NextGen Healthcare, Inc.

Welcome to the NextGen Healthcare Fiscal 2022 Fourth 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 I will now turn the call over to Matt Scallo. Hello.

Thank you, operator. 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 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 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 in 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 good afternoon, everyone. Earlier this month, we preannounced our fiscal fourth quarter results and issued fiscal 23 financial guidance. and hosted our first investor event as a new management team. We covered a lot of ground during the investor event, providing a clear overview of our business across three domains, enterprise, office, and insights. We highlighted NextGen's top goals, including our path to accelerating revenue growth and our target 10% rate by fiscal 25, piece to longer-term operating leverage, an expanding adjusted EBITDA figure, and the Rule of 40 performance metric, which combines revenue growth and adjusted EBITDA margin. For those of you who are not able to attend the investor event, I would strongly encourage you to listen to the replay on our website. Now let me turn to my favorite topic, growth. For fiscal year 22, NextGen generated 7% revenue growth, an acceleration over 3% growth in fiscal 21, and 2% in fiscal 2020. This growth was driven broadly across product lines, but consistent with the investor event, I thought I would provide a few comments across each domain. Starting with enterprise, which we define as practices with 10 or more providers, is our largest practice area by revenue. And we're growing faster than the industry average driven by new client wins and further penetration of existing clients with our expanding breadth of solutions. Our success in this market area is built on longstanding and trusted client relationships, which is particularly attractive now with such uncertainty and transition at a number of industry participants. The last point I'd like to make on our enterprise group is we remain on track with our three-year target of incremental $100 million in bookings from our surround solutions through fiscal year 2024. Now turning to our second domain, office, which focuses on the smaller independent ambulatory practice market. Think of a practice with fewer than 10 physicians, which we service with our multi-tenant TAS offerings. This area continues to grow well, reflecting the strength of our SaaS solution and our success providing managed services and revenue cycle management solutions during a period when many of our clients are struggling with labor shortages. We are confident the office domain can continue to grow double digits as we continue to execute and expand into slightly larger practices and adjacent medical specialties over time. And our third domain, what we call Insights, offers significant untapped potential. We spent considerable time outlining the opportunities in this exciting area at our investor event, but I won't repeat it here. However, NextGen is investing in a number of solutions and strategies across connectivity, analytics, and outcomes that will provide a solid foundation for strong growth in this business over the long term. We entered fiscal 2023 with solid momentum. And our fiscal 23 revenue guidance of $628 million to $640 million reflects our competence in continuing to execute on our growth. We are also introducing adjusted EBITDA into our fiscal 23 financial guidance. I think it's important to call this out as we see this as another step the company is making to improve visibility, particularly as investors now track our progress on the Rule 40 metric going forward. My final comment is on the company's disciplined capital deployment strategy. NextGen has an attractive business model that generates positive free cash flow, has a healthy balance sheet, and access to significant capital. We continue to have a board-approved share buyback program in place, and we envision other business development activities, such as M&A, to contribute to our longer-term growth goals. And with that, I'll ask our CFO, Jamie Arnold, to provide the details on fiscal fourth quarter and our outlook. Thank you, David.

