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Edited Transcript of NXGN earnings conference call or presentation 23-Oct-19 9:00pm GMT

Q2 2020 NextGen Healthcare Inc Earnings Call

Irvine Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Nextgen Healthcare Inc earnings conference call or presentation Wednesday, October 23, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Robert Arnold

NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer

* John R. Frantz

NextGen Healthcare, Inc. - President, CEO & Director

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Conference Call Participants

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* Alexander Yearley Draper

SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research

* Anne Elizabeth Samuel

JP Morgan Chase & Co, Research Division - Analyst

* David Howard Windley

Jefferies LLC, Research Division - Equity Analyst

* Donald Houghton Hooker

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Eugene Mark Mannheimer

Dougherty & Company LLC, Research Division - Senior Research Analyst of Healthcare

* George Robert Hill

Deutsche Bank AG, Research Division - MD & Equity Research Analyst

* James John Stockton

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst

* Jeffrey Robert Garro

William Blair & Company L.L.C., Research Division - Research Analyst

* Matthew Dale Gillmor

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Michael Joseph Ott

Oppenheimer & Co. Inc., Research Division - Associate

* Rivka Regina Goldwasser

Morgan Stanley, Research Division - MD

* Stephanie July Demko

Citigroup Inc, Research Division - VP & Senior Analyst

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Presentation

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Operator [1]

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Welcome to the NextGen Healthcare Fiscal 2020 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'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 security laws, including, and without limitations, statements relating to anticipated industry trends, the company's plans, future performance, products, perspectives 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 this call include both our earnings results and guidance, which contain certain non-GAAP financial measures. For our earning results, the GAAP financial measures most directly comparable to each non-GAAP financial measure used or discussed and any reconciliation of the differences between each non-GAAP financial measure and a 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.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [2]

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Thank you, operator, and thank you to everyone for joining us this afternoon to review NextGen Healthcare's fiscal second quarter FY '20 results.

Q2 FY '20 was a solid quarter for NextGen as we continued to execute on our strategic plan. In Q2, our revenue came in at $134.3 million compared to $130.3 million a year ago, both under ASC 606. This represents more than 3% year-over-year growth.

Our non-GAAP EPS of $0.24 was flat compared to Q2 FY '19 and in line with our expectations.

Bookings for the quarter came in nicely at $36.6 million, showing growth over a very strong $36.1 million in the same quarter of last year.

Operating cash flow for the quarter was $23.8 million and NextGen generated $17.1 million in free cash flow as our cash generation capabilities continue to expand our storehouse of dry powder.

In addition, we're able to fully pay down the remaining balance on our revolver this quarter, giving us a current total available liquidity of $324 million. As we move forward, we will continue to look for uses of this capital to drive additional value for the shareholders.

Legacy maintenance retention came in at 90.4% over the trailing 12 months or slightly ahead of our FY '20 modeled level of 89%. As we stated on the last call, we anticipate some volatility in the retention rate as we move forward and believe our modeled level continues to be appropriate.

As we look back at Q2 deal flow, we saw continued success in signing all-in deals and further cross-selling our RCM, or revenue cycle management solution, which represented almost 1/3 of the bookings in the quarter. Notably in the quarter, we signed another large all-in deal totaling over $5 million annually. A software-only client that was, frankly, highly dissatisfied 4 years ago when I started my tenure has reached a level of confidence and satisfaction that they were comfortable adopting the entire integrated ambulatory platform, including revenue cycle management, our mobile platform and our pop health analytics, which is a competitive replacement. Clearly, a great validation that our performance in driving satisfaction and innovation is opening up opportunities within our client base.

This wasn't the only significant deal, as in Q2, we closed a total of 11 clients who entered into arrangements over $400,000. I'm really proud of the momentum that the team is driving and look forward to the back half of the year.

From an M&A standpoint, we announced the acquisition of Topaz Information Solutions, a deal closed in the last month of the quarter. Topaz has been a strong reseller partner into the behavioral health space and brings both strong commercial and solution capabilities to NextGen. While this acquisition brings negligible revenue, we see behavioral health and integrated care as key strategic areas for NextGen, and this transaction expands our capabilities to deliver our planned growth in this part of the market. We'll be augmenting the capabilities of both NextGen and the incoming Topaz team with further investments, both from a solution standpoint and by further expanding our sales team.

Diving a bit deeper into sales, last quarter, we discussed a couple of areas in which we are changing and enhancing the structure of parts of our organization, and this quarter we have continued that evolution.

To that end, we've made a couple of strategic changes to our sales structure. Without significant disruptions to our client relationships, we have chosen to both expand the number of quota-carrying feet on the street, while at the same time we're closely aligning our sales team with their managers to promote more of a player-coach relationship. Reorganizing in this fashion will allow for the managers to become specialists in their geographies and declared specialties, taking a proven commercial model and evolving it to become even more effective.

Ultimately, this will be a very important shift as we focus more on new client acquisition in areas that we have a competitively advantaged hand to play. While we expect this evolution to have minimal impact on our full year bookings expectation, we do expect to see bookings a bit more back-loaded into Q4 as these changes settle in and the new organizational model takes hold.

