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spk05: Welcome to the NextGen Healthcare Fiscal 2023 First 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 Scalio, Vice President of Investor Relations. Today's call is being recorded, and now I will turn the call over to Matt Scalio.
spk09: Thank you, 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 in the Form 10-K and any subsequent quarterly report in 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 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 the 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.
spk02: Thank you, Matt. I'm pleased to report another solid performance for our fiscal first quarter. Our commercial team continues to execute, closing a handful of seven-figure wins while delivering 14% bookings growth. These sizable wins, from both inside and outside our base, reflect NextGen Healthcare's focus on the independent provider and our comprehensive offerings that enhance the client's ability to achieve better clinical and financial results. We continue to see wins across a range of medical specialties, from ophthalmology, to orthopedics, to integrated multi-specialty groups. And once again, new clients accounted for over 25% of fiscal first quarter bookings. We believe these trends support our confidence and our growth acceleration in the fiscal second half. As for key revenue growth drivers this quarter, I call out our subscription services revenue line grew a healthy 12% and reflects double-digit growth in next-gen office, and cross-selling of our surround solutions into our enterprise base. We remain on track to achieve our target $100 million and contracted annualized recurring revenue for the surround solutions by the end of fiscal year 24. In response to some recent investor questions regarding general market conditions, I wanted to reiterate our positive outlook for the independent ambulatory market and NextGen's business model. We continue to see overall practice volumes at healthy pre-pandemic levels. This shows in our volume-driven businesses such as data and reflects an ongoing industry trend of procedure volumes migrating out of higher cost settings, like hospitals, favoring lower cost settings and independent healthcare providers. We also continue to see healthy activity levels in our current pipeline. Development activities such as lead generation and demos reflect a positive demand environment. We are not seeing much impact from economic concerns. We continue to constructively engage prospects and our clients to find ways to achieve better outcomes for all. Since our last earnings call, I've had the opportunity to meet with our largest clients in person or at our large client user group, at client sites, and at our Leaders in Healthcare Summit. They're excited about our move to cloud-native technology enhanced mobile capabilities, and our insights. It was good to get confirmation that our strategies that focus on outcomes align with our clients' strategies. So from what we are seeing from the market, our positive outlook has not changed. Turning to NextGen's business model, 91% of our revenue is recurring in nature, and we have no customer concentration risk. And we are building on this steady foundation to achieve our long-term goals. We continue to make progress on certain strategic initiatives. In fact, today we announced the sale of certain dental assets, a legacy part of the company. Through our more disciplined portfolio management process, we move forward with monetizing these non-strategic assets. It's important to note that we are adjusting our fiscal 23 financial guidance strictly to account for this transaction. Another example of our progress is the expanded relationship with Instamed that we recently announced. We are pleased that our patient pay offering is now even more accessible and easy to use for both patients and clients. We expect patient pay to contribute to fiscal year growth, and its contribution is already incorporated into our fiscal year guidance. Now let me ask Jamie to provide further details.
spk00: Jamie? Thank you, David, and let me welcome everyone to this call. I will start where David left off, strategic activities. specifically the sale of the certain dental assets. This transaction, while relatively modest in financial terms, is a good example of how we are increasing focus on our broad portfolio of assets and their contribution to strategic value. The commercial dental assets include our legacy dental system, quality dental web, our multi-tenant SAS offering for dental practice, and their customer contracts. but excludes EDR, which is the dental record system we license to federally qualified health centers. These assets generated approximately 10 million in annual revenue per year, and while they generated positive contribution margin, they produced no growth over the last few years and would have required significant incremental investment in future periods. We are pleased these assets have found a good home and we'll discuss the transaction's impact on our fiscal year 2023 financial guidance later in my prepared remarks. Now let me turn to the first fiscal quarter of 2023. First quarter bookings came in at $39.2 million, an increase of 14% on a year-over-year basis. Adding to David's comments, We continue to see increased demands across our client base for surround solutions like managed services and EDI. And new client wins accounted for over 25% of bookings this quarter, a continuation of a trend that we've seen for approximately two years. Total revenue of 153 million in the quarter increased 5% year over year. Of this total, recurring revenue accounted for 139.8 million, or 91%, and was driven by growth in subscription services and managed services. Subscription services generated 42.8 million in the fiscal first quarter revenue, an increase of 12% year over year. Growth drivers continued to be NextGen Office, Enterprise SaaS, as well as a host of surround solutions such as mobile and telehealth. I want to call out that we have introduced a new line in recurring revenue, transactional and data services, or