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spk06: Welcome to NextGen Healthcare Fiscal 2023 Third Quarter Results Conference Call. Hosting the call today from NextGen are David Sides, President and Chief Executive Officer, and Jamie Arnold, Chief Financial Officer. Today's call is being recorded. All lines have been placed on listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star then the number one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. We ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you require operator assistance, please press star zero. At this time, I would like to turn the call over to James Hammerschmidt, Senior Vice President of Finance and Investor Relations of NextGen. James, you may begin.
spk18: Thank you, operator. Before we start, please note that we will be making forward-looking statements during the presentation and the QA part of the call. These statements are based on management's current expectations and assumptions and are subject to risks and uncertainty. Factors that may cause actual results to materially differ from expectations are detailed in our earnings release and SEC filing. This call will also reference certain non-GAAP financial measures. Information about non-GAAP financial measures, including reconciliations to U.S. GAAP, can be found in our earnings release, which is available on our investor relations website. At this time, I'd like to turn the call over to our President and CEO, David Seid.
spk20: Thank you, James. In May of last year, we described our multi-year journey to deliver double-digit revenue growth, operating leverage, and disciplined capital management. And I'm pleased to report strong execution and solid results across all three fronts in the quarter. But before I go into my prepared remarks, I'd like to address an important topic. On January 6th, we became aware of unauthorized access to a limited part of the NextGen network. Upon investigation, we learned the company was the target of a sophisticated cyber attack. We immediately executed our internal response procedures and contained the threat, secured our network, and have returned to normal operations. Our forensic review is ongoing, and to date we have not uncovered any evidence of access to or exfiltration of client or patient data. Based on our investigation to date, this incident impacted select administrative non-client files within our network. In total, this affected less than 1% of the devices used by our employees. Out of an abundance of caution, as soon as we noticed the threat, we severed connectivity to some systems and notified clients who were impacted in a timely manner. the vast majority of clients continue to operate as usual without any disruption. Those systems have all been securely restored and operations have returned to normal. While unfortunate, we are happy to note that previous investments in cybersecurity paid off. We will continue to invest in keeping our systems safe and secure for our employees, clients, and the patients they serve. Now back to our progress in the quarter, I'd like to start with growth. Our integrated solution creates a foundation to deliver insights at the point of care, which allows for us to partner with clients to improve outcomes. This differentiation is resonating in the market, especially among leading integrated care organizations looking for a holistic platform to deliver medical, behavioral, and dental care. Our bookings in the quarter reflect this differentiation, where despite the macroeconomic environment, we continue to see success in gaining new logos and cross-selling our surround solutions. There were six deals over $1 million, spanning both inside and outside the base. Bookings from net new clients represented approximately 30% of sales in the quarter, bringing our full year average back above 25%. We continue to see opportunity to help our clients address the problems they face in today's environment, such as staffing shortages, wage increases, and higher patient volumes. These challenges create demand for our managed cloud services, revenue cycle, and patient engagement solutions as our clients look to gain practice efficiencies and improve financial outcomes while continuing to deliver quality care. These factors, in addition to strong client retention, have resulted in continued growth acceleration across our diverse revenue streams. This is especially clear in our recurring revenues, which is been building momentum and exceeded 10% growth in the quarter. While our commercial efforts are focused on delivering growth in fiscal year 23, our solutions and development organization are innovating to build new offerings that drive growth in fiscal year 24 and beyond. We believe there's tremendous opportunity to expand our platform, especially when we look at the patient intake process and other front-end offerings that are currently in early testing with clients. We see strong proof points that our solutions are delivering value and a clear return on investment. I look forward to updating you all on the progress the team is making when we approach the start of our new fiscal year. Moving on to our operations and investments we're making to scale. Our ability to deliver operating leverage starts with the foundation of our employees and our culture. We just recently conducted our annual vote survey, that is voice of the employee, which measures employee engagement across 14 dimensions. I'm pleased to say employment engagement has increased for the sixth year in a row and is well above the benchmark, with strong improvement in culture, working environment, and client focus. We've been thoughtful in managing our headcount throughout the year, from the expansion of our sales development rep program, creating the upgrade center of excellence, and moving to a remote-first, work-from-anywhere organization which allows us to access talent pools on a global scale while minimizing our facility footprint. The company is focused on making investments and taking the actions required to show operating leverage. We will continue to optimize our resource mix, rationalize vendor spend, and rethink processes and technologies to improve our productivity as we close out the final quarter of fiscal year 23. Now turning to our capital allocation effort, We believe total shareholder return is enhanced by taking a disciplined and deliberate approach to capital acquisition and deployment. Our strategy is focused on investing in innovation, accelerating growth through M&A, and returning capital to shareholders through opportunistic buybacks. Following our last earnings call, we raised $275 million in convertible debt and concurrently purchased approximately 2.1 million shares