From a client satisfaction standpoint, we've made a meaningful progress in the quarter as our class scores continue to move in the right direction. In the practice management, all provider sizes, we now rank just a touch behind the largest vendor in our space. In the 11- to 75-provider category, we maintained our #1 PM, practice management, ranking and our enterprise EHR scores have increased 12.5 points since September 2017, representing a more than 19% improvement in only 2 years. Our Voice of the Client survey provides another proof point that our clients are pleased with their NextGen experience. Specifically, 81% of respondents in the quarter said they would recommend NextGen Enterprise EHR and 87% would recommend our enterprise practice management solution. This increase in client satisfaction, along with the continued expansion of our solutions, have made us increasingly competitive in the field. This quarter was another point of validation for this improvement, and I'm very pleased with the 9 competitive takeaways captured in our second quarter bookings number.

Coming up, we are looking forward to our User Group Meeting in a few weeks. UGM 2019 represents an amazing opportunity to both gather feedback from our clients as well as showcase a number of key areas of evolution. Among the many areas we'll showcase, we are excited to present our strong new capabilities in behavioral health and integrated care, areas that resonate with both our large federally qualified health center base as well as our growing base of behavioral health clients. We're also on a significant journey to educate our clients on the breadth of the capabilities of the NextGen solution platform.

Many of our clients are not leveraging significant aspects of the platform, and we see opportunity to drive both further value and increase client satisfaction by educating them on how to get more from the investments they've already made. This education also supports the cross-sell strategy of expanding our clients' NextGen footprint.

In addition, we'll show the clients another great step forward from a usability standpoint as we show our first look at a new user interface for our EHR, specifically launched in the primary area providers operate in, the SOAP note. We are excited to spend time on these and so many other exciting areas with both existing clients and an increasing number of new prospects as we look forward to another great User Group Meeting.

As we look at revenue for the full year, we are happy to reaffirm our guidance of $536 million to $550 million for FY '20 revenue. We see Q3 revenue growth being a bit more muted, with Q4 being a more meaningful jump as our Veradigm relationship begins to deliver. As we look at the back half of the year on the EPS line, we are also happy to reaffirm our full year guidance of $0.82 to $0.90. We continue to be pleased with our progress on our strategic plan and the beginnings of organic revenue growth. We're excited to see this year's bookings growth and revenue growth continue for years into the future. As we deliver on our current plan, as we seek our competitive increase and our ability to execute and improve, our confidence only increases.

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

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [3]

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Thank you, Rusty, and thank you to everyone on the call. Total revenue of $134.3 million increased $4 million or 3% compared to the same period last year and was in line with our expectations. Recurring revenue of $120.6 million increased $4.3 million or 4% compared to a year ago, with increases of 7% in subscription services and managed services and 3% for EDI and data services offset partially by a modest decline of approximately 1% in support and maintenance revenue.

Recurring revenue is 90% of our total revenue, slightly higher than the 89% in the prior year. Subscription revenue of $31.4 million increased $2.2 million compared to a year ago. The growth was primarily driven by analytics and NextGen Office. Support and maintenance revenue of $39.4 million decreased $300,000 year-over-year due to attrition in our legacy NGE customers, largely offset by new contracts and CPI increases.

Managed services revenue of $25.2 million increased $2 million compared to a year ago, mainly due to growth in hosting services and RCM services related to the large new customer we signed in June of last year. We remain focused on driving RCM penetration in our customer base as well as leading with it in proposals to new customers.

EDI and data services revenue of $24.6 million increased $700,000 year-over-year, largely due to increases in existing and new customer volume, offset by modest decrease in data services revenue.

Nonrecurring or onetime revenue was $13.7 million, a $300,000 or 2% reduction over the same quarter last year.

Software license and hardware revenue of $8.3 million declined $1.1 million or 12% year-over-year, consistent with the trend we discussed last quarter.

Nonrecurring services revenue of $5.4 million increased $800,000 or 16% compared to a year ago due to growth in connected health and analytics professional services. Bookings came in at $36.6 million in the quarter, up 1.4% on a year-over-year basis against a very tough comparison.

Cost of goods increased by 8% due to higher amortization of capitalized development cost and higher managed services cost due to a mix shift.

Gross profit declined 1% to $68.5 million and gross margin declined to 51% compared to the prior year quarter of 53.1%. This is due to the increases in cost of goods just discussed.

Taking a look at our operating expenses. SG&A of $39 million is an increase of $4.8 million or 14% from $34.2 million a year ago. The increase is primarily due to a prior year insurance credit of $5.7 million related to shareholder litigation.

R&D of $19.8 million increased $1.4 million or 8% from $18.4 million a year ago. This increase is related to increased gross spending and a slight reduction in capitalized software development cost.

Impairment and restructuring charges of $2.1 million are primarily related to costs associated with reduction in expected sublease income on the vacated portion of our Horsham property.

Our GAAP tax rate for Q2 FY '20 was 7.7% with a non-GAAP tax rate of 22%. For FY '20, we will continue to use the non-GAAP tax rate of 22%.

To conclude my comments on the income statement, our Q2 GAAP EPS of $0.09 decreased from $0.20 a year ago. Our non-GAAP EPS of $0.24 for Q2 was flat to the prior year.

Turning to the balance sheet, we ended the quarter with $42.9 million in cash and equivalents and a 0 balance outstanding on our revolving credit agreement.

DSOs in the quarter were 57 days, a decrease of 3 days from last year and flat to last quarter, all within our expected range of 55 to 60 days.

