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Edited Transcript of QSII earnings conference call or presentation 31-Jul-18 9:00pm GMT

Q1 2019 Quality Systems Inc Earnings Call

Irvine Sep 15, 2018 (Thomson StreetEvents) -- Edited Transcript of Nextgen Healthcare Inc earnings conference call or presentation Tuesday, July 31, 2018 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

* Anne Elizabeth Samuel

JP Morgan Chase & Co, Research Division - Analyst

* David M. Larsen

Leerink Partners LLC, Research Division - MD, Healthcare Information Technology and Distribution

* Donald Houghton Hooker

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

* George Robert Hill

RBC Capital Markets, LLC, Research Division - 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

* Mohan A. Naidu

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Sean Wilfred Dodge

Jefferies LLC, Research Division - Equity Analyst

* Sean William Wieland

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Stephanie July Demko

Citigroup Inc, Research Division - VP & Senior Analyst

* Steven Paul Halper

Cantor Fitzgerald & Co., Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to the Quality Systems, Inc. First Fiscal Quarter 2019 Conference Call. Hosting the call today from Quality Systems/NextGen are Rusty Frantz, President and Chief Executive Officer; Jamie Arnold, the Chief Financial Officer. Today's call is being recorded. (Operator Instructions)

Before we start, I'd like to remind everyone that the comments made on this call may include statements that are forward-looking within the meaning of the federal securities laws, including and without limitations, statements relating to anticipated industry trends, the company's plans, future performance, products, perspectives and strategies.

Risks and uncertainties exist that may cause results to differ materially from those expressed in these forward-looking statements including, among others, those risks set forth in the company's 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 contains certain non-GAAP financial measures. For our earnings results, the GAAP financial measures most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our fourth quarter 2018 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 QSI/NextGen. Rusty?

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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 First Quarter 2019 Results.

We kicked off 2019 with $133.2 million in revenue and another strong quarter of bookings, which came in at $29.1 million, a 23 pro forma increase -- 23% pro forma increase from the first quarter of fiscal 2018.

Our growing pipeline continues to turn into bookings growth as we made progress in executing our long-term strategic plan. In addition, our earnings came in at our expected value of $0.18, reflecting steady progress towards our full year earnings forecast. Overall, we feel good about the results of the first quarter and look forward to sharing them along with our thoughts on the remainder of the year on the call.

In addition, we'll spend some time on the ASC 606 rev rec transition as well as changes in the structure of our P&L as we seek to continue to provide better clarity to our investors.

Our bookings performance of $29.1 million in the first quarter puts us nicely on the path to a strong FY '19 and beyond. The team has continued to show increased ability to both identify opportunities and more importantly, close them. We are seeing our clients begin to recognize the value of our fully integrated offerings as these all-in complete solution recurring deals are becoming more and more prevalent. We've demonstrated through our bookings results that we have built the right sales force and provided them with the right fixed solutions to successfully go to client and deliver.

We continue to see robust growth in our pipeline and encouraging levels of excitement for all of our solutions. As we approach the 1-year mark since acquiring our NextGen top health and analytics solution, we're gratified by the commercial progress we've made as it blends into our broader solution, and we anticipate seeing further traction in the future. The NextGen mobile solution continues to drive our professional services revenue and remain confident that there are numerous opportunities to display this solution further into our client base. Finally, our NextGen Office solution has continued to grow in line with our expectations as well. On previous calls, we've highlighted our growing RCM pipeline, and I'm pleased to report that we're starting to see that pipeline convert into bookings. During the first quarter, we saw an uptick in both deal flow and deal size within revenue cycle management including one rather sizable deal. The benefits from the increased integration between our software platform and our financial services capabilities as well as the expansion of those service capabilities are really beginning to show up in our client base. We are seeing more and more clients with the NextGen as a full solution provider, having proved that we can perform well and deliver necessary and important capabilities as our clients venture further into the value-based care world. This increased confidence in us is supporting continued growth in our pipeline of opportunities both in revenue cycle management but also across our broader solution.

Looking at client satisfaction, we had the opportunity to sit down with our clients at our large client user group in Chicago in June. It was great to check the temperature of the client base but also to understand their needs going forward and how those needs map to our growing solution. Of that client base, each of which has over 100 providers in their organization, all but 3 had either upgraded or were in test to go to our fall 2017 release, which we formally called 5.9/8.4 or our summer 2018 release. In addition, the tone of the meeting was incredibly optimistic. Clients are downright excited of what they are seeing and have great hope for the future.

Our view of our clients was further confirmed in a meeting with the team from KLAS a few weeks ago. The clients on our last 2 EHR releases, fall 2017 and spring 2018, have reported KLAS scores well into the 80s. This is a massive improvement from the high 50s KLAS score from 3 years ago when this team began the journey to turn NextGen around. In addition to improving total scores, we saw unprecedented increases in both optimism and NextGen keeps all of its promises. All of this led the KLAS team to say that this was the fastest turnaround in scores they had seen in their time measuring health care. It is great feedback, but we're by no means satisfied or finished on our journey to believing in better. Regarding attrition, while it remained relatively flat from last quarter, it is trending at the high end of our anticipated range. It's an area of significant focus for us, and we -- as we deal with a highly competitive marketplace. That said, the pace of bookings should be more than enough to offset that attrition rate and keeps us comfortable with our multiyear guidance.