for $40 million as part of the offering. These proceeds, in addition to our cash generation and credit facility, provide ample capital to execute on our inorganic growth agenda. We also announced the acquisition of TSI Healthcare, a longstanding partner in the first acquisition the company has done in almost three years. TSI expands the addressable market served by our enterprise domain, unlocking new attractive specialties such as cardiology, rheumatology, and pulmonology. The company provides purpose-built clinical content and a differentiated service offering, which when paired with our strong commercial channel, will drive long-term sustainable top line and bottom line growth. Given the similarities in culture and in the line strategy, I'm pleased to say the integration effort is going well as we start making foundational investments back into the business. Looking forward, we maintain an active M&A pipeline and will continue to assess future acquisitions especially as it relates to capabilities that accelerate our effort behind next-gen insights. We believe data, analytics, and value-based care enablement will continue to be an attractive opportunity for the company to pursue. Lastly, I'd like to acknowledge the passing of NextGen Healthcare's founder, Sheldon Raisin. Billy was an intensely passionate and entrepreneurial innovator. By digitizing health records and automating workflows decades before the HITECH Act mandated the use of EHRs, Shelley has improved the lives of thousands of clients, tens of thousands of providers, and millions of patients. He will be missed. And building upon his legacy, the company is more focused than ever to innovate and deliver better health care outcomes for all. And now, I'll turn the call over to Jamie to provide details on our financial performance in the corridor. Jamie?
spk16: Thank you, David. Now turning to the third quarter fiscal year 23 financial results. Total bookings came in at $44.8 million. This represents a 19% increase from the third quarter of last year and a 20% increase from last quarter, bringing year-to-date bookings growth to 9%. Software-licensed bookings were below recent trends, which has an outsized impact on both quarterly revenue and earnings. Total revenue for the quarter was $161.9 million, an 8% increase year over year. Recurring revenue accounted for $148.7 million, or 92% of total revenue. This equates to 11% year over year growth, excluding the impact of the TSI acquisition Our organic growth for recurring revenue was 8%, primarily due to the strong performance in transactional and data services and managed services. Most of the contribution from the TSI acquisition is reflected in the subscription revenue line. Non-recurring revenue for the quarter was $13.2 million and represents a 14% decrease compared to the same quarter last year. and a 17% decrease from last quarter. While we expect Q4 software bookings will return to the prior six-quarter trend, we are closely watching for changes in client purchasing preference that could be affected by the macroeconomic environment. Gross margin of 47.3% was down approximately 310 basis points compared to the same quarter last year, and down 94 basis points compared to the prior quarter. As noted in the discussion about non-recurring revenue, software revenues are off recent trends, which had a significant impact on gross margin decline. Additionally, as discussed on last quarter's call, we have made significant investment in our upgrade center of excellence and professional services, as well as a shift in product mix. Margin improvement will continue to be a focus and SPRIN related to upgrades should start to moderate in the back half of fiscal year 24. Turning to operating expenses, SG&A of $46.2 million decreased by 2% compared to the same quarter last year due to lower variable compensation as well as cost reduction actions we have been executing, such as reducing facilities footprint. Net R&D expense was $19.6 million for the quarter and represents 12% of total revenue. This is a 1% increase compared to the same quarter last year. We had a GAAP tax provision of $1 million this quarter with a GAAP effective tax rate of 11.5%. Our non-GAAP tax rate remains at 20%. On a GAAP basis, Q3 fully diluted net income per share was 12 cents compared to net income of 8 cents per share in the fiscal third quarter of 2022. On a non-GAAP basis, fully diluted earnings per share for the fiscal third quarter of 23 was 26 cents compared to 24 cents in the year-ago quarter. Turning to the balance sheet, we ended the fiscal third quarter with $241.6 million in cash and equivalents and no balance outstanding on our line of credit. Free cash flow for the quarter was a negative $6.9 million. As David noted, in November, we issued $275 million convertible senior notes with net proceeds to the company of $266.5 million after debt issuance costs. Key terms include a 3.75 percent coupon rate, five-year maturity period, and a conversion price of $25.68. We can call them on or after November 20th, 2025. For more detail, please refer to the debt footnote in our financial statements. Concurrent with the convertible debt offering, we purchased 2.1 million shares for $40 million at an average cost of $19.02 per share. Since the authorization of our share repurchase program in Q3 of fiscal 2022, we have purchased a total of 4.8 million shares for 85.8 million at an average cost of $17.68 per share. As of December 2022, we still have $74 million remaining in the share repurchase authorization. On November 30th, we acquired TSI Healthcare. The acquisition provided minimal impact to our Q3 financial performance since it represents only one month of actuals. We expect the acquisition to contribute between $10 and $12 million of revenue for fiscal year 23 and will be accreted to earnings within a year. As mentioned earlier in the call, the impact to revenue will be mainly in the subscription revenue line. Turning to our fiscal 23 financial guidance, as noted in the press release, we are updating our prior guidance to account for the acquisition of TSI and the convertible debt offering. We now expect fiscal 23 total revenue to be in the range of $642 million to $650 million, which represents a year-over-year growth of 8.3% at the midpoint. Moving to adjusted EBITDA, we are maintaining our prior guidance range of 110 to 115 million and our prior fiscal non-GAAP EPS range of 93 to 99 cents. In closing, I believe the company is well positioned to meet our long-term objectives based on our strong bookings performance in Q3, operational execution, and disciplined deployment of capital for smart acquisitions like TSI. And now, let me turn the call back to David for closing comments.