Our CapEx, excluding capitalized R&D, was $1.5 million and capitalized R&D was $5.2 million.

To close the call today, I reiterate our outlook for fiscal 2020. We expect revenue to be between $536 million and $550 million and non-GAAP EPS to be between $0.82 and $0.90 per share.

Overall, I'm generally pleased with our performance in Q2, and as we execute our strategic plan, I'm looking forward to continued progress throughout this year and into next year.

This concludes my review of the second quarter financial results. I'll now turn the call back to Rusty.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [4]

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Thank you, Jamie. As I look back over the last 4-plus years here at NextGen, I continue to be amazed at the tremendous progress we've made. We've come from having one of the worst client satisfaction levels in our sector to one of the best. We have significantly expanded our solution platform, both organically as well as through multiple successful acquisitions. We've built a robust employee culture that is an enabler of both client satisfaction and strong innovation. We've delivered significant bookings growth and are now moving into revenue and earnings growth. And most importantly, we have once again become a positive force in the evolution of health care as we seek to do well by doing good. I'm so proud of our team and so grateful to be a part of this amazing organization.

With that, I'll pass it over to the operator and open it up for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jeff Garro with William Blair & Company.

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Jeffrey Robert Garro, William Blair & Company L.L.C., Research Division - Research Analyst [2]

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Maybe I'll start off with a question on bookings. Hoping you could help us set expectations for bookings growth for the full year. Certainly, the first half performance has been good against some challenging comparables and the setup sounds promising for the second half, but I want to make sure we understand all the puts and takes relative to some of those small changes to the sales organization.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [3]

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Yes. I mean as I look through the back half of the year, what I'd say is, I'm very -- I would confirm the guidance I've provided at the beginning of the year, which is we expected -- last year, we delivered, I think, 14% year-over-year bookings growth. This year, we expect it to be a little bit more muted, but kind of in that top half of the single digits. I feel like we've got clear line of sight to that, a robust pipeline. We had a great quarter this last quarter, and my expectation is that Q3 will be a good quarter and Q4 will really rebound.

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Jeffrey Robert Garro, William Blair & Company L.L.C., Research Division - Research Analyst [4]

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Great. That's very helpful. Still on the bookings front, one thing that didn't come up specifically in the script is the population health win at University Hospital Health Systems. I think that's one that people had an eye on. Curious about both the process there, since that's a large system outside of your core client base, and then the substance of why they chose NextGen.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [5]

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Yes. So the reason why we didn't include it in this quarter's deals is it actually signed couple of days before the beginning of this quarter, but we press released it this quarter, which kind of makes it net new news. We're very excited about it. If you remember, this was about a year or 1.5 years ago, I'd talked about an interesting win in a hospital system in the Northeast, whereas 4 hospitals that had pulled in our pop health. And I said, you know what, it's an interesting win, but until I've got more data points, I'm not going to declare it an opportunity. With the University win, we really feel like we are starting to become a little more interested in a broader space beyond our core client base. That one, we were chosen really because we've shown the ability to bring together multi-source data in a way that is truly actionable. By multi-source data I mean not just clinical feeds and not just claims feeds, but bringing those together. So you both have clinical information, but also the cost information necessary to validate not just quality outcomes but the cost of achieving those. By bringing that all together and by showing that we can interoperate across a multiple-EHR platform system, which we did in that prior group that I talked about where they have, I'd say, across their entire ecosystem somewhere in the high-teens from an EHR standpoint, almost -- it may even be 20. And so the ability to bring all that together and then deliver truly actionable information that really drives activity from a pop health standpoint, I think all of those things are really positioning us in a somewhat of a unique space in a part of the market that is as much of an agnostic opportunity, maybe even more than just an extension of a single EMR.

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Operator [6]

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Your next question is from Jamie Stockton with Wells Fargo.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [7]

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The sales restructuring, could you just give us a sense for your quota-carrying reps, kind of what -- like, what their experience will be on a go-forward basis versus what it was in the past? What will change about their job?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [8]

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Yes. It's a great question. So think about it this way. So in -- prior to October 1, a regional vice president may be managing reps that are focused on the cross-sell inside the base, on new client acquisition outside the base, on parts of the health care ecosystem like a federally qualified health center or behavioral health and an orthopedic group and a multispecialty group and a primary care group. And so when you think about mentoring and being that player coach to their entire team, the breadth of knowledge that, that regional vice president had to have was very significant and, frankly, they were managing more of the sales process and the forecasting than being able to participate as directly in mentoring -- both mentoring reps, but also being able to truly engage the client. And so by segmenting our leadership team out so that there is more of a peer group under them -- so for example, a regional vice president might be solely responsible for sales executives who are our new client hunters. And so by bringing that kind of alignment, we're enabling the leadership to better support the team. Jamie, any comment...