As many of you know, we'll be hosting our annual Analyst Day on September 7, and we'll dig deeper into our newer solutions capabilities. For example, the upcoming fall 2018 software release and our expanded management -- managed financial services offerings, which includes our revenue cycle management offering. By bringing together and expanding the entire NextGen solution, we increasingly enable clients to realize true population health management and great financial performance from a single integrated solution set. I look forward to sharing with you the broadening suite of capabilities and overall value we will bring to our clients as we continue to expand and enhance our solution.

Before I turn the call over to Jamie to take a closer look at the financial results from the quarter, I want to reiterate my feelings that this was a strong way to start the fiscal year, most importantly due to the high levels of interest we're receiving across the solution set from our customers. Our clients, existing, new and prospective, are recognizing the value that NextGen software and services platforms can deliver to enable their success in the future, and it is starting to really show up in the numbers. The momentum in bookings that we're seeing now gives us confidence in -- continues to give us confidence in the midpoint of our annual guidance as well as achieving our multiyear growth plan of low single-digit growth with some leverage in this year fiscal 2019, high single-digit revenue growth with increasing leverage in fiscal 2020 and ultimately, 20% operating margins in fiscal '22. And with that, I'll turn the call over to Jamie to review the numbers. Jamie?

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

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Thanks, Rusty, and thank you to everyone for joining the call today.

Q1 FY '19 represents another quarter of consistent performance and including -- includes delivering our second consecutive quarter of year-over-year bookings growth and P&L performance in line with our annual guidance.

Before delving into the first quarter results, I want to review 2 changes in our accounting and reporting, including, first, ASC 606 and second, modifying how we report revenue. To facilitate this discussion, we have added 5 new tables in this press release.

Let's start with ASC 606. This accounting pronouncement impacts revenue and associated expenses. Like many in the health care IT industry, we implemented this pronouncement using the modified retrospective method. This implementation methodology required that effective April 1, the first day of fiscal year 2019, we record a transition adjustment to reflect the cumulative difference between accounting for historical transactions on both a 605 and a 606 basis. Table 4 quantifies the impact of the transition adjustment on the line items in the opening balance sheet and Table 5, the cumulative impact on balance sheet through June 30. Note there is a new balance sheet account called contract assets, which is primarily unbilled accounts receivable.

One of the more challenging aspects of the modified retrospective method is that we report fiscal year '19 results under 606 but do not restate prior periods, thus making explanation of variances in evaluating performance very difficult. To facilitate comparing quarter performance to prior period performance, we reconcile the report FY '19 on the 605 basis. While the accounting literature requires the reconciliation to be done on the line items on the face of the P&L, in our press release, we reconcile at a disaggregated revenue line item level. See Table 6 for the June 30 calculation of the 605 P&L.

The second change effective this quarter is that we have changed the face of the P&L. We believe this new presentation format better focuses the reader of our financial statements on the highest value driver, which would be recurring revenue, and it also brings us in line with most of our peers. On the face of the P&L, we are now reporting revenue via 2 line items, recurring revenue and software, hardware and nonrecurring services. I think of the second group of items collectively as upfront or onetime revenue. We believe this new format helps to focus the reader of the financial statements on the pricing and revenue recognition models. And while we were revisiting how to best report results, we determined we should reclass the reporting of certain product lines. For instance, we moved annual licenses from the software, hardware line to the subscription line. In Tables 7 and 8, we reconcile how we historically reported revenue line items with the new reporting formats.

Turning now to our first quarter results. As noted above, we have reconciled Q1 FY '19 revenue to what it would have been on a 605 basis, and all of the following commentary is an apples-to-apples or 605 to 605 basis. Total revenue in the first quarter of $133.2 million increased approximately 2% year-over-year and declined 2% sequentially. As an aside, as you will see in Table 6, there was only a $46,000 difference in the total revenue which was reported under 606.

Taking a closer look at our individual revenue line items for the quarter on a 605 basis. Using the rec cash revenue, recurring revenue of $121 million increased 1% compared to a year ago. Recurring revenue was 91% of our total revenue, which would be consistent with the prior year quarter on a restated basis. Subscription revenue of $26.8 million increased 5% compared to a year ago. The growth was primarily driven by our NextGen Office solution and contribution from the 2 acquisitions we completed last year.

Support and maintenance revenue of $40.6 million decreased 1% year-over-year due to previously discussed uptick in attrition in our legacy and GE customers. Managed services revenue, which is primarily -- we primarily describe it as revenue cycle management, was $29.3 million and flat compared to a year ago. We are continuously focused on driving penetration in our customer base with RCM as well as bringing on new customers.

Electronic data interchange revenue of $24.1 million increased 3% year-over-year and in line with our expectations.

Onetime revenue was $12.6 million, a 7% increase over the same quarter last year. Software license and hardware revenue of $6.9 million decreased 7% year-over-year. Customers, new and existing, are increasingly engaging with us under a subscription-based model, and we continue to see declines in add-on sales from existing customers as that market is largely saturated.

Nonrecurring services revenue increased 31% compared to a year ago, driven mostly by several large professional consulting engagements.

Next, I'll discuss bookings, which came in at $29.1 million in the quarter, up 23% on a pro forma year-over-year basis and 24% increase on an as-reported basis.