Before diving into the fourth quarter results, I would like to comment on our fiscal year 2022 accomplishments. Total revenue increased 7% compared to a year ago. Subscription services revenue of $162.6 million grew 10% as clients continue to adopt our surround solutions. Perpetual software licenses grew approximately 9%, primarily due to our success partnering with existing clients who want to standardize on and broaden the use of NextGen across their enterprise. On a gap basis, fully diluted earnings per share was $0.02 compared to $0.14 a year ago. Recall that in the first half of fiscal 22, we had significant expenses associated with the proxy contest. On a non-GAAP basis, fully diluted earnings per share was 98 cents compared to 98 cents in the prior year and ahead of our full year guidance provided at the start of the year. These results are a strong reflection of execution on the commercial side and deliberate cost management efforts put into place at the onset of the pandemic, balanced against investments made to support long-term growth plans. Now turning to the fourth quarter financial results. Starting with bookings, which came in at $41.4 million in the fourth quarter, an increase of 18% on a year-over-year basis. We saw a strong demand for professional services and managed services, particularly patient pay. New client wins accounted for close to 25% of bookings for the quarter based on outstanding bookings from inside the base, and we expect the return to excess of 25% in the new fiscal year. We closed several seven-figure transactions in the quarter from both existing and new clients, both of which are focused on adopting the full portfolio of offerings we provide, all in. NextGen is partnering with clients that are moving away from managing multiple different legacy systems and upgrading to our fully integrated and scalable solution. This is the case with David's example of independent provider-led consolidation. In other instances, we are working with existing clients to add NextGen surround solutions to enhance their productivity and patient 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. we generated total revenue of 151.3 million in the quarter, an increase of 5% year over year. Of this total, recurring revenue grew 6% and accounted for 137.2 million, or 91% of total revenue, and was driven by solid performances in our subscription services, managed services, and EDI businesses. Software subscription services generated 42.1 million in the quarter, Fiscal fourth quarter, an increase of 10% year over year. Growth came from strong performance in next gen office and next gen enterprise surround offerings, such as telehealth and mobile, which enable physicians to better engage their patients and improve the patient provider experience. Managed services revenue of 28.9 million grew by 7% due to continued strength in our managed cloud services as well as solid performance and revenue cycle management. Q4 client and counter volumes were ahead of our expectations. EDI and data generated $26.4 million in revenue this fiscal fourth quarter, up almost 3% over the year-ago period, as transaction volumes remained strong. Software maintenance and support revenue of $39.9 million was up approximately 4% over the prior year period. This reflects strong client retention and some upside from large expansion clients continuing to pursue a perpetual license and maintenance model. Non-recurring of $14 million, or a decrease of 5% over the same quarter last year, reflecting the lumpiness of contract timing we have mentioned in the past. Turning to operating expenses, SG&A of $50 million increased by 2% compared to a year ago period. Tight cost controls and G&A offset increasing investment in sales and marketing. For modeling purposes, please be aware of the timing of certain events, like our national sales meeting or large client user group that did not happen in person in the year-ago period. This will create lumpiness in our fiscal first quarter. As David alluded to earlier, we had some nice wins from new and existing clients early in the quarter, which allowed us to pull forward spending on investments we see as having a high return on investment. These include robotic process automation and overall process improvement activities, as well as investments related to both our office and insights domains. A number of these projects kicked off in the fiscal fourth quarter and continue into the first quarter, and then begin to roll off in the second quarter. Net R&D expense of $19.4 million decreased $2 million from a year ago due to a higher capitalization rate, 28% in the current quarter, 21% in the previous year. Fiscal fourth quarter gross R&D spend represents 18% of total revenue, and net R&D spend represents 13% of total revenue. Our GAAP tax rate was approximately 85%, with non-GAAP tax rate of 20%. On a GAAP basis, Q4 fully diluted net income per share was one cent compared to a loss of one cent per share in the fiscal fourth quarter of 2021. On a non-GAAP basis, fully diluted earnings per share for the fiscal fourth quarter of 2022 was 19 cents compared to 21 cents in the year-ago quarter. Now, turning to the balance sheet. We ended fiscal fourth quarter with $59.8 million in cash and equivalents and no balance outstanding on our line of credit. Our cash balance rose just over $10 million compared to the fiscal third quarter due to strong operating cash flow. We did not buy back any shares in the fiscal fourth quarter. We believe our positive momentum provides ample capacity to return cash to shareholders while continuing to execute on our growth strategy. DSOs in the quarter were 46 days, a decrease of three days from the same period last year, but an increase of three days from the fiscal third quarter. Pre-flash flow from this quarter was 8.7 million, reflecting strong year-end operating activities partially offset by capitalized software costs. Now onto our fiscal 2023 financial guidance. As noted in the press release, We are confirming the guidance that we provided at our investor event two weeks ago. And as David mentioned in his prepared remarks, we are adding an adjusted EBITDA metric into the guidance to improve visibility into our Rule of 40 commentary going forward. Let me review the main components of our fiscal year 23 financial guidance. Fiscal 23 revenue is to be in a range of between $628 million and $640 million. or 5.3 to 7.3% year-over-year growth. Key drivers in our enterprise domain include subscription services, managed services, and revenue cycle management. Within our office domain, we continue to see consistent growth in the core, which is offered as a multi-tenant SAS, RCM upsell, and other managed services, which includes chronic condition management. And in Insights, we believe various initiatives around connectivity discussed at our recent investor event are expected to start to impact our results in the second half of fiscal 23. The timing of Insights growth in fiscal 23 is important. For modeling purposes, we would expect the second half of fiscal 23 to reflect higher year-over-year growth in the first half due to incremental momentum and insights and easier comparisons with the year-ago period. To aid in your models, we are forecasting growth in the first half of 23 to be in the range of 4 to 6 percent. Gross margins for fiscal year, fiscal 23, are expected to compress slightly as product mix shifts, leans more towards lower margin services, and we absorb a full year of investment in areas such as centers of excellence, R&D, and sales infrastructure. Our cost of sales expense growth will level off in the back half of the year and then be in a position for attractive leverage in fiscal year 24 and beyond. We continue to make ongoing investments in sales and demand generation and R&D to enhance our offerings. These investments will accelerate through fiscal year 2023 before leveling off in fiscal year 24. Our adjusted EBITDA guidance is for $111 million to $116 million, which compares to $114.5 million, or 19.2% of total revenue, in fiscal 22. We confirm our fiscal 2023 non-GAAP ETS guidance of $0.95 to $1. Now, factoring in our earlier comments on mid-single-digit revenue growth in the first half of fiscal 23, combined with slight compression of gross margin and increased R&D spend in the fiscal first quarter, we arrive at non-GAAP EPS ranges for the first fiscal quarter in the mid-teens. We expect this EPS level to improve progressively throughout the fiscal year. In closing, I am pleased with the overall momentum and diversified growth we generated in the quarter. We will continue to focus on profitable growth as we consider capital deployment, both internally and externally, to drive long-term shareholder value. And now let me turn the call back to David for closing comments.