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [9]

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Sure, Rusty. The most important thing about this pivot is, it starts -- it's primarily focused at the leadership, the sales leadership. We previously had bifurcated the sales organization between those who focused inside the base and outside the base. The reps who are focused inside the base, there is no change to them right now. To those who are outside the base, they are -- they have been divided into specialty focuses. So there is a little bit of change for them, but it will help them narrow their scope and become more targeted. And the biggest change is that for the regional vice presidents, where we now have separated them to the same kind of category where there is 3 regional vice presidents in charge of the inside the base or the farmers and there's 3 that are outside the base.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [10]

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Yes, and I think one of the core principles of this was to really disrupt the sales rep-client relationship to the least degree possible, because here we are in the middle of the year, we're driving great bookings growth. And the other thing I'd say is, this was not in response to any problem as much as this is leaning forward into opportunity.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [11]

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Okay. That's great. Maybe just one more. The R&D spend, if I look at it sequentially, I want to say maybe it came down a fair amount, but I guess the thing that runs through my mind there, although I realize there might be some noise, your capitalized levels were up a little bit, but maybe not as much as, I think, the pro forma R&D number came down. Like -- or have we -- is this us seeing the headcount shift to India and like this is the new number that we should think about? Just any color on that would be great.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [12]

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Yes. We are in the process, as we talked about in -- a couple of quarters ago, of making that headcount shift and expansion. We're well on the way through that, but there is puts and takes along the way as we move through that. I will say that we have no intention of saving our way to success on the R&D line. Our expectation is right in line with what we said at the beginning of the year. And while there will be some ebbs and flows from a cap software standpoint, you should expect the full year number to very closely resemble last year's number.

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Operator [13]

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Your next question is from Matthew Gillmor with Baird.

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Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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One more on the sales reorg and some of the goals there. It seems like this will give you a little bit of a clearer focus outside of the base. So I was hoping you could kind of confirm where you are from a bookings standpoint. Is it still sort of 85-25? And then with the sales reorg, where do you expect that will trend as we get into next year?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [15]

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Well, I can tell you, it's not 85-25 because that is mathematically impossible. But what I would say is, I feel like we are starting to move past 85-15. And I think if we look down the road, we see that probably going as somewhere in the 75-25 range as we look at next year because we are having success.

Now the great news is, we're having continuous success inside the base. And so if we can accelerate outside the base, that creates the natural bookings growth curve that we've really discussed over the last few years and expect to extend going forward. We are expanding the number of quota-carrying reps that are focused outside the base simply because we've played a reasonably successful hand there and we see that as a good investment and a win for the shareholders.

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Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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Got it. Let me ask one more on the -- just capital deployment priorities. You've got no debt at this point. Your cash is building up. The Topaz deal seems pretty small. So just where are you focused on acquisitions? And are you close to anything?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [17]

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Well, if we're close to something, we'll tell you when we're there. But what I would say is, look, we've -- prior to this acquisition, the last one was, I think, about 1.5 years ago, which was another small tuck-in of an orthopedic and musculoskeletal-focused reseller. Prior to that would have been all the way back in October '17, which was the acquisition of EagleDream Health, our population health analytics play. As we sit here today, we've done a really good job of both integrating and delivering on value of the things that we've done, and as we now start to look forward, especially with, we believe, more energy in the transition to value as well as a greater emphasis on patient-provider interaction, I would expect to see us continue to focus in those areas. And given the liquidity we have, we definitely have some opportunities to do some interesting things. And so my expectation is that you'll see us make moves as we move through the next 2 to 4 quarters, but you can never forecast those things, depends on the right asset being actionable at the right time and, frankly, at a price that we believe is a win for the shareholders.

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Operator [18]

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Your next question is from Donald Hooker with KeyBanc.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [19]

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Great. You referenced that interesting population health deal win, sounded like it was last quarter, in the University Health System. Can you give us an update on that EagleDream? I guess you call it NextGen population health analytics, I think, now. Kind of how much of that -- where are you in terms of client count there? It's been growing nicely. And are you getting more traction now outside of the legacy NextGen base? Like maybe a breakdown there. What is that now, 50-50?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [20]

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We haven't actually broken that out. And -- but what I would say is, I think we're having as much success agnostically as we are within the base. The client count continues to increase. We're plus or minus around 100 clients and, I think, are getting -- more than that though, are starting to see clients really start to expand the number of feeds and expand the distribution of the product as people are really starting to wrap their heads around what it can do for their organization.

I think also we've talked publicly about the fact that we are in the process now of adding care management capabilities to population health. That will show up in calendar FY '20 -- calendar '20 rather -- sorry, not calendar FY '20. That will show up in calendar '20. And that's really then taking the analytics and allowing those analytics to really extend into consistent personalized action around what the cohort identified population health needs. And so it's really focused on not just identifying the cohorts that can -- that need special attention, but actually ensuring that you have a relatively consistent approach to what kind of attention you're paying to that patient, which then allows you to continue to evolve practice and deliver better quality at lower cost proactively to patients before they become a bad fact from a profitability standpoint for the client. And so we are really -- right now, we're kind of stepping back and really taking a look at the success we've had in pop health and now starting to figure out what are the broader set of capabilities that we can integrate with population health, and so we can play an even more important and strategic hand for clients both within the NextGen base, but also outside of the NextGen base in ambulatory and potentially, over time, more and more in the critical care space. Time will tell on that.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [21]

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And just maybe one last question. Just love your perspective on sort of any change in appetite among your clients that you might or might not be seeing with regards to taking on risk. I guess we're looking ahead to 2020 where there'll be some new ACO contracts, a direct contracting model I guess we're waiting for details on. But I'd love to hear your broader perspective on your clients taking on risk.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [22]

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Yes. And certainly, I'll be also able to update that next quarter as we get through our User Group Meeting and our clinical summit. But let's just say, the conversations -- I spend a lot of time in the field. The conversations I'm having with clients are both how can they be successful in the current model, but people are definitely becoming aware when they look at things like a lot of episodic capitation, a lot of bundles coming out -- bundle capitation coming out, there's some real concern around having the right analytics to be able to be successful in those kind of models. And we feel like folks are, on one hand, starting to become aware that they need to do something, but a lot of our clients are still not aware of what that something should be beyond "I need a pop health solution." Our goal and our job is to educate them more on how they manage that transition, not just by slapping analytics on their organization, but actually retooling the way the organization works to truly be successful in risk-based arrangements. It's an entirely different world when you're paid on outcomes versus paid on activity. And I think our clients are starting to face that more and more, and our expectation is that heavy investment in both solutions and education will pay dividends for the clients and in return for us.

