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spk05: Welcome to the NextGen Healthcare Fiscal 2022 Third Quarter Financial Results Conference Call. Hosting the call today from NextGen is David Sides, President and Chief Executive Officer, Jamie Arnold, Executive Vice President and Chief Financial Officer, and Matt Scallo, Vice President of Investor Relations. Today's call is being recorded, and now I'll turn the call over to Matt Scallo. Hello.
spk00: Okay, thanks, Leo. And before we start, I'd like to remind everyone that the comments made on this call may include statements that are forward-looking within the meaning of the federal securities laws, including and without limitations, statements related to anticipated industry trends, the company's plans, future performance, products, perspectives, and strategies. Risks and uncertainties exist that may cause results to differ materially from those expressed in forward-looking statements, including, among others, those risks set forth in the company's public filings with the U.S. Securities 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 contain certain non-GAAP financial measures. For our earnings results, the GAAP financial measures most directly comparable to each non-GAAP financial measure used or discussed And a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our latest quarterly earnings release that was filed with the SEC and is posted to the investor relations section of our website. This release also provides qualitative descriptions of how we have calculated non-GAAP financial measures contained in our guidance. At this time, I'd like to turn the call over to our President and CEO, David Sides.
spk03: Thank you, Matt, and everyone on the call today. Over the last few months, Jamie, Matt, and I have been busy speaking with a number of investors that are new to the story, and we appreciate your interest. Since joining the company, I've made raising the company's long-term growth rate a top priority. While NextGen is already delivering accelerating revenue growth, having generated 2% growth in fiscal 20, 3% growth in fiscal 21, and and now approaching mid-single digits in fiscal 22. But I'm challenging the team to achieve even higher levels, and at the same time, to keep an eye on the bottom line. One way to keep focused on this balanced growth ambition is to incorporate the Rule of 40 into our internal planning process. For those not familiar, the Rule of 40 is prevalent in SaaS software investing, where you combine total revenue growth and adjusted EBITDA margin into a single percentage. It's a way to compare value generated by SAS models at different stages of maturity. While we are not a pure SAS company, we're moving in that direction as we continue to shift to a highly recurring revenue model, and so we believe this is a useful metric to frame our longer-term financial goals. If you look back a few years using this rule, we would see that NextGen has made steady progress moving from 18% total in fiscal 19 to 20% total in fiscal 20 to 23% in fiscal 21 and now approaching mid 20s in fiscal 22. We anticipate continuing to grow this measure by two to three percentage points a year longer term. In the near term, revenue growth will be the main driver while earnings leverage should materialize thereafter. And I would also reiterate our comfort with an annual target revenue growth rate of six to 8% next year, driven by the strength of our comprehensive offering and commercial capabilities. This higher growth rate is the end result of effective teamwork across departments and individuals from strategic planning to product management. from marketing to R&D and onto our go-to-market execution. A highly coordinated effort, all to achieve NextGen's mission. All we think about are ways to help independent physicians ease their workload and manage the risk and complexity in their practices. We constantly question the status quo. How can we help them automate repetitive tasks? How do we help them meet ever-changing regulatory requirements? And ultimately, how do we support them as they deliver great clinical care? This focus sets NextGen apart. To achieve our mission and elevate NextGen's growth profile, we have spent considerable time enhancing a comprehensive, long-term strategic plan. This process is led by our Chief Growth Officer, Sri Velamore, who came to NextGen very familiar with our technology, product offerings, and capabilities from his prior career as a consulting partner at McKinsey. This process also had significant input from core commercial teams, as well as the executive team, and reviewed at the board level. As I mentioned on our last call, I'm excited about the new board members and the expanding breadth of experiences and insights they bring. I believe our engaged board will be vital to shaping NextGen's long-term strategic plan and future direction. We look forward to providing more visibility into our plans and longer-term growth trajectory, along with a deeper dive into key assets that can unlock future value at our upcoming investor event this spring. More details to follow. Now