NextGen Healthcare, Inc.

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

Okay, thanks, Catherine. And before we start, I'd like to remind everybody that comments made on this call may include statements that are forward-looking within the meaning of the federal securities laws, including, and without limitations, statements related to anticipated industry trends, the company's plans, future performance, products, perspectives, and strategies. Risks and uncertainties exist that may cause results to differ materially from those expressed in forward-looking statements, including, among others, those risks set forth in the company's public filings with the U.S. Securities and Exchange Commission, including the discussion under the heading Risk Factors in the company's most recent annual report on the Form 10-K and any other 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 the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our latest quarterly earnings release that was filed with the SEC and is posted to the investor relations section of our website. This release also provides qualitative descriptions of how we have calculated non-GAAP financial measures contained in our guidance. At this time, I'd like to turn the call over to our CFO, Jamie Arnold.

Jamie Arnold Thank you, Matt, and thank you to everyone who has joined the call today. It's been a highly productive quarter here at NextGen Healthcare. as our team continues to execute on our goals, in particular, accelerating revenue growth. Our guiding principle is as apparent today as it was when I joined NextGen over five years ago, believe in better. and better in this case translates to being the preferred solutions provider and trusted advisor to our clients as they continue their journey in a market that is evolving to value. In mid-June, we spoke with our clients, employees, and investors regarding the orderly leadership transition of our former CEO, Rusty France. While change can be disconcerting, we approach this transition from a position of strength and confidence, both financially and operationally. Our clients and employees have expressed a clear commitment to NextGen and the company's long-term growth strategy. With our focus on commercial execution, NextGen is accelerating its revenue growth while continually investing in exciting longer-term growth opportunities. The company has strong cash flow generation that allows us to self-fund meaningful growth initiatives, as well as a strong balance sheet with no debt and access to significant capital should an attractive inorganic growth opportunity arise. Finally, the company is guided by an experienced leadership team and staffed with employees who work tirelessly to promote NextGen's outstanding culture and to drive continuous improvement in organizational structure and execution. The Board, directly and through the Board Oversight Committee consisting of Jeff Margolis and Vice Chairman Craig Barbarosh, strongly and actively supports the interim leadership structure. The members of the Executive Leadership Committee, or ELC, include me, David Metcalf, Donna Greene, and our new Chief Growth Officer, Sri Velamore. Having worked with David and Donna for the last five years, I can't overstate the impact they have made on their respective departments and the company as a whole. And with only a month at NextGen, Sri, who recently led healthcare digital strategy as a partner at McKinsey, is bringing a fresh and highly informed perspective to shape and accelerate our growth agenda. The board has also initiated a robust executive search process to identify, evaluate, and engage top talent for the CEO role. The process includes both internal and external candidates, and we will provide updates on this process as warranted. Turning to Q1 operations, let's start with a brief update on our Spring 21 rollout. We are still in the early adopter phase, but are fast approaching the next phase, ramp to scale. In the early adopter phase, our focus is on planning, testing, and resourcing a scalable process that will deliver an enhanced experience to our client. Our goal is to lead our clients through this process so that we better enable them to fully leverage the system and deliver measurable results. We are seeing a meaningful percentage of clients, particularly those on the most current version of NextGen Enterprise, raising their hand to start the upgrade process. As such, we are adding resources in anticipation of this ramp. In other operational highlights, bookings came in at $34.3 million in the quarter, up 34% on a year-over-year basis. While the comparator was low due to the impact of the pandemic in the prior year, we believe our solid booking momentum speaks to the advantages of our solutions in certain medical specialties and attractiveness of the breadth of our solution. New client wins accounted for over 25% of bookings, and we note that we closed a few seven-figure deals in the quarter, spanning both existing and new clients. Speaking of large transactions, I'll provide color on a few of those larger transactions. The first one is a federally qualified health center, or FQHC, that does great work focusing on whole person care, serving over 38,000 patients across 48 facilities. The prospect recognized how our comprehensive offering, which supports both physical and mental health and includes virtual visit capabilities, could address their current needs and will scale to support their planned growth. We look forward to supporting this client and their mission going forward. I would also like to mention an expanded relationship with the National Medical Group with over 2,300 physicians. Our new agreement provides solutions that surround our core offering, including mobile, virtual visits, automated rules engine, and appointment reminders. It is rewarding to see how being a trusted advisor supports our clients' growth. Now, the Q1 results. Starting with total revenue, the company generated $146.1 million in fiscal first quarter, an increase of 12% year over year. Of this total recurring revenue accounted for 132.4 million or 91% and was driven by strong performances in our managed services, EDI and subscription businesses. Managed services revenue of $29.4 million grew by 31% due to continued growth in our managed cloud services and revenue cycle management, and year-over-year comps reflecting the impact of the pandemic last year. In a change from recent quarters, client encounter volume for the quarter was at or above pre-COVID levels. EDI and data generated $26.2 million in revenue this fiscal quarter, growing 13% over the year-ago period as transaction volumes improved and the year-over-year comps reflected the impact of the pandemic last year. Software subscription revenue, which is at the crossover point to becoming our largest revenue category, generated at 38.3 million in fiscal first quarter and grew 8% year over