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Operator [23]

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Your next question is from Ricky Goldwasser with Morgan Stanley.

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Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [24]

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So when we think about the Topaz acquisition, obviously small in revenue contribution, but it seems that its strategic value could be very interesting here. So when you think kind of like holistically, you step back, do you see any other opportunities where you can develop solutions outside kind of that core provider, physician market, really enhance the offering that fits in within that?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [25]

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Yes. I mean, well, certainly, as we look at integrated care as one of those kind of emerging pieces, classically, there's been a real stigma around behavioral health in this country. And yet as people step back, they realize that behavioral health is actually the proactive treatment that prevents a lot of costly medical problems down the way. And so for us -- for that one, especially given that integrated care is actually a combination of behavioral, medical and dental, we have a really interesting hand to play there because we bring all of that to the table through our FQHC base. And so really as we start to work with, effectively, a relatively new segment of the industry for us, we're starting to see some real opportunity there to go above and beyond just kind of what's been done in the past and bring together a couple of great solutions to really support them.

When we look further afield, Ricky, I'd say that right now, our primary focus is really on the integrated ambulatory market. We've added behavioral health, but we're still focused very much on multispecialty and rolling up single specialties and FQHCs. The only other thing we've started doing, which the University Health is an example, is to really start to think about is there a broader play from an agnostic pop health and value-based care solution standpoint in the critical care space. But at this point in time, we have 2 wins, and 2 wins does not make a full offensive business strategy. At this point, it's a little more opportunistic than planful.

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Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [26]

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Okay. And then I know that in the past, you said the vast majority of bookings convert to revenue within the year. You are seeing more all-in deals. Does this change the way you think about the time line or how we should model it?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [27]

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No, it doesn't. In fact, for example, the large deal that we just signed should start producing revenue before the end of this financial year or right at the beginning of next one. And so that time line still holds. And if anything, it's getting more repeatable as we get more experience in these deals.

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Operator [28]

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Your next question is from Anne Samuel with JPMorgan.

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Anne Elizabeth Samuel, JP Morgan Chase & Co, Research Division - Analyst [29]

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I was just wondering if there are any margin implications from the sales force changes, especially given the expansion of quota-carrying reps. And then should we think about this as an area of investment going forward?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [30]

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Actually what we did, Anne, so we've acquired a number of solutions over the years, as you're aware of. And when you first acquire the solution, we, as a general rule, keep a sales overlay that helps make sure that we do not lose momentum with the solution post-acquisition. However, as time goes on and the general field force becomes more facile with the solution, that enables us to depend more on the individual rep rather than perhaps double comping on certain solutions. So what we're able to do here is actually fold some of those specialists back into the rep and into the rep pool rather than having them double covering. And frankly, the way that we've now maybe narrowed a little bit the market segment for each rep also makes it a little more possible for them to have a broader understanding of the solution itself. And so actually, we're able to pull all of this off in a budget-neutral way.

And so for us, I mean, it was really about how do we just become more efficient and effective with the dollars we have today.

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Operator [31]

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Your next question is from Sandy Draper with SunTrust.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [32]

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A couple quick housekeeping ones, probably for you, Jamie. I guess the first is can you just remind me on the retention number, what are the inputs? Is that revenue-based, number of clients, or number of docs? I just can't remember on that. And then second, on the Veradigm relationship, should we pretty much expect that to be a consistent fourth quarter event or there are things that eventually start to move around? Because it sounds like it's going to hit again in the fourth quarter.

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [33]

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So let me answer the first question on the retention statistic. That is a dollar-based statistic. And so think of it as how much was available at that -- at the beginning of the quarter for renewal and how much renewed in the quarter. So that is what that statistic -- trying to make it easier to use it as a modeling tool.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [34]

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Yes. So just to be clear, it is -- we look at a population of clients on the front end of the quarter and what that population is paying us, and we look at that same population on the back end. It is not -- it does not include added, because we always add clients as well. We exclude that from the calculation, and it does not include any CPI increases. And it is specifically for legacy maintenance. Does that make sense?

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [35]

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Yes, it absolutely does. And then the Veradigm?

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [36]

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And then relative to Veradigm, once those contracts -- the vast majority of the -- what we would expect to get from Veradigm will be taken ratably over the course of the year. So it will start -- we expect it to start showing up in our fourth quarter of this fiscal year.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [37]

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And the Q4 number from last fiscal year was a one time, not part of that ratable revenue.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [38]

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Okay, that's really helpful. And then maybe if I can squeeze in one bigger picture for you, Rusty. And there's maybe not one consistent trend. When you think about the new wins you're getting, when you think about market drivers, and as you talked a little bit about pop health, a little bit fuzzy what's driving it, dissatisfaction with their existing vendor, maybe someone moves. I mean, are there any consistent trends when you see someone coming to you, going out to market? And what's actually getting that client out into the market to actually do an RFP?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [39]

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Yes. So it's interesting, because I mean, I think the replacement market has been bouncing around as a meme now for about 4 years, right? And when I look at the replacement market, a client is going to replace their EHR/PM infrastructure for one of a couple of reasons.