shifting to certain trends in our fiscal third quarter performance. NextGen continues its positive momentum, winning new business. Fiscal third quarter new client wins accounted for well over 25% of total bookings. This strong performance reflects the company's focus on medical specialties, the breadth of our solutions, and the continued strong execution from our commercial team. I'm excited to say NextGen closed a handful of seven-figure deals again this quarter, and we are beginning to see the positive influence of consolidation in the independent ambulatory space. Yes, I said positive influence. Let me explain. While most investors are aware of the ebbs and flows of hospital-driven consolidation trends over the past few decades, the independent ambulatory space is now seeing provider groups that value their independence acquiring other practices with the support from well-financed investors. As these practices grow in the number of providers, services offered in complexity NextGen becomes the obvious choice to provide not just data, but clinical and financial insights. Let me provide an example. In the fiscal third quarter, NextGen had a nice win adding a large mission-driven provider of clinically integrated eye care. This organization has been growing rapidly and now has over 1,000 providers across ophthalmic and optometry clinics as well as surgery centers. They operate in hundreds of locations across multiple states and are well financed to continue their expansionary goals. NextGen beat multiple competitors to win this important client due to our longstanding presence and commitment to total vision care as well as the breadth and scalability of our solutions. We'll be implementing our core practice management and EMR offering along with certain surround offerings like hosting, plus our Merck Connect, financial analytics, and additional services. It's an exciting opportunity and speaks to the true value of NextGen's offering and how we win in the market. While Jamie will provide the details on the quarter, I also wanted to address a few questions we've been fielding recently. Regarding how a higher inflation and interest rate environment affects our business, first, NextGen has a solid balance sheet with no debt and a resilient business model that generates significant free cash flow. Second, a portion of our client contracts have an automatic annual inflation hedge tied to the consumer price index. So not only are we well protected in an inflationary environment, but we are positioned to thrive in it. Turning to the current tight labor market, We see some interesting potential outcomes for NextGen. First, many of our clients are experiencing labor shortage and higher staff turnover. And we're seeing customers that in the past probably would not have discussed outsourcing activities like revenue cycle management now actively evaluating and engaging us for these services. As an example, in fiscal third quarter, we were able to cross-sell RCM services to an existing client, a multi-specialty group operating out of over 10 locations in Texas. The ROI on this service was so compelling, especially in this environment, I can see other clients making the same decision. But it's not just about the value of RCM here, it's a strong relationship NextGen has built with this client over the years. The trust that has been earned that makes a client turn to NextGen first. So we see this tight employment market as an incremental positive tailwind for select solutions. As for NextGen itself, the investments we have made in our culture are paying dividends in being able to attract the talent we need. Of course, it's challenging to find top data scientists as we expand our data offerings, but we are optimistic given our vision and ability to attract talent. And one of the advantages of our hybrid work model is that it allows us to hire broadly across the United States and India. Not only does a hybrid work model save on real estate footprint costs, but it better positions NextGen to find top talent. Lastly, we've received a number of questions regarding my perspective on M&A and how it might affect the company's stance going forward. What I'll say is NextGen has a singular focus on accelerating its growth profile. I'm agnostic as to whether this growth is driven by internal or external means. Let me make clear. we expect to drive 68% revenue growth through organic means. NextGen has considerable assets that with investment will likely drive significant future growth. When it comes to external activities, NextGen has ample dry powder. We have a disciplined process with multiple hurdles in which many targets just don't make the cut. Critical elements include strategic fit, cultural fit, growth above next-gen's level, clear line of sight to revenue and cost synergies, and at a price that is not diluted in the first 12 months. We favor bolt-on transactions that add a technology or capability that we've decided not to build ourselves. However, we won't rule out larger transactions. And with that, I'll ask our CFO, Jamie Arnold, to provide the important details on fiscal third quarter.
