NextGen Healthcare, Inc.

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.

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.

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.