One is because their vendor can't keep up from a regulatory standpoint, and therefore, they just can't stay there. The second is, is because the vendor has done, frankly, just a really poor job and the client's gotten to their wits end. And then the third one is, is because somebody's being acquired by somebody else.

And when we look at that, certainly, we are doing a phenomenal job on the regulatory side. We continue to innovate and bring a broader solution to the table because, frankly, EHR and PM were necessary and sufficient in the 2010 time frame. As we sit here today, a broader ecosystem is necessary to really enable the clients to be successful.

And so we've seen -- we've seen a lot of bucket 1 and 2. And then given the fact that we have a really good-sized footprint in rolling up single specialties, we're also seeing that M&A tailwind come to the table for us. And I think, really, the combination of those things, plus when you think about the fact that we are driving very visible client satisfaction, if you were really to map out the class scores for all the major vendors over the last 4 years, you would see that really only NextGen has been on a very significant upwards trajectory and almost everybody else in the space is flat to down.

And so I think we've separated ourselves to a degree based on trajectory. It's not that there aren't other great solutions out there. But oftentimes, clients don't look at where somebody is at a point in time. They look at the trajectory because the trajectory really implies where the company is going to be in the future.

And so all of those things, I think, are a really nice tailwind for us.

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Operator [40]

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Your next question is from David Windley with Jefferies.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [41]

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So kind of a granular sales force follow-up question. I've heard you talking about all-in deals and your -- rest of your comments just then about a broader solution set required in the marketplace to really effectively compete. If I understood from your earlier comments, the sales force outside the base is being asked to focus more narrowly, and those seem a little incongruent. Is the reason there because your sales outside the base are going to start with maybe one solution or a limited amount of solution and then potentially expand from there? Is that how that makes sense?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [42]

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Actually -- maybe I didn't speak as clearly as I could. When we say focused more narrowly, we don't mean focused narrowly from a solution standpoint. What we mean is -- if you think about it, right? The difference between the language, the business practices, the challenges facing a federally qualified health center are entirely different than the challenges facing a rolling-up orthopedic private equity-backed group.

And so what we've done is we've bifurcated the market a little bit so that a rep can bring the entire solution to the table and map it onto a relatively consistent client base. I'm always worried about people becoming so broad in their market segmentations they have to manage that they become very lightweight.

And when you're talking to -- for example, if you're talking to the orthopedic group and you talk about patients. Well, if you go talk to a behavioral health group, you're talking about clients. You're not talking about patients. It seems like a simple thing, but even just being able to talk in the right lexicon for the client base you're dealing with is so important because the client base wants to feel like the person that they're dealing with and the company they're dealing with truly understands their space.

And so what we've done is we've narrowed the market segment a little bit. But frankly, when we're going into these clients, we're going in saying, "You need an entire integrated ambulatory solution that enables you to be successful in both fee-for-service as well as fee-for-value." Now interestingly enough, we're not going to wave a magic wand and tomorrow, you're going to be up and live on all this. What we're going to do -- and this worked very well at the large client we signed last year. We're going to work with that client to understand their resource map, their strategic priorities, their time lines. And based on that, we're going to deliver to them a road map of evolution because you don't go through that much organizational change all at once and become successful. You have to take it step-wise. This is really different than this organization sold in the past, where a salesperson would just show up and sell some licenses and move on. Now we're really establishing that high-level C-suite strategic conversation with the client and truly understanding both their strategy and the roadblocks for them to get there.

And I think that just completely -- I said at UGM, my first User Group Meeting 4 years ago. And I step on the stage and I said, "Look, we're on a journey. We're on a journey from being a vendor to being a partner to aspirationally being a trusted adviser." Your vendor wants to sell you something. Your partner understands your problems and helps you solve them. A trusted adviser, on the other hand, shows you problems you didn't even know were coming and helps you solve them before they become real issues for your company.

We're starting to move through that spectrum and, in some cases, aspirationally getting to being a trusted adviser because we are seeing a broader market view, we are seeing the problems from a more objective standpoint, and we do have solutions that can help.

And so it's an exciting time. It's -- look, anytime we make tweaks or adjustments to our sales structure, there's always a little bit of risk there. But if you think about 1.5 years, 2 years ago when we were completely reinventing our sales structure, we saw a significant drop in bookings. This time, on the other hand, we feel like, yes, there may be a little bit of -- we may not get as far up as we'd like to, but this, once again, is not an emergency. This is really leaning in to get a much more intimate sales team with the client base and, frankly, continue our path of driving multi-year bookings growth.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [43]

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Got it. And that definition as you've just described it, that definition of, say, client category for a rep to focus on applies both inside the base and outside the base?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [44]

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Yes, that's correct.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [45]

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Right. Okay. And then dovetailing kind of on that trusted adviser commentary, your discussion to an earlier -- answer to an earlier question about clients and bundles and capitation and potentially helping them to understand how they need to retool to be able to operate in those situations sounds like a different type of consultative relationship or service provision. Do you have the knowledge base, the professional services in the organization today to do that? Or is that an area that you need to expand as well?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [46]

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I would say yes and yes. We have that capability. I want to see it expand and flourish. For example, if we look at our account management framework. So we have account executives, and account executives for an existing client are responsible really for selling the strategic evolution of the client. We have an account manager who is responsible for consistent contact with the client. We are now continuing to educate our account managers. We are bringing in as well, augmenting with new talent to start to provide more and more of that consultative solution, and not just as an engagement, but also just as an everyday conversation with your account manager. And that's the kind of evolution.