spk01: Thank you, David. Let's begin with a few operational highlights. Bookings came in at $37.7 million in the quarter, up slightly on a year-over-year basis, and on track with our expectations. And for another quarter in a row, new client wins accounted for over 25% of bookings. As David noted, NextGen closed a handful of seven-figure transactions in the quarter. These wins reflect both existing and new clients and span across a range of medical specialties, from neurosurgery to ophthalmology to multispecialty. In certain cases, NextGen is partnering with clients that are moving away from managing multiple different legacy systems and consolidating on our fully integrated and scalable solution. In other cases, we're working with clients to add NextGen surround solutions to enhance their productivity and customer experience. These wins reflect our strong commercial capabilities and ability to execute, as well as the market's growing appreciation of NextGen's core value proposition. Now onto the fiscal third quarter financial results. NextGen generated total revenue of $149.7 million in the quarter, an increase of 6% year over year. Of this total, recurring revenue accounted for $134.5 million, or 90%. Our largest revenue category, software subscription services, generated $41.2 million in the fiscal third quarter, or 8% growth year over year. Clients continue to adopt our surround solutions to better engage their patients and improve the patient-provider experience. Managed services revenue of $28.9 million grew by 5% due to continued growth in our managed cloud services and continued strength in revenue cycle management as Q3 client encounter volumes continued to be strong even as the Omicron variant grew late in the quarter. EDI and data generated $26.2 million in revenue this fiscal third quarter, up 5% over the year-ago period. as transaction volumes remain strong. Software maintenance and support revenue of $38.2 million was up slightly over the prior year period. Non-recurring revenue of $15.2 million increased 13% over the same quarter last year and reflects several large perpetual license transactions. along with the strength of services bookings in prior periods. Gross margins of 50.4% remained flat year over year, reflecting added staff to support the Spring 21 rollout and increased hosting costs, offset by higher license revenue and reduction in amortization of acquisition-related software technology. Turning to operating expenses, SG&A of 47.2 million decreased by 1.7 million compared to a year ago. The decrease is due to tight controls in G&A and reduction in shareholder litigation expense offset by increasing investments in sales and demand generation personnel. Net research and development of 19.4 million grew 7% over the year-ago period, and represents 13% of total revenue. Net R&D spend reflects increased growth spend due to project timing and slightly lower capitalization, which increases net R&D expense. Our gap tax rate was approximately 33%, with a non-gap tax rate of 20%. On a gap basis, Q3 fully diluted net income per share was $0.08 compared to net income of $0.01 per share in the fiscal third quarter of 2021. On a non-gap basis, fully diluted earnings per share for the fiscal third quarter was $0.24 compared to $0.26 in the year-ago quarter. Turning to the balance sheet, we ended the fiscal third quarter with 49.4 million in cash and equivalents and no balance outstanding on our line of credit. Our cash balance is down from the fiscal second quarter due to the initiation of our share buyback plan. As you may recall, we announced the board approval to purchase up to 60 million of our stock in October. And in fiscal third quarter, we purchased 35.9 million worth of stock in the open market at a weighted average repurchase price of $16.53, or approximately 2.2 million shares. This program underscores our confidence in our balance sheet and strong cash flow generation. We believe our positive business momentum provides ample capacity to return cash to shareholders while continuing to execute on our growth strategy. DSOs in the quarter were outstanding at 43 days, a decrease of one day from the previous quarter. Free cash flow this quarter was $9.7 million, reflecting a carryover from the proxy contest of $9 million and repayment of employer tax deferral due to the pandemic. Free cash flow generation should return to historic levels for the fourth quarter. Now to our fiscal 2022 financial guidance. As noted in the press release, we are raising our guidance for fiscal 22. For revenue, the updated guidance range is $591 million and $595 million. and non-GAAP EPS guidance is raised to 96 cents and $1. Our fiscal third quarter's performance was strong and well-balanced. We continue to monitor the impact of the Omicron variant While potentially disruptive in the early month of fourth quarter, it appears to be on the wane. As we discussed last quarter, there are approximately five fewer business days in the back half of the fiscal year compared to the front half. And patient volumes are historically lower in the fiscal fourth quarter due to deductible resets, which will have an impact on our managed services and EDI lines of business. And 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 trends typically smooth out. We continue to expect subscription services revenue to grow at approximately 10% for the full year. Gross margins for fiscal 22 will continue to reflect the increased personnel cost associated with spring 21 implementation process and slightly higher amortization of the previously capitalized R&D. We continue to make ongoing investments in sales and demand generation and R&D to enhance our offerings. These investments will accelerate throughout the remainder of this fiscal year, and yet we are raising our non-GAAP EPS range. 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 total revenue growth longer term. And now let me turn the call back to David for closing comments.
spk03: Thank you, Jamie. And I did want to add to your comments regarding the company's share buyback activity. This action reflects NextGen being more responsive to shareholder interest with a focus on driving a return on capital. But I would also like to add that key members of the executive team Also purchase shares in the open market over the last quarter, as we are all big believers in aligned interest. I'll wrap up today's call by reiterating the company's focus on driving accelerating and profitable revenue growth. NextGen has significant untapped potential. We have a refreshed board with an excellent breadth of experience in healthcare and technology. We have the right leadership, a clear strategy, and attractive assets to go after high growth market opportunities. We will continue to make the right investments that position NextGen to win now and in the future. And I was just informed that NextGen will be honored by Forbes as one of America's best employers. So it's an exciting time here at the company and hope you'll join us as we continue to execute on our strategic initiatives. This concludes my comments. Let's move to questions. Operator?
