NextGen Healthcare, Inc.

Welcome to the NextGen Healthcare Fiscal 2021 Third Quarter Results Conference Call. Hosting the call today from NextGen are Rusty Frentz, President and Chief Executive Officer, and Jamie Arnold, Chief Financial Officer. Today's call is being recorded. All lines have been placed on listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star, then the number one on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should require operator assistance, please press star zero. Before we start, I'd like to remind everyone that the comments made on this call may include forward-looking statements, Within the meaning of the federal securities law, including and without limitations, statements related to anticipated industry trends and 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 and including the discussion under the heading Risk Factors in the Company's Most Recent Annual Report on Form 10-K and any subsequent quarterly report on Form 10-Q. Any forward-looking statements speak only as of today. The company disclaims any intent or obligation to update these forward-looking statements. Our remarks on today's call include both our earnings results and guidance, which contain certain non-GAAP financial measures. For our earning results, the GAAP financial measures most directly comparable to each non-GAAP financial measure used or discussed and the reconciliation of differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our latest quarterly earnings press release that was filed with the SEC and is posted to the investor 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 France, President and CEO of NextGen. Sir, you may begin.

Thank you, Operator. Thank you all for joining our call. Q3 FY21 extended our run of strong performance as we continue to execute on our growth strategy. We are delivering a great client experience to complement our leading integrated ambulatory platform. We are adding new client bookings at an accelerated rate, and we are delivering growth while simultaneously improving our balance sheet. Q3 was truly another great step for NextGen. Highlights from this quarter include NextGen's strong Q3 performance across every operational metric, driving bookings, revenue, earnings, and cash flow. Another quarter of strong double-digit growth in subscription services which has now surpassed maintenance as our largest revenue stream. NextGen's delivery of the best overall client experience in the independent ambulatory market continues to show up in commercial wins, both inside and outside the base, and validated by external feedback. We continue to play our part in supporting both the front lines of care as well as helping enable the vaccine administration process for our providers and their patients. Our strong execution on revenue, earnings, and collections continue to generate robust free cash flow opening up a full range of options for growth in the future. And most importantly, NextGen's culture and employee engagement continue to be the core foundation of all our success. So let's start with our robust Q3 operational performance. Bookings came in strong at 37.5 million, an increase of 22% year-over-year on an as-reported basis, including a high watermark in recurring bookings. We saw strong subscription services bookings from our recent patient engagement-focused acquisitions and increased managed service bookings as clients look for us to take on more of their back office operations. On the revenue line for Q3, NextGen came in at 141.8, an increase of 3% year-over-year on an as-reported basis. Among notable growth drivers is our continued delivery of surround solutions that bring the platform to life for our clients and generate recurring growth. This has shown up most notably in the continued double-digit subscription services growth. We continue to win in the replacement market, primarily fueled by organizations seeking an integrated, purpose-built platform to replace fractured, underperforming, or failed applications. Furthermore, we continue to seek success through the maturity of our client success model that provides a specialty-based experience aligned to our clients' strategic goals and objectives. This was also a quarter where we saw more clients going all-in with our managed service offerings. Managed cloud services continue to be a nice growth area for us, and managed financial services, notably RCM, continued to grow, though more slowly than cloud services. Digging a little deeper into RCM, the area most correlated to patient volume, we saw volume maintained at 93% to 95% in the quarter, continuing to be a drag on that revenue line. And that's 93% to 95% of pre-COVID levels. We have modeled this range through Q4. Our earnings performance this quarter was also positively impacted by a strong level of perpetual license revenue, as some clients continue to prefer this licensing methodology. At $20 million, our free cash flow was strong and reflects another quarter of strong performance from our collections team, resulting in a DSO of 49 days. This is the second quarter in a row of DSOs at 49 days, and is another sign of the strength of our relationship with our clients. These numbers represent one of our best performances in recent memory and continue to support our confidence in the road ahead. Jamie will provide the full recap on the financials in a bit. but I'd like to take a step into how and why the news continues to be so good. The power of our integrated platform continues to gain traction in the market, which resulted in competitive success as bookings from new client wins increased to 25% of total bookings