It's one thing to build a great service organization, it's another thing to have knowledge pervade your entire organization and have your client be constantly, frankly, amazed by the fact that when they talk to people, those people understand their world and their challenges.

And so this is -- it's not a wave-a-magic-wand type of thing, but it's something that we have in the organization. We are just now looking to expand it and expand that knowledge.

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Operator [47]

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Your next question is from George Hill with Deutsche Bank.

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George Robert Hill, Deutsche Bank AG, Research Division - MD & Equity Research Analyst [48]

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Rusty and Jamie, I guess my question is we're 2 quarters through the year and the guidance range at the revenue line is about $14 million, but you've acquired Topaz, you've announced South Bend, you won UH, you've probably got a little visibility into Veradigm, kind of -- can you just walk through kind of what are the big moving pieces? What gets us to the high end of guidance versus the low end of guidance?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [49]

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Yes. I mean, well, as we sit here right now, if we were on the high end of guidance or the low end of the guidance, we would have put out a different message, first of all. We feel like the guidance we put out is appropriate. Certainly, if we see overperformance from Veradigm, that gives us maybe a little bit on the upside. If we see underperformance on Veradigm, that puts us on the downside. From the standpoint of bookings and revenue, I think we've got pretty good line of sight on to kind of the normally generated revenue.

And so like I said, we feel pretty good about where we are in the range, George. And as I said, if I felt like things were really trending upwards, we would have indicated that. And if things were falling off the bottom, we'd indicate that, too, much like we did last quarter when we had the bankrupt client. And on top of that -- so that was a $4 million loss of revenue. But then on top of that, you're also seeing in the software and hardware line, you're seeing that flip from perpetual to subscription happening in real-time as we go through the year.

It's unfortunate that, that flip came in under what we expected, but I'd actually argue it's fortunate because the reality is more subscription bookings are better for the lifetime revenue growth of this company. And that move from perpetual to subscription, while it may be a little painful in 1 year, is actually a win for the shareholders in the medium and long term.

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Operator [50]

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Your next question is from Mike Ott with Oppenheimer.

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Michael Joseph Ott, Oppenheimer & Co. Inc., Research Division - Associate [51]

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It's great to hear that nearly 1/3 of bookings are now from RCM cross-sell. Just wondered if you could update us on RCM penetration in your base or any qualitative color you could share there.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [52]

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I'd say that we're -- we've gone through a lot of transformation in RCM, we're really starting to see the sales volume. Our expectation is as we move into next year, that volume should start really showing up on the revenue line. From a penetration standpoint, yes, we've made some inroads. I'm not ready to put out a percentage number or anything like that. But what I would say is there's still a ton of room out there.

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Operator [53]

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Your next question is from Stephanie Demenco (sic) [Demko] with Citi.

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Stephanie July Demko, Citigroup Inc, Research Division - VP & Senior Analyst [54]

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Just given some of your color around takeaways in your prepared remarks, are there any trends to call out on what's been driving this, such as a particular solution gaining traction or maybe a pure acquisition resulting in heightened attrition you've been able to benefit from?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [55]

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I'm sorry, can you -- sorry, Stephanie, you broke up there. Can you repeat it one more time?

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Stephanie July Demko, Citigroup Inc, Research Division - VP & Senior Analyst [56]

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Just any of the big drivers of some of your competitive takeaways, given that it's pretty [different] from historical trends.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [57]

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Yes. Well, we've seen -- look, in some cases, we're taking away from a vendor that's perhaps distracted by a lot of merger and acquisition activities that they are a part of, and so that distraction certainly is a help. In one case, we had a vendor end-of-life a core platform for a lot of clients and, frankly, an attempt to switch them on to another one of their platforms, and we were successful in coming in and taking some of those clients.

And so it's really -- I go back to what I said about the replacement market. It's really when a vendor end-of-lifes something, it's when a vendor is going through significant distraction and unable to deliver the experience that the client wants or the value that the client wants. And if I look across our competitive takeaways, those 2 are the primary drivers.

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Stephanie July Demko, Citigroup Inc, Research Division - VP & Senior Analyst [58]

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All right. Got it. And then looking at bookings for this year, could you just walk us through the puts and takes of some of the tough comps and how you're going to think about the all-in growth versus growth normalized for the tough comp?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [59]

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Yes. I mean, if I look at bookings for the full year, look, I mean -- as I think I said at the beginning of the year, we expect reasonable year-over-year growth, not necessarily the 14% of last year, but somewhere in the upper half of the single digits.