Bookings decline on a sequential basis reflects our typical seasonality from Q4 to Q1. Gross profit was essentially flat at $71.3 million, reflecting higher expenses associated with amortization of acquired intangibles and capitalized development cost as well as incremental consultants to help with the increased professional services assignments. Gross margins decreased to 53.7 from 54.8, due primarily to the higher costs discussed.

Take a look -- taking a look at our operating expenses. SG&A of $46.6 million, a 4% increase from $43 million a year ago. The increase is primarily due to increased employee cost. R&D of $22.1 million increased about 11% compared to a year ago, due to increased investment in people cost and the decline in capitalized software development cost due to the timing of the development and releases. Gross R&D was up $1.7 million, and capitalized software development cost declined $0.5 million. Our GAAP tax rate was 14%, and for FY '19, we will use a non-GAAP tax rate of 22%.

To conclude my comments on the income statement, our GAAP EPS of $0.04 compared to $0.06 a year ago. Our non-GAAP EPS on a 605 basis of $0.18 represented a $0.01 increase over the year ago.

Turning to the balance sheet. We ended the year with -- ended the quarter with $26.5 million in cash and equivalents and $44 million outstanding against our revolving credit agreement. DSOs in the quarter were 59 days, which is an increase of 2 days over the prior quarter but in line with our target.

To close the call today, I reiterate our initial outlook for fiscal 2019. For the full year 2019, we expect revenue to be between $532 million and $548 million and non-GAAP EPS to be between $0.70 and $0.78 per share.

As previously noted, we have implemented a new revenue recognition, ASC 606, using the modified retrospective approach. Because there is not historical data under 606, we have provided guidance based on 605. For each quarter of the fiscal year, we will provide reporting revenue and EPS under both ASC 605 and 606. As we look further out, we stand by our prior statements regarding revenue growth and operating leverage.

In closing, I am pleased with our performance in Q1, and I'm looking forward to continued progress throughout fiscal year '19.

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

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

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Thanks, Jamie. So in closing, as I finish my 12th earnings call over my 3 years here at NextGen, I'd like to thank everyone who's been following our story, challenging us, supporting us and investing in us. We've come a tremendous distance in employee culture, client experience and organizational capabilities in a very short time. We've significantly enhanced the breadth and value of the solution we provide to our clients. All of our work has yielded solid operational performance leading into consistent and predictable financial performance, enabling us to deliver on our strategic plan as identified. It's been a privilege to lead this great team and organization to the changes and evolutions necessary to get to this point, and we have no shortage of exciting evolutions ahead of us. I look forward to the next chapter as NextGen moves towards growth and continues aggressive moves towards a bright future.

Thank you. And with that, I'll open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Jeff Garro from 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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I want to ask about the increase in amount of all-in deals. Maybe you could put a little bit more context around that in terms of maybe just sizing the type of deal or maybe in terms of client wallet share and maybe some anecdotes about how those deals are coming to fruition.

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

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Yes. I mean, we're not really going to comment on size of specific deals except to say that as we start to see deals that are up into the low to mid-single digits from a 7-figure standpoint, that really gives us a good bit of confidence as we move forward in our ability to deliver. From a share of wallet standpoint, when we think about it, right, those all-in deals are EHR, practice management, mobile platform, population health analytics, potentially outreach as well as managed service and managed financial services. So it is a broad set of the solutions necessary for the client and really does have -- frankly, a solid part of their share of wallet. We're seeing a lot more interest in this because clients are starting to realize that it takes more than EHR and practice management to truly survive and thrive, especially as we start to see more two-sided risk arrangements and more value starting to move into the marketplace.

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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 helpful. And maybe a follow-up, ask about the conversion of the RCM pipeline that you're trying to see. Maybe you could describe what type of client is converting and what's causing them to convert now versus maybe waiting on the decision to pass, either something that's happening in their practice and their geography or just seeing the solution set that you guys are offering evolve?

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

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I think a lot of it -- well, first of all, I think there's a good bit of focus on better financial performance across the industry, and you're certainly seeing some energy in the RCM space because of that. But I think also, I mean, the reality is we've become a partner to our clients. And so in the past, we were a vendor to our clients, delivering a software solution that perhaps wasn't meeting their needs. As we've now -- I mean, if you think about it, we went -- we increased by 25% year-over-year from our clients in NextGen keeps all of its promises in the latest KLAS data. It's a massive increase. And that really -- if somebody is going to hand over their financial back-end to a partner, they want to make sure that, that partner is somebody who is going to be credible, who is going to be transparent, who is going to deliver. And so I think a lot of it is really the fact that we're just a much better provider and also our commercial teams are really starting to get their feet under them on the managed financial services talk track.

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Operator [6]

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And our next question is from the line of Sean Wieland from Piper Jaffray.

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Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [7]

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So what can you tell us about the bookings in a little bit more detail, maybe new versus existing mix, the win rate you're seeing, how much is cross sell, things like that?