compared to an already impressive over 20% last quarter. Truly, our broad solution, great client experience, and new footprint sales team continue to bring clients to next gen. Looking back, this performance reflects our directing of 25% of our sales spend at new footprint hunters in late FY19. It's great to see that new team delivering, and as we move forward, this will be an area of further investment in the near term, which should produce fully in three to four quarters. Our platform capabilities are also resonating with our current clients. We have seen increasing success in cross-selling our broad portfolio, especially around the patient experience as our client base evolves around consumer-driven care. We are seeing the fruits of our work on strategy and client satisfaction as our solutions are very well aligned with our current clients' goals and objectives. This success both inside and outside the base with the integrated platform strategy is leading to larger deal sizes resulting from our new sales approach. We are selling a vision and reality of transformation to the ambulatory market at a time when change requires it. To that end, we had four deals in this quarter over $1 million, year trend of increasing deal size ambulatory organizations continue to seek flexibility within a scalable platform that enables them to address the progressive transformation in areas such as reimbursement models specialty uniqueness and certainly relying on great interoperability to truly operate across the continuum of care sales success is also a function of client receptivity and satisfaction every quarter we focus on delivering great provider and patient experiences and this quarter was no exception In point of fact, we're gratified to score at the top of the interoperability, patient engagement, and EHR telehealth reports from CLAS. And that was based on spring 20. Wait until spring 2021. As we move towards the annual best-in-class awards, we'll be excited to see where we land, but more excited for the impact of our spring 2021 platform on client satisfaction as we move through the year. Dipping a little deeper into telehealth, we continue to see nice growth here, now having enabled well over 1 million integrated telehealth visits while delivering a great and increased patient satisfaction rating of 9.1. It's pretty amazing considering we acquired the capability in December 2019 and it only completed less than 30,000 visits with an already high score from patients of 8.9 at the end of March 2020. By delivering this level of scaling and increasing satisfaction, we've once again shown that we can leverage our balance sheet combined with our organizational capabilities to deliver a home run for our clients and shareholders. Moving to that spring 2021 platform release, we are well on track to deliver the platform to the breadth of our client base. We will partner with them to ensure that they can leverage our integrated approach of end-to-end workflows in the pursuit of a better journey for the patient, the provider, the practice, and the population. As we take them into a bright future, we'll also ensure that our clients are ready in advance to meet the planned regulatory requirements coming in December 2022 with a planned implementation deadline for the 21st Century Cures Act. Our 2020 UGM, our user group meeting, naturally went virtual this year. I was concerned about the attendance being light, and my team was not, and I turned out to be quite wrong. Instead of the expected 2,500-plus attendees that we normally have, we actually had over 8,000 this year. Fortunately, the team was ready, even if I wasn't, and put together a great and tremendous program. And we did just a phenomenal job of engaging, educating, and inspiring our clients. We really value our time at the user group meeting because we get so much bidirectional feedback, and certainly this year was a little tougher. And so we really look forward to late this year in 2021 when we hopefully will all be back together in Orlando for an in-person user group meeting. From a next-gen culture standpoint, we continue to evolve and increase our employee satisfaction and engagement at an accelerated pace. We increased on every dimension in the survey and are above benchmark in every dimension across the board. As of the end of the year, based on our annual survey, we have 85% of our organization fully or nearly fully engaged. Our culture score increased again this year more than 10% year over year to 82, and that's from the mid-40s in 2016. We continue to evolve our employee experience as we become an even more fully engaged, diverse, and inclusive organization. Our journey to 100% will continue, and these scores really represent alignment, collaboration, optimism, but most notably, the joy of working to advance healthcare. Touching on that mission, we're privileged and humbled to be able to play our supporting role in the fight against COVID. Specifically, we've created an internal COVID immunization task force to ensure we safely and effectively enable our clients to document, track, and report these important vaccinations. Whether education or advice, software to make the administration process more efficient, regulatory guidance to help streamline the process, and the data to support the broad analysis of where COVID is and where it's going, we're all in. That being said, we're actually a very small part of the broader effort, and we can see the weight of the true heroics in the faces of our frontline clients. Thank you for that. Now I'd like to turn the call over to Jamie to go into a deeper dive on the financials. Jamie? Thank you.

