted to express my gratitude to the amazing clinical folks across our client base and our nation. I wake up every day thankful for the commitment to great outcomes that have brought the most important person in my life back from the edge on multiple occasions, and now we have our friend and teammate Jamie back and in good health following a scary time. We at NextGen have the honor to work tirelessly to support these amazing caregivers, all the while making health care better, more accessible, more affordable and more rewarding to practice.

It's an effort that we know can enable the great outcomes that keep our friends and family, healthy, happy and productive. We're a business that constantly strives to do well, but more importantly, are gratified that doing well comes from doing good. Thank you, and I'll now open it up to questions.

(Operator Instructions) And your first question comes from the line of Ricky Goldwasser with Morgan Stanley.

This is actually Alexa in for Ricky. So I just, I kind of wanted to unpack your comments on the client, the larger booking loss from last year. So you said they ran into operational challenges. So can you maybe give a little bit more color on what they, what was happening with them, when they notified you about these issues and then...

My apologies, but that is confidential and proprietary for the client. What I would say is that it was not a NextGen issue that caused this to go in this direction. And so we had a significant booking. The booking was, give or take, about $4 million annually. And we had reason to expect that they were going to solve their financial problems as we came into this year. And just in the last month or so, we've realized that, that is -- we have come to the conclusion that, that is not going to happen. Now fortunately because we are conservative we did not actually book revenue on this. And so as they came into this point, we are simply removing it from our revenue forecast and moving on.

Got it, okay. And I guess just to follow-up on that, do you -- in terms of your other clients and the bookings that you made last year, do you foresee this issue coming up with anybody else? Or are you fairly confident in the rest of the revenue forecast for the year?

Yes. The only reason we actually bring this forward is twofold. Number one, it's material to the forecast this year; and number two, it's an extraordinary event for us to have something go this way. And therefore, we felt like, in the interest of transparency, that we needed to share with the investment community the fact that 1 of the 2 very large bookings for last year was not turning into revenue and therefore impairing this year's revenue forecast.

Got it. Okay. And then just a second one for me, on the retention of -- you said the 89% which is exactly the amount to what you guys are modeling for the full year, so that's great. Just in terms of how you're thinking about it for the rest of the year, you guys have previously mentioned the key factor to watch is just hospitals and systems migrating towards single stack. And so do you guys foresee any of that happening later through the year? Are you -- is everything kind of just stable as of now?

Again, I mean I think we've been pretty clear in the past that a lot of our exposure to hospital consolidation has already run off. And so attrition's just a difficult thing to forecast. We -- that's why we say the number's somewhat volatile because frankly, you can only read so much into the minds of your clients. But as we've talked about before we put a robust proactive process to stabilize the client base. And because of that, we feel like we've done a good job of managing and retaining our clients. But as I said it is a volatile number.

And your next question comes from the line of Sean Wieland with Piper Jaffray.

So what's going on with the transfer of expenses from OpEx to COGS, particularly in sales and marketing?

It's really G&A, Sean. We moved some people from, who historically had been part of our IT organization, into -- because of this, over time, they've been doing more work. It's related to supporting clients, particularly in the managed services area. And so we made the decision that it should be -- that they should be properly classified as cost of goods.

Yes. They're supporting ongoing revenue generation.

Yes. So it is just one of those things that legacy, we started using them. And then as we look at it in organizationally, we actually, I think made this move middle of last year, but it didn't really show up in the cost of goods. And as I was reviewing the variance for this quarter, and it, I figured it was worth calling out. So the G&A went down, cost of goods went up. It's easy to explain it. Did that make sense?

Yes, I think so. Can you maybe quantify what the points of impact is on margin or number of people?

Round numbers, it's about $2 million this quarter. I think about $1.5 million to $2 million. I'm doing it off the top of my head but I believe that's pretty accurate.

Okay. And then -- so other than the $4 million annualized hit from the deferral of the bookings, what else is going on with the revenue to cause the guide down?

Well what we're seeing, Sean, is we are seeing clients -- and we think this is also a function of the financial pressure on the client base. We are seeing clients move more and more towards recurring and subscription models, and so our -- we had over the last 2 years, we've been relatively -- FY '18 and '19, we were relatively stable from a soft perpetual -- instantly recognizable perpetual license standpoint. As we both got in through this quarter and then started to look at the full year forecast we do feel like it's taking another step down. And so unfortunately, as perpetual license revenue turns into subscription revenue, it's great for the long term but it does create a temporal problem within the year and so as quickly as we started to see this dynamic emerge then take another step down, we had to build that into our forecast.

Okay. And then one more quick one, you have any update on the 20% operating margin goal for FY '22? From the (inaudible)

Yes. As I said on the opening call, I -- if you'll notice, I said significant operating leverage, I did not say 20%. Our view -- and we're still, frankly Sean, we're still updating our model based on kind of this new reality. Our view is this probably pushes it, the 20% into FY '23.