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

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We haven't really commented on new versus existing, except to say that between 15% and 20% of our expected number is new, and I'd say that new continues to kind of float around within that range, and so we feel comfortable. And the reason that's important for us is that also -- that view informs our staffing percentages, who is forming in the base for the cross-sell versus who is hunting for new clients. And so our resource load kind of models that percentage, and we're seeing about that take through. I would say from a bookings standpoint, like I said earlier, that we are seeing a lot more all-in deals come to the table. And deals are actually evolving as we get in with the clients, and they start to realize the breadth of what we have. I'd say that our population health analytics platform, formerly EagleDream, produced kind of in line with what it's been producing the last couple of quarters, of course, factored down a little bit for the fact it's Q1. We've been talking about number of deals of EagleDream. I'd say we saw a little bit of a fall back from Q4, but that was expected. As we move forward now that we've lapped by a year, we're going to stop walking through kind of deal flow on EagleDream, kind of like we did on Entrada and HealthFusion before it and just fold that into the broader numbers. But I'd say, Sean, once again, this is the second quarter where I've had name deal traceability the entire way through and where when something fell out, we had upside that we could go after to bring in. This is the third quarter in a row that we've made no heroic attempts from a pricing or deal packaging standpoint to pull things in over the line, which continues to give us confidence that we're kind of delivering the right way and in a way that's consistently supportable.

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Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [9]

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Can you tell us any more about the large RCM deal you did?

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

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I can tell you that it's certainly a multimillion-dollar deal. It started, frankly, as more of a license deal and then migrated all the way into being kind of an all-in deal. And it happened reasonably quickly. It's a client that had a legacy view of us. And frankly, the leadership team sat down with the client, and we walked them through the transformation that we've gone through. And that took a deal that was frankly a somewhat small license deal and turned it into an all-in complete solution deal. So that was really exciting. And as we said in this quarter, we've seen another one of these larger deals already come to the table, which is continuing to give us confidence that we're viewed as a primary option going forward.

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Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [11]

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All right. And one more quick one. Can you give us the attrition rate?

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

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Oh, I'm sorry. It went from 10.5% to 10.9% this quarter. I thought Jamie was going to clean -- was going to come behind me and add that number in, so there you go.

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Operator [13]

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And our next question is from the line of Matthew Gillmor from Robert Baird.

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

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On the bookings front, Rusty, you mentioned that part of the strength was your ability to identify the right types of opportunities. And I was curious what you meant by that. Was that identifying these sort of all-in opportunities? Or was there something more around that comment?

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

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Yes. No, I mean identifying the right opportunities means identifying the opportunities where the client has -- it's why do it, why NextGen, why now. And so it's one thing to just go in and talk to all your clients. It's another thing to have evaluated your clients based on their demographics, based on the market they're in, based on our knowledge of their strategy and know that you have a not just a why do it and why NextGen but also a why now. And so as the sales team and the commercial teams are now doing a lot more discovery upfront, they're not spending time in clients that are right now in the midst of doing something else strategically. They're finding the clients where we have a great value proposition, and the client has a need and desire and really attacking there. And so that's a question of sales efficiency. Meanwhile though, we continue to look at clients who haven't necessarily maybe upgraded to our latest versions, and those clients are the stabilize those clients this year so that they become the targeted opportunities for sales next year.

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

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Okay. And then one follow-up on the maintenance attrition. I just wanted to confirm that, that was -- the increase was driven by the same factors that you highlighted last quarter, was at -- I think there was some commentary around a client consolidating their systems. Or was there anything else new?

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

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I mean, it was basic. I mean, I would say primary pressure on the attrition line comes from Epic and Cerner. There's a little bit of pressure in there, where we're giving and taking from other clients. But we've actually -- when we look at it, we're actually -- we're dealing punches as much as we're taking them, if not more, at this point in time, which is a great thing from where we were.

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Operator [18]

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And our next question is from the line of Sandy Draper from SunTrust.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD [19]

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First question for Jamie. Just a quick question to make sure I understand, it's a reclassification of software licenses into subscription. So these are still licenses, but they're annual renewals, that basically, the customer, if they don't renew, they lose the license. I'm just trying to understand the dynamics of what moves that from software license to subscription.

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [20]

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That is correct. They are an annual license that they have to renew and have to pay additional funds, so they operate just like a subscription.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [21]

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It's a third-party license, just to be clear. These are not our EHR or PM licenses. These are third-party licenses that we then pass through to the client, and we make a little margin on. It had been classified in that perpetual license bucket for years. We took the opportunity to appropriately move it into the recurring side of the business because it is fundamentally recurring. Does that make sense?

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD [22]

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Yes. Yes. That's very helpful. I appreciate that. And then my follow-up, obviously, really nice improvement on the KLAS scores. And I'm sure the answer may be a little bit of all, but when you think about the improvement, you can think about improving your product or improving your customer service, your overall responsiveness, just the way you interact to the customers, how do you think about -- what were the things recently that have been changing that continued this improvement?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [23]

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Yes. I appreciate the question. Look, when we -- we saw our internal VOC for the spring release go from 7s and 8s to 8s to 9s from what was in the 5s when I first showed up. And so the last 2 releases have frankly been yet another significant step-up, and so that has really driven a lot of it. But in addition, a lot of it -- a lot of the feedback comes, "Wow, I actually see my sales team now. And they are actually asking me questions about my business, not trying to sell me stuff." Some of the verbatims were, frankly, we've got an RFP from a client. And instead of spending all of our time on the RFP, we first said, look, it sounds like you guys are suffering. How can we make your current platform run better for you, and then once we get you to happy, then we can engage with the RFP. And frankly, if you want to keep going with the RFP and take somebody else, more power to you, we're still going to deliver a great experience for you. Interestingly enough, the feedback came back through KLAS that they appreciated that strategy so much that we're going to win the RFP. And so it is -- honestly, it's a lot the same way we deal with the investment community. We try to be transparent. We work our tails off. We tell it like it is, and we're never satisfied with our performance and are always trying to improve it. And I think that culture within our organization is a lot of what's driving these scores. That combined with the fact that we're actually just better on service, better on commercial, better on software. It's better.