TDS. This line comprised of EDI and data, plus now includes our patient pay, which was previously reported in the managed services revenue line. A historical reclassification table is available on our investor webpage for modeling purposes. Managed services, which no longer includes patient pay, generated revenue of 30.6 million and grew by 10% over last year. Our managed cloud services, as well as revenue cycle management, continues to drive performance of this line. Transactional and data services, which includes patient pay, generated $27.2 million in revenue this fiscal quarter, down 2% over the year-ago period due to modest decline in data revenue, which can be lumpy. Software maintenance and support revenue of $39.1 million was up 2% 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 revenue of $13.5 million was essentially flat over the same quarter last year. Inside this line item, software and hardware line was down, reflecting the lumpiness of software license, contract timing, offset by growth in non-recurring services. Gross margins of 47.8% were down 240 basis points compared to the same quarter last year. This trend reflects a combination of factors which we discussed last quarter, including our investments in centers of excellence and other activities to accelerate Spring 21 migration and a product mid-shift, particularly given the decline in non-recurring software license revenue and the increase in lower margin managed services. Turning to operating expenses, SG&A of $49 million increased 1% compared to a year ago. This reflected lower legal expenses associated with shareholder disputes that have now been resolved and cost saving actions previously discussed offset by return to travel and increased personnel costs. Net R&D expenses of 21.8 million increased 2.5 million from a year ago and represents additional projects across our three domains. Fiscal first quarter net R&D spend represents 14% of total revenue. We had a GAAP tax benefit of approximately $250,000 this quarter with a GAAP effective tax benefit of 27%. Our non-GAAP tax rate remains at 20%. On a GAAP basis, Q1 fully diluted net income per share was two cents compared to net income of $0.04 per share in the fiscal first quarter of 2022. On a non-GAAP basis, fully diluted earnings per share for the fiscal first quarter of 2023 was $0.16 compared to $0.25 in the year-ago quarter. This result is in line with our fourth quarter commentary and consensus. Turning to the balance sheet, we ended the fiscal first quarter with $40.4 million in cash and equivalents and no balance outstanding on our line of credit. We purchased 148,000 shares for $2.5 million at an average cost of $16.93 per share. We have $21.6 million remaining on our current share buyback program. Free cash flow for this quarter was a negative $14.1 million, reflecting first quarter's seasonal activities, such as payout of the accrued bonus. Now to our fiscal 2023 financial guidance. As noted in the pledge release, we are adjusting our prior guidance for the divestiture of our commercial dental assets. I want to be clear here. we are adjusting our full year guidance to reflect the transactions impact and only the transactions impact. We now expect fiscal 23 total revenue to be in the range of 621 to 633 million, down approximately seven million, reflecting the eight months contribution from the sold dental assets. Moving to adjusted EBITDA, we are lowering our range by about two million to between 109 and 114 million. And our fiscal non-GAAP EPS is now in a range between 92 and 98 cents, or a reduction of three pennies. If you want to adjust your historical models, annual revenue from the products we have divested fell into the following three lines. Approximately four million in EDI, $4 million in maintenance, and $2 million in subscription services. In closing, I am pleased with the continued momentum and diversified growth we generated in this quarter. We will continue to focus on profitable growth as we consider internal and external capital deployment to drive long-term shareholder value. And now, let me turn the call back to David for closing comments.
spk02: Thank you, Jamie. While it feels like some time ago, it was only May at our investor event where we introduced our business model using three domains, enterprise, office, and insights. Enterprise is our largest area by revenue and should continue to grow in the mid single digit range and ahead of the overall market. We expect growth to be driven by new client wins and further penetration of existing clients with our expanding breadth of solutions. Our second domain, office, focuses on the smaller independent ambulatory practice market. This area continues to grow well, reflecting the strength of our SAS offering and our ongoing success providing managed services. We see the office domain continuing to grow double digits as we 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 are 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. In closing, NextGen Healthcare continues to execute with a focus on driving accelerating and profitable growth. Our overall positive outlook reflects the combination of the general health of the independent ambulatory market, NextGen's resilient business model, and our focus on driving shareholder value. This concludes my comments.
spk07: We'll move to questions. Operator?
spk05: At this time, we will open the floor for questions. If you would like to ask a question, please press the star key followed by the one key on your touchtone phone. If at any time you would like to remove yourself from the queue, press star two. Please limit yourself to one question and one follow-up. Our first question comes from Jeff Garrow from Piper Sandler. And your line is open.
spk01: Why don't we start off on the sale of the dental assets? I wanted to ask any specifics you can share first around timing of deal close and net proceeds expected, and then maybe more strategically, help us understand retaining the FQHC-related assets and the resources needed to support that, while maybe it didn't make sense to support and update the divested assets.