Thanks, Jamie. Certainly has been a busy May for us here at NextGen, but based on the overwhelmingly positive feedback from our investor event, I'd say it's well worth it. I'll wrap up today's call By reiterating the company's focus on driving accelerating and profitable growth, 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. With respect to fiscal 23, we would expect these investments to have a bigger impact in the early part of the year. Lastly, I wanted to congratulate Jamie Arnold for receiving a Lifetime Achievement Award by the Orange County Business Journal. Great to see Jamie being recognized for attributes we see every day. Your commitment to NextGen's mission and contribution to the company's overall success over the last six years is undeniable. Thank you, Jamie. We've got a lot more work for you, so don't even think about playing that fact nine for a few more years yet. This concludes my comments. Let's move to questions. Operator?

To ask a question, you'll need to press star 1 on your telephone keypad. To withdraw your question, please press the pound key. In the interest of time, and to get to as many questions as time permits, we ask that you please limit yourself to one question and one follow-up.

And we'll pause for just a moment to allow questions to queue. And we will take our first question from Jeff Gouraud with Piper Sandler.

Your line is open.

Yeah, good afternoon. Congrats on the quarter, and thank you for taking the questions. I want to start off by asking about bookings. Now, you ended the last fiscal year growing bookings 18%, well ahead of your revenue growth targets. And I think longer term, we would expect bookings growth to converge with revenue growth targets. But based on what you see in the pipeline, is the bias for FY23 bookings more towards recent momentum extending, or that tougher comparables are a headwind to above target bookings growth?

That's a good question, Jeff. I think we expect double digit bookings growth in 23 as well. maybe not quite as much as last year, just given it's above next year, so maybe in the mid-teens, but it should still be the growth above last year.

It won't be the growth. Sorry, let me correct. Our target for next year will be for growth. It's going to be close to, you know, we're projecting somewhere in the 8% to 12% range in there. for bookings, but we're not giving guidance on bookings. But we are expecting it to continue to grow next year.

Fair enough. Sounds like the momentum is continuing near term, so good to hear there. And then maybe to dig a little bit deeper into the FY23 outlook, I wanted to ask what the areas of potential variability are in the revenue guidance. And I guess maybe more specifically, what are the assumptions around client retention, implementation pacing, and client patient volumes?

So we're taking kind of a consistent approach to last year's retention into 23. Some of the things that could lead to variability are or if we can hire to fill services positions to generate revenue from our services side more quickly. So we're focused on, we've got quite a backlog of services that we can train people more quickly, onboard people quickly, and get to those services. So that would be, to answer your question on retention, we're assuming same level as last year. And some of the variability could be around, you know, either the usual lumpiness of licensed software sales, if that happens for existing clients, and services, if we can fill those roles and hire more quickly to actually deliver those services.

Jenny? That's it. I mean, probably the area that has the most potential variability would be the software line. And that's an area that we focus on because it not only affects the revenue, but it's because it has such high gross margin, you know, it would affect. We are, you know, to be clear, you asked the question, I think, Jeff, about volume, and I would say we're assuming that there won't be any change either to the negative related to the volume. We seem to have largely recovered from COVID. We've been running for better than four quarters now, and they're back to, you know, pretty much pre-COVID level. So our assumption is that that's going to continue and that we won't see a dramatic change because of something like COVID again.

Makes sense. Thanks again for taking the questions.

Yep.

We will take our next question from Stephanie Davis with SBB Securities. Your line is open.

Hey, guys. Thank you for taking one of my many, many questions. I was hoping you could give us a little bit more color on just what you're seeing demand-wise on the ambulatory market, just given some of the hospital players coming under cost pressure in this past quarter. So, any sort of quick health check and color on how the IT wallet for ambulatory is trending would be super helpful.

