NextGen Healthcare Inc (NXGN) 2022 Q4 法說會逐字稿

Welcome to the NextGen Healthcare Fiscal 2022 Fourth Quarter Financial Results Conference Call. Hosting the call today from NextGen is David Sides, President and Chief Executive Officer; Jamie Arnold, Executive Vice President and Chief Financial Officer; and Matt Scalo, Vice President of Investor Relations. Today's call is being recorded. And I will now turn the call over to Matt Scalo.

Thank you, operator. And 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 related 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 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 the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our latest quarterly earnings release that was filed with the SEC and is posted to the Investor Relations 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'd like to turn the call over to our President and CEO, David Sides.

Thank you, Matt, and good afternoon, everyone. Earlier this month, we preannounced our fiscal fourth quarter results and issued fiscal '23 financial guidance, and posted our first investor event as a new management team.

We covered a lot of ground during the investor event, providing a clear overview of our business across 3 domains: enterprise, office and insights. We highlighted NextGen's top goals, including our path to accelerating revenue growth and our target 10% rate by fiscal '25, beat the longer-term operating leverage and expanding adjusted EBITDA figure and the Rule of 40 performance metric, which combines revenue growth and adjusted EBITDA margin.

For those of you who are not able to attend the investor event, I would strongly encourage you to listen to the replay on our website.

Now let me turn to my favorite topic, growth. For fiscal year '22, NextGen generated 7% revenue growth, an acceleration over 3% growth in fiscal '21 and 2% in fiscal 2020. This growth was driven broadly across product lines, but consistent with the investor event, I thought I would provide a few comments across each domain.

Starting with enterprise, which we define as practices with 10 or more providers, is our largest practice area by revenue. And we are growing faster than the industry average, driven by new client wins and further penetration of existing clients with our expanding breadth of solutions. Our success in this market area is built on long-standing and trusted client relationships, which is particularly attractive now with such uncertainty and transition at a number of industry participants. Last point I'd like to make on our enterprise group is we remain on track with our 3-year target of incremental $100 million in bookings from our Surround solutions through fiscal year 2024.

Now turning to our second domain, office, which focuses on the smaller independent ambulatory practice market, think of a practice with fewer than 10 physicians, which we service with our multi-tenant SaaS offering. This area continues to grow well, reflecting the strength of our SaaS solution and our success providing managed services and revenue cycle management solutions during a period when many of our clients are struggling with labor shortages. We are confident the office domain can continue to grow double digits as we continue to execute and expand in the slightly larger practices in adjacent medical specialties over time.

And our third domain, what we call insights, offers significant untapped potential. We spent considerable time outlining the opportunities in this exciting area at our investor event, so I won't repeat it here. However, NextGen is investing in a number of solutions and strategies across connectivity, analytics and outcomes that will provide a solid foundation for strong growth in this business over the long term.

We entered fiscal 2023 with solid momentum and our fiscal '23 revenue guidance of $628 million to $640 million reflects our confidence in continuing to execute on our growth -- we are also introducing adjusted EBITDA into our fiscal '23 financial guidance. I think it's important to call this out as we see this as another step the company is making to improve visibility, particularly as investors now track our progress on the Rule of 40 metric going forward.

My final comment is on the company's disciplined capital deployment strategy. NextGen has an attractive business model that generates positive free cash flow, has a healthy balance sheet and access to significant capital. We continue to have a Board-approved share buyback program in place and we envision other business development activities, such as M&A, to contribute to our longer-term growth goals.

And with that, I'll ask our CFO, Jamie Arnold, to provide the details on fiscal fourth quarter and our outlook.

Thank you, David. Before diving into the fourth quarter results, I would like to comment on our fiscal year 2022 accomplishments.

Total revenue increased 7% compared to a year ago. Subscription services revenue of $162.6 million grew 10%, as clients continue to adopt our Surround solutions. Perpetual software licenses grew approximately 9%, primarily due to our success partnering with existing clients who want to standardize on and broaden the use of NextGen across their enterprise.

On a GAAP basis, fully diluted earnings per share was $0.02 compared to $0.14 a year ago. Recall that in the first half of fiscal '22, we had significant expenses associated with the proxy contest.

On a non-GAAP basis, fully diluted earnings per share was $0.98 compared to $0.98 in the prior year and ahead of our full year guidance provided at the start of the year. These results are a strong reflection of execution on the commercial side and deliberate cost management efforts put into place at the onset of the pandemic, balanced against investments made to support long-term growth plans.

Now turning to the fourth quarter financial results, starting with bookings, which came in at $41.4 million in the fourth quarter, an increase of 18% on a year-over-year basis. We saw a strong demand for professional services and managed services, particularly patient pay. New client wins accounted for close to 25% of bookings for the quarter based on outstanding bookings from inside the base, and we expect the return to an excess of 25% through -- in the new fiscal year. We closed seven -- several seven-figure transactions in the quarter from both existing and new clients, both of which are fixed -- are focused on adopting the full portfolio of offerings we provide, all in.