spk05: To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. In the interest of time, and to get to as many questions as time permits, we ask that you limit yourself to one question and one follow-up. Thank you. We'll take our first question from Jeff Garrow, Piper Sandler.
spk02: Hi, and thanks for taking the question. It's nice to hear you cement the higher revenue growth profile for the next fiscal year. I want to ask what the incremental revenue growth drivers are to get from where you are now to 6% to 8% and maybe more specific. What speaks in there on client patient volumes, retention, acceleration of recent demand trends, or any new products or markets that you'll be entering?
spk03: We'll go through all those at Investor Day, but at a high level, let me just give you some examples, Jeff. So the subscriptions growing at 10% is our largest revenue line item that we see continuing to grow. We've talked about in past calls about some of the growth areas where we're investing, like interoperability, data, some of our services, and our population health or value-based care solutions. We expect all of those to accelerate as we've started to make investments in those this quarter and last quarter, and we'll continue that through this year. And those should then add in additional growth. On the retention, we've seen that be where we expect it to be, and that's why we don't report it anymore. So you can assume that that's also at a good level going forward and not a headwind from that perspective. And then new client wins. So these new client wins that we've had the last few quarters really add in the ability for us to sell our surround solutions into those clients if they didn't buy everything in the first round, which nobody does. So that gives us additional sales opportunities for growth next year. And so as we looked at our preliminary plans for a budget, we're comfortable with that 68% growth for next year.
spk02: Excellent. All very helpful. And one more follow-up from me on maybe the bookings and really just trying to understand the balance between the solid bookings number, the really strong trends in bookings coming from new clients, and the deal size, It seems to be reflecting clients adopting more of your profile against what I think might be the biggest software license quarter in two and a half years, which I would think would come more from an existing client. So if you help us understand the kind of push and pull there as we think about the recurring revenue profile going forward.
spk03: So our preference is still to sell, you know, as much recurring revenue as we can. But to your point, it was a very large licensed software deal this quarter that kind of pushed that forward. We also talked about some of those larger clients that we had. You know, 1,000 physicians for a win is a big client for us. there's still more room in that client. We're still talking with them, starting to get that implementation started. I'm actually having dinner with them next week. And, you know, we'll see where that relationship goes. But we're excited about, you know, those kinds of relationships and especially the ones that are consolidating or that are, you know, growing that we talked about in the comments because, you know, there's, opportunity to then move those things forward. We've mentioned the deal in Texas where we added our RCM services. We're investing in RCM. We have, you know, not as much of our client base on our RCM services as we think we're able to capture, and so you'll see that as, to your previous question, another place for growth. So it's really all of those add up for new sales, a good bookings quarter. And as we think about next year and going forward in the future, we're really working on, okay, how do we get systematic about selling some of these larger deals to get some of the sales, to continue the sales momentum we have, but then accelerate it to get the growth rates up in the next periods.
spk05: We'll take our next question from Stephanie Davis of Silicon Valley Bank Lerank.
spk07: Hey, guys. Thank you for taking my question. I apologize for the hoarseness. I've got some COVID going on right now.
spk01: Oh, no.
spk07: It's no fun. But I guess my big question is last quarter you attributed the conservative forward guidance to just a time and pull forward. You know, this quarter you're putting up another broad-based beat. Is this a read-through that we can see that some of the new products and the surround sound strategy is starting to more meaningfully surprise to the upside? Or is there anything else in timing that we should be considering? Or just conservative?
spk01: No, Stephanie, I think we've talked about before, and Jeff asked the question about the perpetual license. And, you know, we've often said that, you know, perpetual license, the larger deals are harder to predict in terms of timing. And when you close a large deal, and the one that David just talked about, the timing of it sort of made this quarter look probably a little better than we thought when we came into the quarter. And so, and as you know, License revenue gets a little spike on the license number and also on your gross margin and operating margin. So I think we saw a little extra strength in the license this quarter that we don't anticipate going, at least in Q4. And then on the other side, we had a really strong volume from managed services and EDI, and as you know from prior years, as we go into our fiscal Q4, the first quarter of the new calendar year, deductibles reset, and we typically see a little fall off there. So all of that is factored into our forward guidance for the balance of this year.
spk07: Well, let me try asking it in a different way. You saw a large transaction close last quarter. Another big benefit from license sales this quarter, and one of your competitors pre-announced last night was likely a chunky license sale win. Is there anything in the market on the EHR side that's causing more of an embrace of these large license sales?