spk02: Yeah, good question. So we are keeping the assets that support the FQHC, so all of that dental pieces for them, tribal community health centers, and the folks to keep that up to date. To your point, the divested assets would have been a big lift for us to bring to modern kind of technical standards. And when we looked at it and looked at focusing the business further on We thought a divestiture was a better way to manage that portfolio from a return and capital allocation perspective. Jamie can give details. They were in the script, but any other details about the... Your question was when is the transaction going to close.
spk00: It closed today. And the proceeds are... Total purchase price is about $12 million today. with a sort of normal holdback for a one-year period. So there will be cash in this quarter, and the use of the proceeds is, at this point, it will be like all of our other cash on the balance sheet.
spk01: Excellent. That helps. And I'll follow up on the capital allocation front. It does seem like this dental sale plus your ongoing cash flows and recent increased liquidity could allow you to more actively use the balance sheet. So I want to ask what the current thought process is on share buybacks versus M&A and then get your pulse on whether private company valuations are getting more realistic.
spk02: So on your first question, our bias is toward M&A, because to answer your implied third question, we think private valuations usually show a two-quarter lag to public, and we're starting to see the private company valuations get to be more attractive. So I'd say we have a bias toward M&A with cash over share repurchases, though in the at a modest level, about $16.93. So we're still buying shares when we see them at what we see as an attractive price, but our preferred use of cash is to further the strategic investments and products that we can offer to the industry to further grow the business more quickly and get to that double-digit growth that we've talked about.
spk01: Got it. Makes sense.
spk07: Thanks for taking the questions. I'll hop back into queue. Thank you, Jeff.
spk05: Our next question comes from Stephanie Davis from SVP Securities.
spk04: Hey, guys. Thank you for taking my questions. I just wanted to finish a little bit more on that portfolio management question. When you think about your strategy for assets, that you are debating divesting from your core portfolio. Is there any general rule of thumb in either growth or margins of what you're not looking to keep?
spk02: I'd say we have a preference for growth, right? So we're trying to grow the business. Assets that aren't growing as quickly or we don't see a near-term opportunity to grow as quickly as the 10% on the whole are probably the ones that we're you know, going to take a closer look at. Some of the way we've looked at, if you've seen some of our recent announcements, doing business with others to fill in parts of our portfolio or where we've seen clients rapidly adapt parts of our portfolio that are growing better. Those are places that we don't have to buy everything. We can partner. So you've seen us partner recently with Instamed and or about half of our clients were using Instamed. There's opportunity to get into market more there, and so we've made that change. So it's just another example. It won't be, you know, divestitures won't happen very often, actually, I don't think, but you'll see us do things like Instamed where we see opportunities to accelerate growth where we already see good client uptake.
spk04: Understood. So less of a focus on the margin side, just given the premium portfolio and the dental assets.
spk00: Could you say that again, Stephanie?
spk04: I said, so is there less of a focus on the margin side, giving the premium EBITDA profile for the dental assets?
spk02: I mean, we think about both. But your question before was, where is our bias? And I'd say our bias is to growth. So if they're or assets that are growing slower than the 10% that we're ascribing to, those are the ones that we're taking a hard look at, at either getting them to that growth profile or how strategic are they to our business.
spk04: Understood. Hey, going to that growth side of the business, one thought for me, can you tell me about the pace of converting bookings into revenues? You've had a lot of really strong booking speeds over the past few quarters. So curious why there was a reiterated core revenue guidance.
spk02: We're only one quarter in, so I'd say we had a good, reasonable quarter. We did exactly as we'd said. There's still work to do in the year. We'll see how the rest of the year plays out from that perspective.
spk04: All right. Looking forward to seeing it.
spk06: Thank you, guys.
spk07: Thanks, Stephanie.
spk06: Our next question comes from Jack Wallace from Gronenheim.
spk08: Hey, thanks for taking the questions. Two from me. Just wanted to get some incremental color on the hiring cadence coming into the year. It seems like you're a little behind schedule on, or you would have liked to have been able to hire a bit faster in third, fourth quarter last year. We knew there was going to be an uptick. particularly in R&D this quarter. Where are we with that cadence? Did we catch up the plan, and is there any more, let's call it, lumpy hiring still to go as we progress through the year?