Look, it's -- honestly, the puts and takes on it are just continued execution the way we have been. The pipeline continues to get more robust. Our forecasting continues to get better, both from a number, but also from a deal traceability standpoint, which is not to be undervalued in sales forecasting. And I think as we sit here today, we feel -- frankly, last year, we had a good first half start and then it got a little soft in the back half. This year, we've had a good first half start and we're very, very focused on having a good second half as well, which I think will put us right where we need to be.

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Stephanie July Demko, Citigroup Inc, Research Division - VP & Senior Analyst [60]

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Is there any way to benchmark that? Just thinking the level of growth you would need to get to the mid or the high point of the projected 21 range?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [61]

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Well, so we haven't put out a 21 range at this point in time. And frankly, have held off a bit and probably won't refresh the long-term until we get into the -- to the end-of-the-year call and have more visibility on next year. But what I would say is, look, given the amount of subscription bookings we're driving versus perpetual, that gives us increased confidence in revenue growth next year, because rather than having that big drop off from a perpetual license to the maintenance stream that comes after it, which is about an 80% drop-off on $1, we're now looking at purely ratable revenue, which just generates a natural growth curve as we get into next year.

And so my expectation is, is that we're going to continue to see bookings growth, but we don't need 14% every year to deliver that. It's actually a smaller number, especially given the high-quality subscription nature and recurring nature of the bookings.

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Stephanie July Demko, Citigroup Inc, Research Division - VP & Senior Analyst [62]

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Got it. And we should we assume that prior mid- to high single-digit target no longer holds then?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [63]

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No, we should just assume that we haven't refreshed our guidance for next year. I literally just don't know at this point in time, Stephanie. We have our own theories, but we got to see how the back half of the year finishes out before we push anything forward.

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Operator [64]

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And our final question comes from Gene Mannheimer with Dougherty.

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Eugene Mark Mannheimer, Dougherty & Company LLC, Research Division - Senior Research Analyst of Healthcare [65]

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Congrats on the good progress this quarter. I wanted to dig into Topaz a little bit more, how much client overlap with you, what's the level of integration between your NextGen EHR and their behavioral platform, and how would you characterize the competition in that space? I know you didn't raise revenue guidance this year, so the revenue is immaterial from Topaz. But how would we look towards the long term?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [66]

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Think of this almost more as a forward integration of a reseller partner. Their capabilities are built on and around our platform, and their clients -- frankly, we are forward-integrating the revenue that we -- in many cases, much of it we already have, right? This is less about integrating in revenue and earnings, to your point, and it's much more about -- if you think about it, behavioral health, for example, is roughly different in every single state. It's a patchwork quilt of regulations. Each state has a very intimate group that know -- all of them know each other.

And so going into that market is a little bit different than going into kind of a nationally consistent market. It takes expertise, it takes passion, it takes caring about integrated care and behavioral health in ways that are different than we might have seen on the medical side. And so bring -- I almost look at it as almost an acqui-hire in this case.

We brought them into this organization because we think there's a great hand to play. We've taken some share from the largest player in the space. We've taken some share from other players in the space. And so when we look at that, we say, "Huh, in that case, we can have a reseller out there." But if this is important enough, we'd like strategic control and frankly the ability to augment investment in this area in a very consolidated and consistent way, and therefore, using a small part of our very large storehouse of dry powder to simply forward-integrate this and make sure that we can deliver on our expectations for growth as architected in our plan in behavioral health. I think it was a pretty easy decision for us.

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Eugene Mark Mannheimer, Dougherty & Company LLC, Research Division - Senior Research Analyst of Healthcare [67]

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Okay. No, that makes good sense. And with respect to your guidance for the balance of the year, you referenced some muted growth in Q3, but it sounds like there will be growth, just not as much as from Q3 to Q4. Is that the way to think about it?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [68]

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Yes, I'd say, look, we definitely expect growth in Q3. Let's be abundantly clear on that, right? Year-over-year growth in Q3. And yet as we look at it -- and Q4, first of all, is always a bigger quarter for us anyways, and we expect to see, frankly, the perpetual number be a little bit bigger -- a little bit bigger of the smaller number in Q4 as well.

And so when you think about all of those things, it creates a greater level of revenue uplift in Q4 than we'll see in Q3. We just wanted to make sure that folks were accurately understanding how the revenue is going to show up in this year.

Jamie has a comment, too, Gene.

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [69]

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Gene, so I appreciate Rusty's exuberance. I do want to remind everybody, we had an exceptional Q2 last year. The fact that we overachieved against that number from a bookings standpoint, the timing of transactions. So I just want to be clear, Rusty has given our firm position for the full year, and so having -- signing a deal sometimes falls in and out of a quarter and we -- some -- a couple of deals close a little sooner than I would've expected, fell into Q2, which allowed us to overachieve against last year's very tough comparison. So I have a little more cautious outlook for Q3, but I'm comfortable...

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [70]

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On the bookings side.

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [71]

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On the booking side. But I'm comfortable with the full year number guidance that Rusty is providing.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [72]

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And on the revenue side, Jamie?

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [73]

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I'm comfortable with the guidance that you and I both have reiterated.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [74]

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Perfect. Is that helpful, Gene?

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Eugene Mark Mannheimer, Dougherty & Company LLC, Research Division - Senior Research Analyst of Healthcare [75]

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It sure is.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [76]

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Awesome. Thank you very much.

And thank you, operator, and thanks everybody for joining in on the call.

Have a great rest of your week and weekend, and we'll talk to you in January.

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Operator [77]

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