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Operator [24]

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And our next question is from the line of Sean Dodge from Jefferies.

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Sean Wilfred Dodge, Jefferies LLC, Research Division - Equity Analyst [25]

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Maybe staying on the KLAS scores for a second. Rusty, the incremental differences between the software version that you've rolled out recently, can you give us a couple of highlights or examples of the changes that you've made there in the software itself that seem to be resonating most with the clients?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [26]

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Well, I mean, I think number one is we've taken about 80% of the time out of the upgrade, automated most of it. It can now run easily within a weekend. And on top of that, the number of errors that we're finding, not in release but even in beta, have gone to almost 0. And so all of the performance testing work we've done, we've recreated our clients' environments, representative environments. We've got a load test that represents 2,000 concurrent users. When you think about all of that work we've done there but then in addition, we've also spent a lot of time on usability, removing clicks, making sure that screen transition is great for the provider. We've added in a mobile platform. We've integrated in population health analytics. I mean, when you think about where this platform was at UD2 in 2015 compared to when it is now, there's almost no resemblance in the software development life cycle, in the quality testing capabilities and the user center design. So all of that together is really taking this to the next level, and it's interesting. I mean, if I look across our KLAS scores and where the fingerprint improved, because the KLAS score is actually a fingerprint made of multiple different scores, they pretty much improved across the board. The one area that I'm focused on now as we move forward is what I call moving from installation to implementation. We've got to continue to enable our clients to get to the results that they need with our software, which means continuing to provide best practice, continuing to make sure that they get to the organizational results, that's outcomes, both financially and clinically, that they need to get to, that should be where we view success, and so that's our next horizon. But I've got to tell you, it's great to be where we are. It's just that I think we can do more.

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Sean Wilfred Dodge, Jefferies LLC, Research Division - Equity Analyst [27]

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That's helpful. And then Jamie, thinking about the pacing of your operating expenses over the next few quarters. I know you mentioned before some incremental investments you are planning for, I think, EagleDream specifically and then R&D more broadly. Have those investments been made now, so reflected in financials? Or is there still another wave to come here shortly?

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [28]

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There will not be a significant increase in our operating expenses as we go forward. There may be small amounts that show up, but I'm not expecting a significant increase in the operating expenses.

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Operator [29]

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And our next question comes from the line of Mohan Naidu from Oppenheimer.

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Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [30]

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Rusty, on your stated goals of high single-digit revenue growth and 20% operating margins, can you give us an update on where you are versus your expectations on the road map? And on the top line growth, should we expect to see a similar bookings growth this year to get there?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [31]

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I mean, I'm not going to forecast what bookings growth needs to be or could be. But I think from your model, I think you could assume that probably 20% is not a bad number on the low end. And as we look at it, I mean, I think we just feel like we're on that path. As I said in my first call, we hope for year-over-year bookings growth each quarter. That being said, timing of deals could move that around a little bit. But as I look at the pipeline, I feel like we're -- let me say it a different way. If I looked at our attrition percentage and our bookings number and the likelihood of those bookings to convert to revenue on a specific time frame and I no longer believe that we would get to high single-digit revenue next year, the first part of this call would have been focused on that. So as we sit here, I'm very comfortable with the numbers. I'm very comfortable with the pipeline, and I'm definitely comfortable with the operating capabilities in the organization, and that enables me to continue to commit to the midpoint of our range, and I feel very good about that right now.

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Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [32]

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Okay. Jamie, one quick one for you. So when I look at the 605 versus 606 changes or impact on your numbers, is the impact more on sales and marketing expense, sort of, I guess, the reallocation of that on the SG&A than on the revenue reallocation?

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

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Mohan, you broke up a little bit, but I think your question is on the new accounting pronouncement. And certainly, in this quarter, it was more pronounced impact on the expense line, and that's because under the new accounting standard, you amortize commission expense over the expected life of the arrangement. And so that deferred some of the expenses that we would have recognized under 605. The impact on revenue will change quarter-to-quarter based on the type of transactions that we record. So just because there was a little impact this quarter doesn't mean there won't be an impact in a future quarter.

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Operator [34]

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And our next question is from the line of David Larsen from Leerink.

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David M. Larsen, Leerink Partners LLC, Research Division - MD, Healthcare Information Technology and Distribution [35]

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Can you a little bit about the integration of Entrada and EagleDream? Are those products now fully sort of embedded in the 5.9/8.4 or the, I think, expected 2018 version of the software?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [36]

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Yes, I think -- so they started being more embedded as we got into the spring release. With the fall release, that will take yet another step forward, and frankly, we're looking forward to sharing that to everybody in early September, and we're going to walk through kind of what that broader workflow is that involves both the mobile platform, our population health analytics capability as well as our EHR, PM. And naturally, this capability will continue to evolve over time. After the fall 2018 release, we'll have a spring 2019 release and then another fall 2019 release. And in each step of the way, we will continue to solve more problems, add more use cases and more capabilities out to the broad solution. But we're excited to get to that first level of solution interoperability and integration and really starts to enable clients to more effectively manage their clinical populations.