year. The growth this quarter was fueled by clients continuing to incorporate our solutions to better engage their patients and improve the patient provider experience. Consistent with our past commentary, subscription services growth moderated from recent quarters due primarily to the tougher comps, a stronger adoption of select subscription services like telehealth boosted the prior year period. Software maintenance and support revenue of $38.5 million was flat with the prior year period and slightly better than historical trend. Non-recurring revenue of $13.7 million increased 21% over the same quarter last year. Software license and hardware revenue of $7.2 million grew over 50% year-over-year. This performance reflects timing of larger deals in the quarter and benefits from lower year-over-year comparison. Gross margin of 50.2% represents an increase of 90 basis points from the same quarter a year ago, due in large part to a mixed shift favoring managed services and EDI revenue, which benefited from higher volumes, leading to higher gross margin for those services, and a reduction in amortization of acquisition-related software technology. The benefit was offset partially as we started to add staff to support the spring 21 rollout. Turning to operating expenses, SG&A of $48.5 million increased by $7.7 million compared to a year ago. This increase includes the accrual of separation costs associated with the departure of our former CEO, as well as increased legal expense primarily related to the preparation for the shareholder trial. Net R&D of $19.3 million grew 6% over the year-ago period. Net R&D reflects increased gross spend due to project timing and slightly lower capitalization, which increases net R&D expense. Our GAAP tax rate was approximately 16%, with a non-GAAP tax rate of 20%. On a GAAP basis, Q1 fully diluted net income per share was $0.04 compared to $0.01 net loss per share in the fiscal first quarter of 2021. On a non-GAAP basis, fully diluted earnings per share for the fiscal first quarter of 2022 was $0.25 compared to $0.21 in the year-ago period. Turning to the balance sheet, we ended the first fiscal quarter with $63 million in cash and equivalents and no balance outstanding on our line of credit. DSOs in the quarter were 46 days, a decrease of three days from the previous quarter. Capital expenditures, excluding capitalized R&D, was $1 million for the quarter. Capitalized R&D was $5.5 million for the quarter. Free cash flow generation was negative this quarter, reflecting a higher than average bonus payout percentage from overachievement of fiscal 21 goals. We expect free cash flow generation should return to near historical levels for the remainder of fiscal year 22. Now on to our fiscal 22 financial guidance and closing comments. As noted in the press release, we are raising our fiscal 22 revenue guidance at this time by $2 million. So the new revenue range is $576 million to 586 million. While the fiscal first quarter's performance was clearly strong and well-balanced, we believe that given the number of variables, including the COVID Delta variant, it is prudent not to get out over our skis, particularly after one quarter. Those of you that have followed the story for some time know that the potential timing of a few large software transactions can impact any single quarter's performance, but over time the trend typically returns to normal. While managed services and EDI generated 31% and 13% year-over-year growth in Q1, for the full fiscal year, we see managed services and EDI data generating healthy year-over-year growth in the high single digits. Our current outlook incorporates our belief that the volume spike we noted for Q1 will be temporal, that Q2 through Q4 have, on average, two less workdays than Q1, and we're monitoring the known unknowns of the COVID Delta variant. which may have an impact on service volumes for our clients. We expect subscription revenue to grow in the high single-digit range for the balance of this year. Gross margins for the fiscal 22 will reflect increased personnel associated with spring 21 upgrade and slightly higher amortization of previously capitalized R&D. As noted in prior calls, we are making ongoing investments in sales and lead generation personnel and enhancing our offerings. This will accelerate throughout the remainder of this fiscal year, and therefore we are reaffirming our non-GAAP EPS range of between 89 and 95 cents per share. For perspective, I recently looked back at our commentary in prior years. In fiscal 20, we talked about our expectation for annual GPS range to be in the low 80 cent level through fiscal 23 as the company invest in longer term growth opportunities. And revenue would grow at an increasing pace. Since fiscal 2020, our revenue growth trajectory has steadily improved and our fiscal 22 non-GAAP EPS is actually higher than we envisioned back in fiscal 2020. Reviewing the significant progress the company has delivered may provide useful context when looking at forecasts for fiscal 22 and beyond. Before we close, I'd like to provide an update on a long-standing legal matter. As noted in the 2021 10-K, the Hussein trial was scheduled to start on July 6th, and it did. The jury deliberations began today. While we believe we will prevail and do not have liability, however, if the jury determines otherwise, then the appropriate accounting treatment would be to record the accrual as of June 30th before finalizing and filing the 10-Q. First, we do not think we are liable. And second, if the jury sees this differently, we would view this as a non-recurring item and would exclude the expense from our calculation of non-GAAP EPS. We see NextGen as a revenue growth acceleration story. We just reported a 12% growth driven by strong balanced performance of our portfolio. We also raised the midpoint of our fiscal 22 revenue target and have clear line of sight to achieving our longer-term annual revenue growth rate target of 5% to 8% based on our platform's breadth that addresses the most important trends in healthcare, and especially the interaction between the patient and the provider, what we call our surround strategy. The growing number of targeted medical specialties and other integrated pair models, provider models, where our solutions have a clear advantage, You can see this in the positive momentum in new client wins as well as some of the larger deal sizes NextGen has called out. And finally, our continued reinvestment in commercial operations that is critical to our ability to execute and elevate our clients' overall performance and satisfaction. In closing, I am pleased with the overall momentum. and diversified growth we generated in the quarter. NextGen is making the right investments to drive the adoption of Spring 21 platform and overall revenue growth longer term. This concludes my review of the first fiscal quarter, and let's move to questions.