And your next question comes from the line of Mike Ott with Oppenheimer.

Curious if it is possible to allocate the rev guidance reduction between the lower perpetual bookings mix and then the customer that had the challenges, if you can break that out.

Well it was a $4 million client and we lowered by $8 million.

Okay. That makes it easy.

Even for the CEO, that's math I can do.

Confuse him with $20 the next time you see him.

Great. And then sticking with the bookings, last quarter I recall they were $4 million to $5 million behind your internal expectations. Curious if any of that benefited the quarterly, just reported site here.

No. I mean as I said on the last call, I said look, every single quarter I have my sales team tell me that something slipped. If something slipped every quarter, it's not slipping. So last quarter, we delivered below our expectations. This quarter, we delivered on our expectations. And frankly, most of that was more of the organic things we expected to happen in this quarter, maybe on the margin something slipped from Q4 to Q1 but as I said, you can say that about pretty much every quarter.

And your next question comes from the line of Stephanie Demko with Citi.

I just want to get a quick update on Veradigm and the scribes you're seeing there. Any early traction, and if you're looking at other ways to monetize that data opportunity to kind of help your top line?

Yes. I think -- look, the Veradigm piece, as Jamie said, we had a small onetime revenue event in Q4 that represented kind of the instantiation of the agreement. We expect revenue to start flowing from the Veradigm relationship in the back half of the year. And so at this point in time, we're still in the process of onboarding onto the Veradigm consortium. And as we move through towards the back end of the year, we'll update you there.

From the standpoint of additional data monetization opportunity, I'd say right now we're focused -- we're kind of sticking to our knitting. We've joined the Veradigm consortium, we're very focused on making that effective. And then on the other side, we're very focused more on the operational play of supporting our clients' business rather than finding additional ways at this point to derive value from the identified data.

All right. And can we talk a little bit about how that's kind of the margin side of things as we look at margin expansion out-years?

I'm sorry, say that -- you broke up a little bit there. Can you repeat that, Stephanie?

Sorry about that. I was just wondering if you could, if there's any sort of margin contribution you can think of and how that can impact your out-year margin expansion target.

This is specific to Veradigm?

Specific to Veradigm, the revenue stream. How we should we think about that incrementally.

I would think about that as being a revenue contributor, but I would be much more focused on the rest of the P&L, right? As we sit here today, we see Veradigm a little more on the margins. It's a nice additive but it's not, by no means, the core focus and the core value driver in the P&L. And so we think look, it may have a slight positive but you know it's a complex P&L. There's positives, there's negatives. I think it's more that we feel like, when it comes out in the wash, it is revenue growth and efficiencies on the broad P&L that are going to get us to the margin target.

(Operator Instructions) And we have a question from the line of Gene Mannheimer with Dougherty & Company.

And first of all, it's good to have you back in the saddle, Jamie.

Thank you, Gene.

You're welcome. My question, just going back to the trend in bookings toward more subscription and longer-term recognition. I mean, if we could just save the $32 million or so in bookings that you did this quarter, how much of that say, would convert to revenue in the current year versus historically?

I would say that the vast majority of it converts within the current year, especially given that it's Q1. But we haven't really unpacked kind of time for bookings as much to say that the vast majority of our bookings do go turn to revenue within a year. In fact, I mean the reason both the materiality to the forecast of this one transaction but also because frankly, we do have such good conversion that the loss of this one deal was actually a relatively extraordinary event, which is why we talked about it on the call. Because frankly, what it means is, is there is $4 million out of, the give or take, $130 million that we delivered last year, that we now expect to not turn into revenue. That's a somewhat extraordinary event for us and one that because of that, we elevate it to the level of an earnings call.

Okay, that's very helpful. And with respect to the restructuring and the shift of R&D resources to Bangalore, I mean I would think that would be a benefit to you on the EPS line. And maybe you could quantify that for us, Jamie, because certainly you're reducing the EPS guidance. I understand why. But how much of a benefit would this R&D restructuring deliver?

Gene, I'm actually going to answer that qualitatively. The R&D restructuring was not driven by cost reduction. The R&D restructuring was driven by increased regulatory intensity from the government as well as continually increasing needs from of the client base. When it came down to it, our capacity model was not enough with the ramping up of government regulation to be able to both deliver the capabilities our clients need to win and also deliver the capabilities that the government requires them to. And so based on that, we actually needed to expand our capabilities and expand our head count. And so we are -- this enabled us to do that cost neutrally. But does not create EPS favorability. It creates future optionality from an innovation standpoint.

And we have no further questions at this time.

All right. Well, I'm going to thank Cerner for taking all the rest of the questions away, since their earnings call just started. But thanks, everybody, for hanging in there. We will look forward to speaking to everybody on the next call. Thank you.

And this concludes today's conference call, you may now disconnect.