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David M. Larsen, Leerink Partners LLC, Research Division - MD, Healthcare Information Technology and Distribution [37]

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Okay. And then can you just comment on the state of the sales force? I mean, how many -- roughly how many sales FTEs do you have now? And just any color around that would be very helpful. Are they all sort of productive now?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [38]

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Yes. So we have AEs and SEs. Account executives manage existing clients. Sales executives are in new footprint. The total there is about 70. We also have some specialists set up to support them. The sales force is pretty stable at this point in time. We pretty much -- we're pretty much where we need to be from a headcount standpoint for this year. Naturally, next year, the number will go up a little bit, so we'll look at some point this year to probably add a couple more heads in advance of next year's booking number, taking into account, of course, the time to production with a rep. But what I would say is really happy with the way the sales team has come together in a short period of time. We continue to invest in education. We have another sales meeting coming up, I believe, in early October, where we're actually going to bring the team in again. We bring them in twice a year for training and then do training in between as well because it's a complex space with a lot of different specialties and a lot of different types of clients and making sure that they have the education to be able to really talk to the client is really important. But the sales force have spring in their step, and people are starting to hit numbers and hit strides, and that always makes people happy. And as an old boss of mine said, "When sales ain't happy, nobody is happy."

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Operator [39]

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And our next question is from the line of Jamie Stockton from Wells Fargo.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [40]

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I guess, maybe the first one, let's look at the RCM business. It sounds like you guys are starting to gain a decent amount of traction there. If you take a step back and you look at the competitiveness of your solution versus what other vendors are trying to sell into the marketplace, obviously, you've got this captive base of clients that you're trying to sell into, which is a huge plus. But if you just think about stuff like how automated your solution is or some of the software that you've got in-house, is there anything that you feel like you need to do to help improve the ability to penetrate your existing customer base? Or is the offering fully baked at this point?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [41]

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Well, the offering is fully baked, but it's never fully baked, right? I mean, the reality is the transition to value continues to change. Some of the nature of how you manage clients, things like underpayments become very, very important as you move into those areas. We continue to add capabilities. We've added preclearance service bundles that enable patients pay to be much more effective from a collecting standpoint, to inform the patient upfront of what their liability will be or roughly will be. And so it's adding those kinds of capabilities are certainly continuing to expand our offering and make us increasingly competitive. You are correct. We do have a little bit of an unfair advantage in our own base because they are sitting on our practice management solution, so that's helpful. But I'd say, when you look at -- we do have a very robust automation road map, where we're continuing to take hands out of the process. I would say that's less focused on revenue and more focused on margin. I think the effectiveness of the service is very high, and the key is to automate without losing effectiveness. Because if you automate without losing effectiveness, you maintain revenue, which maintains margin percentage but also maintains, of course, raw margin dollars. And so I think that's the way we're looking at the automation piece. We're really happy with the leadership that we've got in there and really happy with the road map we've got in front of us. So I think it's great to be here. I always want to be here a little faster than we are, but I'll take it.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [42]

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Okay. That's great. And then maybe just a quick one. It sounds like the environment might be a little better. I mean, I know, to Sean's question earlier, you said you're still kind of 15% to 20% of bookings coming from new customers, so the vast majority of it is just minding the base. But can you talk about, is decision-making improving even if it's a little after what seems like a pretty brutal period? And maybe GE is selling to private equity. Obviously, there's a lot of noise around the Athena platform right now. I think Greenway is going through a pretty big product transition. I mean, is there anything that you feel like it's really creating more opportunities for you right now?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [43]

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I mean I think there's a balance, right? On one side, we've got folks that are not -- that are probably on a downward trend from a client sat and a client energy standpoint. And on the other side, we've got primarily Epic and a little bit of Cerner, right? And so when we look at the competitive environment, what I would say, and the KLAS data actually support this as well, we're being included in a lot more decisions than we ever were. And that's very helpful, and it's gratifying. We're starting to win some of those, which is even more helpful, including taking from everybody on the list that you just highlighted. And so as I look forward, I get a little cautious on forecasting competitive environment because people forecasted us as dead 3 years ago, even 2 years ago. And so -- but I would say that I think we are becoming a first tier player. My goal is to have KLAS scores in the 80 across our entire client base. We'll see if we get there. That's a big goal for this year and next year, but we do feel like we're earning our right to be a first choice.

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Operator [44]

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And our next question comes from the line of Steve Halper from Cantor Fitzgerald.

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Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [45]

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Just 2 housekeeping items. What was the operating cash flow and the capitalized software and CapEx figures?

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [46]

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The capitalized R&D cost was $4.8 million. CapEx was $2.2 million. And one second, I'll give you operating cash flow. Operating cash flow was $3 million.

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Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [47]

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Okay. And were there factors in there that made that number a little bit lower? Again, understanding you're on a new convention.

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [48]

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I think part of it is just the time -- we paid off some stuff just based on timing, and our cash receivables was a little bit slower than it has been. 606 implementation has been one of the most grueling exercises we've been through, and we had to postpone some of the billings as we were working through it. So I think both of those have affected the cash flow from operations this quarter. Neither one do -- it's not like either one was $10 million, but they were probably both a couple of million dollars.