NextGen is partnering with clients that are moving away from managing multiple different legacy systems and upgrading to our fully integrated and scalable solution. This is the case with David's example of independent provider-led consolidation. In other instances, we are working with existing clients to add NextGen Surround solutions to enhance their productivity and patient experience. These wins reflect our strong commercial capabilities and ability to execute as well as the market's growing appreciation of NextGen's core value proposition.

We generated total revenue of $151.3 million in the quarter, an increase of 5% year-over-year. Of this total, recurring revenue grew 6% and accounted for $137.2 million or 91% of total revenue, and was driven by solid performances in our subscription services, managed services and EDI businesses.

Software subscription services generated $42.1 million in the fiscal fourth quarter, an increase of 10% year-over-year. Growth came from strong performance in NextGen Office and NextGen Enterprise Surround offerings, such as telehealth and mobile, which enable physicians to better engage their patients and improve the patient provider experience. Managed services revenue of $28.9 million grew by 7% due to continued strength in our managed cloud services as well as solid performance in revenue cycle management.

Q4 client encounter volumes were ahead of our expectations. EDI and data generated $26.4 million in revenue this fiscal fourth quarter, up almost 3% over the year-ago period as transaction volumes remained strong. Software maintenance and support revenue of $39.9 million was up approximately 4% over the prior year period. This reflects strong client retention and some upside from large expansion clients continuing to pursue a perpetual license and maintenance model. Nonrecurring of $14 million or a decrease of 5% over the same quarter last year, reflecting the lumpiness of contract timing we have mentioned in the past.

Turning to operating expenses. SG&A of $50 million increased by 2% compared to a year-ago period. Tight cost controls and G&A offset increase in investment in sales and marketing. For modeling purposes, please be aware of the timing of certain events, like our national sales meeting, our large client user group that did not happen in person in the year-ago period. This will create lumpiness in our fiscal fourth -- first quarter.

As David alluded to earlier, we had some nice wins from new and existing clients early in the quarter, which allowed us to pull forward spending on investments we see as having a high return on investment. These include robotic process automation and overall process improvement activities, as well as investments related to both our office and insights domains. A number of these projects kicked off in the fiscal fourth quarter and continue into the first quarter and then begin to roll off in the second quarter.

Net R&D expense of $19.4 million decreased $2 million from a year ago due to higher capitalization rate, 28% in the current quarter, 21% in the previous year. Fiscal fourth quarter gross R&D spend represents 18% of total revenue and net R&D spend represents 13% of total revenue. Our GAAP tax rate was approximately 85%, with non-GAAP tax rate of 20%.

On a GAAP basis, Q4 fully diluted net income per share was $0.01 compared to a loss of $0.01 per share in the fiscal fourth quarter of 2021. On a non-GAAP basis, fully diluted earnings per share for the fiscal fourth quarter of 2022 was $0.19 compared to $0.21 in the year-ago quarter.

Now turning to the balance sheet. We ended fiscal fourth quarter with $59.8 million in cash and equivalents and no balance outstanding on our line of credit. Our cash balance rose just over $10 million compared to the fiscal third quarter due to strong operating cash flow. We did not buy back any shares in the fiscal fourth quarter. We believe our positive momentum provides ample capacity to return cash to shareholders while continuing to execute on our growth strategy.

DSOs in the quarter were 46 days, a decrease of 3 days from the same period last year, but an increase of 3 days from the fiscal third quarter. Free cash flow from this quarter was $8.7 million, reflecting strong year-end operating activities, partially offset by capitalized software costs.

Now to our -- on to our fiscal 2023 financial guidance. As noted in the press release, we are confirming the guidance that we provided at our investor event 2 weeks ago. And as David mentioned in his prepared remarks, we are adding an adjusted EBITDA metric into the guidance to improve visibility into our Rule of 40 commentary going forward. Let me review the main components of our fiscal year '23 financial guidance.

Fiscal '23 revenue is to be in a range of between $628 million and $640 million or 5.3% to 7.3% year-over-year growth. Key drivers in our enterprise domain includes subscription services, managed services and revenue cycle management.

Within our office domain, we continue to see consistent growth in the core, which is offered as a multi-tenant SaaS, RCM upsell and other managed services, which includes chronic condition management.

And in insights, we believe various initiatives around connectivity discussed at our recent investor event are expected to start to impact our results in the second half of fiscal '23. The timing of insights growth in fiscal '23 is important. For modeling purposes, we would expect the second half of fiscal '23 to reflect higher year-over-year growth than the first half due to incremental momentum in insights and easier comparisons with the year-ago period. To aid your models, we are forecasting growth in the first half of '23 to be in the range of 4% to 6%.