spk03: There could be some from government entities that are buying if they've gotten a lot of money through some of the recent appropriations that we have seen some clients say they want to buy a perpetual because they're licensed because they're not sure where the money comes from in future periods. We'd prefer to sell that over multiple periods as a subscription as kind of our SaaS offering. But there has maybe been a little bit of that because of the government stimulus money that's out there for some of those clients.
spk07: All right. That's super helpful. I'll hop back in the queue. Thanks, guys.
spk05: We'll take our next question from Sean Dodge of RBC Capital Markets.
spk04: Thanks. Good afternoon. Maybe taking a flip side of Jeff's earlier question around next year's revenue growth target, if we look at the bookings in this quarter, we're strong. Growth in bookings leading up to now is averaged, I think it's been in the mid-20s over the last five quarters previous to this. And when we look at the high levels of recurring revenue in your model, I'm curious as to why we're not seeing this convert into faster revenue growth. Is it Is it as simple as some of these are implementing, those can take time, and these wins are just now beginning to layer into revenue, and that's happening? Or is there something else mechanically I'm missing here in the conversion of backlog to revenue?
spk03: I think that's mainly it. So there's a three- to six-month lag as we implement, and then they layer in. So the layers do stack up over time. So to your point – If we can continue to increase bookings or keep it in this level, it does stack up. And that's why we're confident in accelerating our revenue growth in the, you know, what we're showing for 22 and what we intend for 23.
spk04: Okay. Okay. Great. And then... I guess maybe on the spring 21 release and upgrade, David, last quarter you shared some metrics around the number of clients that had signed up to upgrade. I think you had said 40% of your target clients at that point had signed up. Where are you on that now, and how are those that have already opted in, how are they progressing?
spk03: We're closing in on just about 50% of those that are contracted. We're slotting people in now. We've been working on the methodology to become more predictable. We're setting up a 10-week upgrade methodology. So we're becoming very methodical on how we go through this process.
spk01: I mean, it's progressing as we originally described it. It's It will take approximately two years to go through the entire customer base. The fact that we've got close to 50% have signed SOWs to take the upgrade. So it's up a little, you know, from the previous quarter. And we're committed to the three-year goal that we've previously described in terms of surround bookings. Broadly on target. Yeah.
spk04: Okay. All right. Thanks again. Yep. Thanks.
spk05: And once again, that is Star 1, if you'd like to ask a question. We'll take our next question from George Hill of Deutsche Bank.
spk06: Oh, hi. It's Maxima on for George. Thanks for taking the questions. So you talked about the strong cross-sell opportunities of RCM services to existing clients. Could you maybe give us some, remind us the ROI and key value proposition that help NextGen win the contracts, please? And then what's the level of penetration or probably the white space available for you to cross the RCM services to existing clients? Thanks.
spk03: Thanks for the question. So the value prop for the RCM services really around, especially now in this labor market, we can automate and run an RCM service to a higher level than a client who may be struggling to find replacement or find people with the expertise to run the system with the technology. So, for example, we'll have better collections. We'll help with revenue. On the expense side, we're usually less expensive due to the high levels of automation that we have inherent in our offering. So that labor savings... is attractive. It's also in this current economy a good driver for us as we are in market because people are struggling to attract talent. So that's good for us. And as far as what percentage of our base, it's about 6% of our base also takes our RCM services. So that gives us a lot of room to really grow those services. There's a lot of cross-sell that we could realize there, and that's where we're focused as one of the main growth areas.
spk06: Great, thanks. Maybe a follow-up. Could you give us an update on the level of turns you're seeing in the quarter versus your expectations?
spk03: Yeah, it's essentially at our expectations are better in that, you know, we don't report on churn anymore now that it's gotten to be less than our target. And we would report if it went higher, I guess. So what we've said in the past is since we don't report it by not saying anything, we're saying it's within our expected range.
spk05: And once again, that is star one on your touchtone phone. One moment while we queue. And there are no further questions at this time. I'll turn the call back over to David Sides for closing remarks.
spk03: Thank you all for joining today. We really appreciate your interest in NextGen and appreciate your questions. We'll look for an Investor Day event to come sometime in early May. perhaps even as early as May 3rd at the NASDAQ offices where we're listed. We'll, of course, let you know as we get closer to that time. But, again, thanks, everyone, for joining the call, and we look forward to talking with you again soon.
spk05: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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