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Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [49]

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Great. And I'm assuming you're on track to get those receivables back in line.

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [50]

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Yes.

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Operator [51]

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And our next question comes from the line of Anne Samuel from JPMorgan.

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Anne Elizabeth Samuel, JP Morgan Chase & Co, Research Division - Analyst [52]

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Are you seeing anything new in Washington that might impact your business to give you confidence in your trajectory? It seems like the commentary more recently has gotten a little bit louder around the shift to value.

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [53]

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Yes, I would say that it's interesting, Anne. As we look at the regulation, and people smarter than I am spend a lot of time reading the regulations, the reality is that there's not that much change and not that much impetus from the standpoint of real change in reporting. I mean, CPC+, I think, is still 90 days the end of next year. But that being said, you are starting to see a little more energy around moving people into two-sided risks, and so we do feel a little bit of energy. But I've got to tell you, we didn't -- we felt -- at least my team felt that the regulations that have just came out, the proposed regulations were kind of a little bit of a [nod]. I mean a lot of focus on certainly on opiate safety, which is incredibly important, and interoperability, which we're a big champion of, but we didn't -- I guess we didn't walk away from reading it, thinking it had a material headwind or tailwind to us.

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Anne Elizabeth Samuel, JP Morgan Chase & Co, Research Division - Analyst [54]

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Okay. Great. And then maybe just on capital allocation, can you touch on the M&A pipeline? Any particular areas that you think might round out your existing offering?

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

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Yes. I mean, certainly, we've been pretty transparent about continuing to look in the patient engagement area, and that takes on a lot of different forms depending on what part of patient engagement we'll talk to -- talk about. But that's an area where we continue to look at interesting capabilities. And we've also said that -- I mean, we certainly have access to liquidity that at some point in time, we may look at something more substantial. But as we sit here today, I think we're still pretty focused on executing our plan for a couple more quarters before we even really start to consider something more significant. Because frankly, we've spent some shareholder money on acquisitions to date, and we kind of have an obligation to really show not just bookings growth but revenue growth coming on that before we start really looking to go deeper into the balance sheet.

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Operator [56]

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And our next question comes from the line of George Hill from RBC.

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George Robert Hill, RBC Capital Markets, LLC, Research Division - Analyst [57]

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I guess to jump into the question, I want to dig into the product side a little bit. You talked about the client churn approaching 11%, but you guys are posting good bookings growth. I guess, can you talk a little bit about which products are seeing displaced and which products kind of are you seeing more growth? And is there kind of a product evolution going on there? And then my follow-up is that if we look over the last 3 years, given the displacement levels and a high level of sales coming to current customers, how has client concentration changed?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [58]

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Yes, good questions. So as I look at -- you know what, I'm sorry, George. I forgot your first part of your question. Can you repeat it for us?

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George Robert Hill, RBC Capital Markets, LLC, Research Division - Analyst [59]

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The first question was which products are getting displaced...

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [60]

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Oh, yes, thank you. I got it. I got it. So when we are losing, we are losing the entire footprint. We are losing EHR and PM based mostly on health system -- I'd say less on health system consolidation now and much more on health system standardization, right? Consolidation's already happened, and now they're just sweeping through and standardizing. That being said, the nice thing is -- what I'd say is that really leads into a client concentration that's moved more and more into the ambulatory side and more out of the health system affiliated and owned piece. And so it's certainly -- it shifted our client conversation into an area that I would call less risk. That being said, I kind of would have preferred to keep all the clients along the way. And so as we look at our success in cross selling, our success in cross-selling is really to the clients that don't want to be part of a health system, aren't part of a health system and are looking to stay independent and, frankly, potentially, to roll up specialty or be a large single -- multispecialty player, et cetera. And so those clients are the clients that are really buying. And what they're buying is really buying the entire solution to lay on top of their EHR and PM footprint if they're an existing client. And as I said before, we're starting to see all-in deals with new clients that include population health capabilities, outreach capabilities, mobile as well as EHR and PM.

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George Robert Hill, RBC Capital Markets, LLC, Research Division - Analyst [61]

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Okay. And then I guess, the concentration part, like how fragmented was the base 3 years ago, and how concentrated is it now?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [62]

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I'd say it's still pretty fragmented. We've lost some of the concentrated parts of the base with the health system acquisitions, but it's still -- we've still got -- like our large client user group is 150 clients. We've still got some very large clients, and now we're starting to add some new ones. But I'd say that our client concentration has really moved out of the health system affiliated footprint just due to the attrition dynamics.

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Operator [63]

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And our next question is from the line of Donald Hooker from KeyBanc.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [64]

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So you mentioned one of the things you're having success bringing business in, converting pipeline to bookings, still working on minimizing client attrition, and you mentioned, I guess, the last question I believe, sort of health system standardizing. Is there anything you can do to kind of -- what's the strategy there to sort of change that conversation? I mean, how -- what are some steps you can take strategically to stem that tide?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [65]