Gross margins for fiscal year -- fiscal '23 are expected to compress slightly as product mix shifts -- leans more towards lower-margin services, and we absorb a full year of investment in areas such as centers of excellence, R&D and sales infrastructure. Our cost of sales expense growth will level off in the back half of the year and then be in a position for attractive leverage in fiscal year '24 and beyond. We continue to make ongoing investments in sales and demand generation and R&D to enhance our offerings. These investments will accelerate through fiscal year 2023 before leveling off in fiscal year '24.

Our adjusted EBITDA guidance is for $111 million to $116 million, which compares to $114.5 million or 19.2% of total revenue in fiscal '22. We confirm our fiscal 2023 non-GAAP EPS guidance of $0.95 to $1.01. Now factoring in our earlier comments on mid-single-digit revenue growth in the first half of fiscal '23, combined with slight compression of gross margin and increased R&D spend in the fiscal first quarter, we arrive at non-GAAP EPS ranges for the first fiscal quarter in the mid-teens. We expect this EPS level to improve progressively throughout the fiscal year.

In closing, I am pleased with the overall momentum and diversified growth we generated in the quarter. We will continue to focus on profitable growth as we consider capital deployment, both internally and externally, to drive long-term shareholder value.

And now let me turn the call back to David for closing comments.

Thanks, Jamie. Certainly has been a busy May for us here at NextGen, but based on the overwhelmingly positive feedback from our investor event, I'd say it's well worth it.

I'll wrap up today's call by reiterating the company's focus on driving accelerating and profitable growth. We have the right leadership, a clear strategy and attractive assets to go after high-growth market opportunities. We will continue to make the right investments that position NextGen to win now and in the future.

With respect to fiscal '23, we would expect these investments to have a bigger impact in the early part of the year.

Lastly, I want to congratulate Jamie Arnold for receiving a Lifetime Achievement Award by the Orange County Business Journal. It's great to see Jamie being recognized for attributes we see every day. Your commitment to NextGen's mission and contribution to the company's overall success over the last 6 years is undeniable. Thank you, Jamie. We've got a lot more work for you, so don't even think about playing that back nine for a few more years yet.

This concludes my comments. Let's move to questions. Operator?

(Operator Instructions) And we will take our first question from Jeff Garro with Piper Sandler.

Yes. Congrats on the quarter. I want to start off by asking about bookings. In the last fiscal year, growing bookings 18%, well ahead of your revenue growth target. And I think longer term, we would expect bookings growth to converge with revenue growth targets, but based on what you see in the pipeline, is the bias for FY '23 bookings more towards recent momentum extending? Or that tougher comparables are a headwind to above-target bookings growth?

Thanks for your question, Jeff. I think we expect double-digit bookings growth in '23 as well. Maybe not quite as much as last year, just given it's about next year, so maybe in the mid-teens. But it should still be the growth above last year.

It won't be the growth -- sorry, let me correct. Our target for next year, it will be for growth. It's going to be close to -- we're projecting somewhere in the 8% to 12% range in there for bookings. But we're not giving guidance on bookings, but we are expecting it to continue to grow next year.

Fair enough. It sounds like the momentum is continuing near term, so good to hear there. And then maybe to dig a little bit deeper into the FY '23 outlook, I wanted to ask what the areas of potential variability are in the revenue guidance? And I guess maybe more specifically, what are the assumptions around client retention, implementation pacing and client-patient volumes?

So we're taking a kind of a consistent approach to last year's retention into '23. Some of the things that could lead to variability are if we can hire to fill services positions to generate revenue from our services side more quickly. So we're focused on -- we've quite a backlog of services that we can train people more quickly, onboard people quickly and get to those services. So that would be -- to answer your question on retention, we're assuming same level last year. And some of the variability could be around, either the usual lumpiness of licensed software sales, if that happens for existing clients and services if we can fill those roles and hire them more quickly to actually deliver those services. Jamie?

That's it. I mean probably the area that has the most potential variability would be the software line, and that's an area that we focus on because it not only affects the revenue but because it has such high gross margin, it would affect -- we are -- to be clear, you asked the question, I think, Jeff, about volume. And I would say, we're assuming that there won't be any change either to the negative. Related to the volume, we seem to have largely recovered from COVID. We've been running for better than 4 quarters now, and we're back in a pretty much pre-COVID level. So our assumption is that that's going to continue and then we won't see a dramatic change because of something like COVID again.

We will take our next question from Stephanie Davis with SVB Securities.

I was hoping you could give us a little bit more color on just what you're seeing demand-wise on the ambulatory market, just given some of the hospital players coming under cost pressure in this past quarter. So any sort of like a health check and color on how the IT wallet for ambulatory, [or trying] would be super helpful.