spk02: We continue to make good progress with the sales, a good sales quarter. We're looking for more implementation people to help us get through that backlog. We could We could hire more there, and that's a focus of ours and our HR team. There's a ramp behind that, so you have to ramp the people to get the skills to install NextGen, then they install NextGen. So in the beginning, there's a carrying cost there, but that carrying cost is preferable to using third parties. So we're approved in that mix, but we're still hiring there. I think on the engineering side, we're mainly good, always looking for good developers, so Appreciate any resumes you sent our way on either of those two roles.
spk00: Yeah, but just to go back, I think we have caught up. We were behind in Q3, Q4. Q1 we caught up largely, so with the exception of the one area that David talked about, implementation and training resources, we're pretty well caught up with where we expected to be.
spk08: Actually, that's helpful. Switching gears, you put out a press release yesterday in the quarter about the Insights business, the Insights Data Hub. I was just wondering if you could talk a little bit more about how that press release and the product so far has been received in the market and if there's any bookings activity that's taken place that offering.
spk02: Which Insights one are you?
spk08: The NextGen Data Hub
spk02: Yeah, so the NextGen Data Hub, so far, good uptick. We're still training the sales force on what's the approach, how do we target that market building pipeline there. So I'd say its impact in Q1 was, you know, nominal, very small. But, you know, really our goal is to exit this year with some good momentum behind that. So early days, but – Promising from a pipeline build, no results yet really in the revenue line item at this point.
spk08: Gotcha. That's helpful. Thank you.
spk02: Thanks, Jeff.
spk05: And once again, that is star and one. And our next question comes from Ann Samuel from J.P. Morgan.
spk03: Hi, guys. Thanks for taking the question. I was wondering if maybe you could touch a little bit on utilization, what you're seeing there, and if there's any impact to your payments business.
spk02: Okay. Yeah. Thanks, Annie. So we're seeing from our clients, from a RCM EDI perspective, we're seeing still elevated use there above the kind of pre-pandemic levels. So that's returned to normal. We think that that continues. So we're not seeing a slowdown there. If your question is a little bit around the economy, that still seems to be at elevated levels and we're comfortable with how we've thought about it for the year. We don't see any changes there.
spk03: Great, thanks. And, you know, maybe just on the RCM business, just wondering, you know, how that's going, particularly given, you know, some of what we're seeing around labor in the hospital environment.
spk02: Yeah, it's a good question. The labor environment actually is a tailwind for that, in our view. We see clients looking for, you know, even spot work that needs to be done, like working a claims queue or working AR. We've started offering, I think we've mentioned last quarter, we've started offering those services a little bit piecemeal just so that they can try our services and then expand as they have difficulty perhaps in the market. And so we expect to see that strategy of helping clients be sure they achieve their financial outcomes will continue to drive growth for us because they're competing against a market that has dramatically increased kind of at the lower end. When you read about $15 to $17 an hour is the new normal, that was not where many offices were before that switch. So we see that as an opportunity. We see clients looking to us for automation and for services that further automate, especially as they have a hard time recruiting. So we're bullish on that part of the business.
spk06: That's great to hear. Thank you.
spk05: And our next question comes from Jeff Garrow from Piper Sandler.
spk01: Yeah, hi. One more for me. I wanted to touch on the Instamed partnership. Just, you know, wanted to ask what's kind of, what's new and expanded about that relationship? Is it more than, you know, the release I noticed Apple Pay, Google Pay capabilities reference, but Maybe there's a stronger go-to-market partnership there as well. And anything you could share on the level of adoption of that offering or recent level of client interest I think would be helpful too. Thanks.
spk02: Thanks. So the Instamed piece really took off for us during the pandemic. Our internally developed pay feature didn't support contactless payment. And so you can imagine in the pandemic that became a really hot item for that we had Instamed clients who were supporting that, both contactless and Google and Apple Pay. And so we saw a good client uptake. Also has some nice features as far as how you manage collections and other pieces in a go-to market that's attractive. So for us, it was a really fairly straightforward decision to say, let's move more in that direction and move forward in that way. It's been in our plans and guidance, that piece, so there's no real change there. But early indications are good because clients like the new functionality that comes with it compared to what we offered, and the patient experience is better using it because we accept all kinds of payments where we didn't have such a broad range before.
spk07: Great. Very helpful. Thanks again.
spk06: Thanks.
spk05: And it appears we have no further questions at this time. I will now turn the program back over to David Sides.
spk02: Thank you, everyone, for joining this Q1 earnings call. We thought it was a good quarter and appreciate your continued interest in the company. Solid quarter. The pace of activity is picking up for us, and we think we have good momentum as we enter through this fiscal year. We look forward to talking to you next quarter in three months for our fiscal Q2 earnings call. Thanks again.
spk05: Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.
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