Thank you Rusty and thank you to everyone who has joined the call today. Now the Q3 results. Total revenue of $141.8 million increased $4 million or 3% compared to the same period last year and was up 1% from Q2 FY21. These results reflect strong demand for our solutions and also that volumes remain consistent with the Q2 rate of 93 to 95% of pre-COVID levels. Recurring revenue of $128.2 million was 90% of our total revenue, in line with the prior year and the prior quarter. Recurring revenue increased $3.5 million, or 3%, compared to a year ago, with an increase of 14% in subscription services, 2% in managed services, offset by a 5% decline in maintenance and support. To provide additional color on recurring revenue, I'll provide a comparison of the current quarter to the immediately preceding quarter. Quarter over quarter, recurring revenue increased 2.6 million, or 2%. Subscription services revenue increased 1.1 million, or 3%, which is in line with our average quarter over quarter increase over the past several years. and in line with our expectation for the future. Managed services increased 1.2 million or 4%. EDMI and data services increased 400,000 or 2%. And maintenance and support decreased $200,000. Non-recurring revenue of 13.5 million increased 600,000 or 4%. over the same quarter last year. Software license and hardware revenue of 7.9 million increased 700,000 or 10% year over year. Software license and hardware in Q3 was in line with the preceding quarter, but significantly ahead of Q4 FY20 and Q1 of FY21. Non-recurring services revenue of 5.6 million declined 100,000 or 2% compared to a year ago. Bookings came in at $37.5 million in the quarter, up 22% as compared to the same quarter a year ago. We had strong performance in the replacement market, and several of the large net new wins were for NGE-based solutions where the customer opted for a perpetual license model, including two instances where the client contracted with us to host the solution for them. We believe this relaxed reflects demand for our holistic solutions and that the sales management reorganization we announced in Q3 last year is producing results. Cost of goods increased by $2.2 million, or 3%, due to higher amortization of capitalized development costs and higher subscription services costs. Gross profit increased 3% to 71.4 million and gross margin declined slightly to 50.4% compared to the prior year quarter of 50.5%. Turning to our operating expenses, SG&A of 49 million increased 6.1 million or 14% from a year ago. The increase is primarily due to an increase in legal expenses and personnel cost compared to Q3 last year, offset by decreases in travel, conference and acquisition cost. R&D of 18.2 million decreased 1.8 million or 9% from a year ago. The decrease is mostly due to higher R&D capitalization, which reduces net R&D expense. we recorded an impairment charge of 2.2 million in Q3 associated with terminating our facilities lease in San Diego and vacating the eighth floor of our office in Irvine. In the 8K we filed today, we announced that the board approved an amendment to our bylaws regarding the location of our principal executive office. As we have vacated the executive office in Irvine, we will be changing our principal executive office to our existing Atlanta facility. Our GAAP tax rate for Q3 FY21 was a benefit of 57% with a non-GAAP tax rate of 20%. To conclude my comments on the income statement, our Q3 GAAP EPS was one cent compared to seven cents a year ago. Our non-GAAP EPS of 26 cents was an increase of three cents compared to the 23 cents in the prior year. Turning to the balance sheet, we ended the quarter with $89.5 million in cash and equivalents after having paid down $35 million on our revolving line of credit. This left us with a $29 million balance outstanding on the line of credit on December 31, which we have now repaid. The SOs in the quarter were 49 days, a decrease of four days from last year, flat from last quarter, and below our target range in the mid-50s. Our capital expenditure, excluding capitalized R&D, was $800,000. Capitalized R&D was $6.8 million for the quarter. Turning to Q4 and our update to full year guidance, I want to first touch on expected headwinds in both revenue and expenses. there are less work days in Q4 than each of the previous three quarters. There are 61 work days in Q4, which is two less work days than the average for the previous three quarters. This means there are less days for visits to the doctor during normal business hours. Second, patient deductibles reset at the beginning of the calendar year, which typically reduces managed services and EDI revenue as patients refrain from non-essential doctor visits. Third, we will capitalize less R&D expenditures due to the imminent spring 21 release. Finally, there is uncertainty in how the current environment will impact client preference regarding licensing our technology. As noted in the earlier comments, over the last four quarters, we have seen significant variability in the procurement preferences. This client decision has disproportionate impact on our quarterly earnings due to the high margin on software licenses. After considering these headwinds, the strong performance in Q3, and continued stability in the market earlier this month, we revised full-year guidance as follows. Revenue in the range of $547 million to $555 million. up from the previously announced 535 to 551 million. Non-GAAP EPS is expected to be in the range of 92 to 98 cents, up from 83 to 93 previously expected. In closing, I am pleased with our performance in the quarter and proud of the organization for their resilience and determination. I am looking forward to our continued progress. This concludes my review of the third quarter financial results And I will now turn the call back to Rusty.