We still see good pickup on the ambulatory side. As we mentioned a little bit in our prepared comments, there's some -- a lot of disruptions in the industry from some of the other players that at least in the short term or we think in the short-medium term is good for us. But the market overall is moving, and we've moved into some slight adjacency for not just physician office or federal qualified health centers, but we started to move a little bit into urgent care. We've seen clients look at urgent care offerings with us, sometimes combined with primary care, where we're taking risk.

We're also seeing some behavioral health opportunities after our initial investments there that could be promising as well. So we like the ambulatory market and some of the moves that we've made to expand the specialties that we support. Not that urgent care is a specialty, but the preventative care, behavioral health is an additional specialty, it's starting to see some traction in our pipeline.

I was going to say, Stephanie, that the other thing is that some of the practices that have been consolidating, there are consolidators in the ambulatory space. And we have seen continued interest from them, particularly based on the strength of our practice management system. So that we see as a positive as we go into the new year.

And dovetailing on that answer that you guys gave, we also have seen some other glow ups in the space, earnings quarter, on increased competition of some of the new age disruptors that have gotten a lot of private market funding. Now I haven't heard a lot about that from you guys that are still some private market players competing with you. I'd be curious what you're seeing in the market and kind of how you're still competing well.

Yes, we're not -- I guess, we're not seeing the -- that level of competition necessarily or any new entrants so far. It's really -- any of those consolidators are, for us so far, have been a tailwind in that we're picking things up. So we even have an example from the last quarter where we were talking to a group that then got acquired, and they put NextGen into the acquisition.

So we went up the other way, which was really good for us, but the acquirer had multiple systems when they acquired a client of ours. They brought in kind of this really strong NextGen as a way to move that part forward. And so the value prop for us, being able to do a better job of doing in financials is really resonating with some of those buyers, which is why when they acquired a company that use NextGen, they actually took it into the acquirer company. So that was a great win for us, but that was unexpected and meaningful.

So the goal, if that trend continues, is we start to demonstrate value and really put outcomes that we achieve for clients and align with them to go forward with them.

[And perhaps will --] going to be a consolidator in this market. I'll hop back in queue.

And we will take our next question from Jack Wallace with Guggenheim.

I wanted to talk about bookings and the pipeline a bit. David, you mentioned that there is a number of all-in deals this quarter. When you're looking at the pipeline, are you seeing more momentum for the all-in deals? And then I got a couple of follow-ups on that.

I'd say the pipeline looks robust. So we came out of our largest sales quarter in the recent history, the last quarter. That continues. Usually, it's the third quarter that may be a little bit larger for us. So we expect good result this quarter as well and go through the year. I don't know what other -- if ever, I'll call you back on the pipeline, Jack, that I can kind of give you some more specifics.

Yes. And then I mean you're seeing all-in, what's interesting to me there is that, that includes the insights business and specifically with the insights suite of services there, how much of that was the shiny service, the real benefits of going all in? And I'm assuming this is a competitive replacement. How much of that -- those capabilities was the deal maker?

So far, not much. So I'd love to tell you that it's those deals, but most of those deals have been moving in our sales cycle 6 to 9 months. So most of those deals have been moving without the analytics. I think it will start to be -- the goal is it's an accelerant as we get more demos to clients that are starting new or at the end stage now.

But the nice thing from a consolidation perspective overall in the ambulatory is people are looking for a reduction in the number of suppliers that they have. And so when we come to them with one offering hosted with our revenue cycle management, all the virtual visits and analytics together, we're winning, especially net new clients. We're trying to take up as much of the space as possible in the first win. And so that's been a great tailwind for us.

I think the analytics should be additive, that we've developed some of that analytics with a couple of our really progressive clients, have already moved it into another couple of clients. And so we're seeing good movement there. But you'll see the insights needle moving throughout -- towards the end of '23. We may add in some number here early, but I agree with you that it is actually helping to get everything in the first time, especially for new clients. Well, we're winning there, they're -- that's a differentiator for them because then they don't have to go and buy some third party like Tableau or something else and try to put that on top of it, right? We're bringing the whole solution at once. So I think it makes it simpler for these practices to be able to do everything they need to right from the start.

Got you. That's helpful. And just to confirm on the insights, the bookings convert to revenue, which are the revenue segments that hit?

Insights should mainly hit subscriptions for the most part.

There'll be subscriptions, and there will be a services component to that. So you'll get both subscription revenue as well as some service revenue associated with it, depending on what the client needs from us.

And there are no further questions at this time. I'll turn back -- I'll turn the call back over to David Sides for closing remarks.

Thank you again for your interest in NextGen Healthcare. We look forward to speaking with you again at the end of July. And that concludes today's call. Thank you, everyone. You can now disconnect.

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