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Look, I mean, to be blunt, if at the top of -- when at the top of Trinity, they made the decision to go to Epic, I don't think they reached out to Athena or us. I mean, that's just a decision that's made in a meeting that, frankly, that we may or may not even be in, right? And so in that situation, what we try to do is we sell the surround products, which we think are great adds for them. I mean, for example, our population health analytics capability is deployed in a hospital system as well as in multiple ambulatory centers, and so we do that. What we really focus on instead of the clients where we can really bring them across the line, keep them in the patch and make sure that they're absolutely getting the value that we're delivering. On the health systems side, we continue to service a lot of health system clients. We do a great job there, and we continue to upgrade them, and we continue to provide that great satisfaction, and sometimes that works in our favor. But what I would say is that when you think about the way that our plan is constructed, there's 2 primary proxies for the success of the plan at this point. One is bookings growth, and one is attrition. Attrition is a negative proxy. And as long as those 2 stay in line with where they are, we have laser focus on delivering our multiyear financial plan, and we have the client base and the client opportunities to get there.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [66]

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Okay. And then just one follow-on. I know a lot of questions have been asked, but in prior calls, and I think you mentioned it in this call as well, automating revenue cycle management, that business -- you've expanded those services nicely, and you're getting traction there. What is sort of a right gross margin objective? I guess you don't break it out this way anymore, but in the past it seemed like you guys were in the high kind of 20s, maybe low 30s. But is there a path to getting that in the next 3 to 5 years higher into the 30s or 40s? Or how should we think about sort of the progression there over time?

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James Robert Arnold, NextGen Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [67]

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Yes. This is Jamie. And I would say if we were still under 605, I would have expected the margin to be marching towards 40% over the next 3 to 5 years. And that would be a combination of the enhancements in the automation that we would be bringing, but also based on the growth expectations as you're able to spread some of the fixed costs. And I temper it by saying that under 606, where we have a bundled pricing, we now have to split the value up, and some of it is going to be assigned to other areas like subscription and services. So I have not reset my expectation. I need another quarter or 2 under 606 to be able to adjust the target. But we do expect -- but let me be clear, and the head of this group would expect me to say this, we do expect margin enhancement in the managed services area.

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

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Yes, we do. And you know what, 605, 606, I mean, frankly, these are accounting standards. The reality is that it is going to take less money to deliver more revenue. I mean, that's our goal. And so how it shows up in the P&L, we'll walk you through with all the ramifications there come through. Frankly, it's been a bumpy road getting there, especially with our ERP vendor not necessarily delivering as they should have, but we are where we need to be, and we've got great faith in the numbers. We'd like them to be a little easier to get to.

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Operator [69]

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And our next question is from the line of Stephanie Demko from Citibank.

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Stephanie July Demko, Citigroup Inc, Research Division - VP & Senior Analyst [70]

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Thinking about your success in the recent cross-selling strategy, could you just walk us through some of your strongest solutions with respect to attach rates and kind of help us frame where the new Entrada and EagleDream products fit into this schema?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [71]

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Yes, I mean, we haven't talked about attach rates nor will we because that's breaking down bookings. But what I would say is Entrada is a great platform for enabling physician workflow, and so we are seeing a lot of that attach rate especially in areas where high-dollar physicians represent a great financial opportunity if you can get them more productive. But in addition, we've also unbundled the basic mobility part of Entrada, and we've actually bundled that in with the EHR to more broadly distribute Entrada and create an even further platform for both software upgrades because things like, for example, being able to do CPOE from the hand -- from the mobile platform is something that is cost plus, right? And so we can distribute it broadly. We've got a great platform fulfilling services and upselling for the software. But I would say that I think the attach rate on EagleDream is also very strong. But I mean, it's still -- when you think about it, population health is still a little bit of a concept sale for many folks because it's been such an overused term that people really are spending their time trying to understand exactly what the capabilities are because a lot of folks have been burned by things that don't do what they said they did. From a revenue cycle management, as we said, it's a longer sales cycle, and so it's a little early yet to really say exactly how it's going to turn out. But as we look forward, what I'd say, Stephanie, is when we look forward and we look into the pipeline, and the pipeline is not a single pipeline. We break down the pipeline so it attributes against different parts of the solution. It's really kind of grown across the board because when we talk to our clients, we're not talking about products. We're talking about an end-to-end solution that enables them to manage their patient population to the best clinical and financial outcomes. And so because of that, it really depends on the client. And so I think we're pretty happy with the broad solution we have because it does allow us these entry points, and it doesn't focus -- force us to focus on one attachment solution.

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Stephanie July Demko, Citigroup Inc, Research Division - VP & Senior Analyst [72]

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All right. Understood. I guess, following up on kind of the opposite of attach rate. Just given the large all-in RCM deal that you did see this quarter, could you give us some color around what percent of sales are coming in with a full suite of solutions sold and where this compares to maybe 2 years ago?

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John R. Frantz, NextGen Healthcare, Inc. - President, CEO & Director [73]

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We can't. I mean, that's a level too deep because then we're starting to break it down below the level that we feel like appropriate reporting. But what I would say is we're seeing a build in RCM, and we are seeing a build in all-in deals. The all-in deals from 3 years ago didn't exist. And so this is really net new. Just in the last year, our sales team is learning how to sell it. Frankly, our invoicing team is learning how to invoice it, and those things are coming together at the right time because we are starting to see some energy on it.

Thank you. All right. Well, let's close it down then. I appreciate everybody's time, and everybody have a great August. Thank you.

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Operator [74]

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Ladies and gentlemen, this does conclude Quality Systems, Inc. First Fiscal Quarter 2019 Conference Call. We thank you for your participation. You may now disconnect.