We still see good pickup on the ambulatory side. You know, as we mentioned a little bit in our prior comments, there's a lot of disruption in the industry. from some of the other players that, at least in the short term, we think in the short, medium term is good for us. But the market overall is moving, and we've moved into some slight adjacencies with not just physician office or federal qualified health centers, but we've started to move a little bit into urgent care. We've seen clients look at urgent care offerings with us, sometimes combined with primary care where they're taking risk. We're also seeing some behavioral health opportunities after our initial investments there that could be promising as well. So, you know, we like the ambulatory market. Some of the moves that we've made to expand the specialties that we support, not that urgent care is a specialty, but it's a venue for behavioral health is an additional specialty. It's starting to see some traction in our pipeline.

And some of the... I'll continue.

I was going to say, Stephanie, that the other thing is that some of the practices that have been consolidating, you know, there are consolidators in the ambulatory space, and we have seen continued interest from them, particularly based on the strength of our practice management system.

And so that we see as a positive as we go into the new year.

There's dovetailing on that answer that you guys gave. We also have seen some other blowups in the space, the greater earning quarter, on increased competition of some of the new age disruptors that have gotten a lot of private market funding. Now, I haven't heard a lot about that from you guys, but there are still some private market players competing with you. I'd be curious what you're seeing in the market and kind of how you're still competing well.

I guess we're not seeing that level of competition necessarily for any new entrants so far. It's really, you know, any of those consolidators for us so far have been a tailwind in that we're picking things up. So we even have an example from last quarter where we were talking to a group That then got acquired, and they put NextGen into the acquisition. So we went up the other way, which was really good for us, but the acquirer had multiple systems. When they acquired Acquire and Evolve, they brought in kind of this really strong, you know, NextGen as a way to move that part forward. And so the value prop for us, you know, being able to do a better job with doing financials, was really resonating with some of those buyers, which is why when they acquired a company to use NextGen, they actually took it into the acquire owner company. So that was a great win for us that was unexpected and meaningful. So, you know, the goal of that trend continues as we start to demonstrate value and really put, you know, outcomes that we've achieved for clients and aligned with them together forward with them.

If they're helpful, good to be a consolidator in this market. I'll hop back in with you.

And we'll take our next question from Jack Wallace with Guggenheim. Your line is open.

Hey, thanks for taking the questions.

I want to talk about bookings and the pipeline a bit. David, you mentioned that there's a number of all-in deals this quarter. When you're looking at the pipeline, are we seeing

more momentum for the all-in deals, and then I got a couple follow-ups on that. I'd say the pipeline looks robust.

So, you know, came out of our largest sales quarter in recent history, last quarter. That continues. Usually it's the third quarter that's going to be a little bit wider for us, so we expect good results this quarter as well and go through the year. I don't know what other colors you'd like on the pipeline, Jack, but I can kind of give you some more specifics.

Yeah, and then you're saying all-in. What's interesting to me there is that that includes the Insights business, and specifically with the Insights suite of services there, how much of that was the shiny service, the real benefit to going all-in, and I'm assuming this is a competitive replacement, How much of those capabilities was the deal maker?

So far, not much.

So I'd love to tell you that it's moved those deals, but most of those deals have been moving in our sales cycle of six to nine months. So most of those deals have been moving without the analytics. I think it will start to be the goal is it's an accelerant as we get more demos to clients that are starting new or at the end stage now. But You know, the nice thing from a consolidation perspective overall in the ambulatory is people are looking for a reduction in the number of suppliers that they have. And so when we come to them with one offering that's hosted with our revenue cycle management, all the virtual visits, and analytics together, we're winning, especially in that new clients. We're trying to take up as much of the space as possible in the first win. And so that's been a great tailwind for us. I think the analytics should be additive. that we've developed some of that analytics with a couple of our really progressive clients. I've already moved it into another couple clients, and so we're seeing good movement there, but you'll see the influx needle really moving toward the end of 23. It may add in, you know, some numbers. here early, but I agree with you that it is actually helping to get everything in the first time, especially for new clients. When we're winning there, that's a differentiator for them because then they don't have to go and buy some third party like Tableau or something else and try to put that on top of it. We're bringing the whole solution at once.

I think it makes it simpler for these practices to be able to do everything they need to right from the start. Gotcha, that's helpful. And just to confirm, when the insights, the bookings convert to revenue, which of the revenue segments does that hit? Insights should mainly hit subscriptions for the most part.

There'll be subscriptions and there will be a services component to that. So you'll get both subscription revenue as well as some service revenue associated with it, depending on what the client needs from us.

Gotcha, that's helpful. Thank you.

And there are no further questions at this time. I'll turn a call back over to David Sides for closing remarks.

Thank you again for your interest in NextGen Healthcare. We look forward to speaking with you again at the end of July. And that concludes today's call. Take care, everyone. You can now disconnect.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.