spk20: Thank you, Jamie. NextGen continues to execute with a focus on driving growth for both us and our clients, and we're making the investments required to deliver long-term profitability and scale. Our overall positive outlook reflects the tailwinds we created by solely focusing on ambulatory care our resilient business model, and our focus on driving shareholder value. In summary, I am pleased with this quarter's results, and it sets us up for sustainable double-digit revenue growth in fiscal year 24, which starts for us in April. This is one year earlier than we set at our investor day in May, which targeted double-digit growth in fiscal year 25. We will provide fiscal year 24 guidance in May, after we announce our fiscal year 23 year-end results, and I am incredibly proud of the commitment and care shown by the NextGen family, both to each other and to our clients. This concludes my comments. Let's move to questions. Operator?
spk06: At this time, if you'd like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. We'll take our first question from Stephanie Davis, SCB Securities.
spk04: Hey, guys. Thanks for taking my question. Just a quick one from me when I think about what takes up most of your guys' time. I think about the progress of NextGen as first, you know, your predecessor, David, he had to focus really on turning around user experience. It felt like your first priority was getting to that double-digit growth target. Now that you're there, is it just pure execution or is there anything else in mind as your next big goal?
spk20: I think it's pure execution from here. So some of the new organic products that we're coming out with in the Insight domain, we're seeing good early client interest. And so we'll talk about those more, but some of the things we talked about, behavioral health, last quarter we had a really good sales quarter for behavioral health. which is a new organic area for us. So those were part of the contribution to having a record sales quarter. So I think from here it's just execution, getting those new products out, driving the margin expansion that we know is there now that we have the revenue growth, and then continuing to be smart on how we deploy capital that we've raised and make really smart acquisitions. Just doing that from here should get us where we want to go.
spk04: Not a bad place to be. And just a quick follow-up then when I think about the quarterly cadence of margins for the year. Is the uptake in 4Q, should I just assume that's license sales shifting from 3Q to 4Q and helping the margins?
spk20: Yes. I mean, that's basically it. And then I think next year, too, we think over time as we, you know, we've talked about this before, we sell more subscriptions. We're going to, you know, temper our expectation for recognizable in our next year plan and account for that by, you know, taking out some costs to allow for that reduction and, you know, kind of higher octane revenue so we can see the growth that we're looking for from that next year. But, yeah, it's mainly you'll see a rebound next year, as Jamie said in his comments, or next quarter, I mean, in the recognizable license revenue. And we'll be, you know, as we talked about, on the full year number as we projected in the guidance.
spk03: Super helpful. Congrats on a set of forget it year. Envious.
spk07: Thank you.
spk06: Our next question comes from Jack Wallace from Guggenheim Securities.
spk11: Hey, thanks for taking the questions. Just a quick question on the hacking incident. Has that had any impact with your current and potential clients? And I got a couple follow-ups.
spk20: No, not so far. You know, unfortunately, it's more common than you would think nowadays. We were glad to contain it, you know, through no client systems affected at all, no client data, no patient data, no provider data. None of those systems were compromised at all. You know, we had a few, less than 1% of devices that were compromised. We quickly shut that down within a day of realizing that. So we contained it and then restored everything, communicated with any clients who might have had a process disruption because we didn't answer a support call or other, you know, kind of ancillary things. But overall, all the practice that we've done and all of our policies and procedures served us well during this. As you can imagine, we're speeding up some of our investments in cyber that we had planned. We implemented a number of those even in the last couple of weeks. And overall, we're fortunate it's not material. It doesn't affect our results financially. We've had good conversations with our clients. They appreciate the honesty and transparency. And from here, we'll adopt a really strong culture, and we've learned from it. It's one thing to do the tabletop exercise. It's another to do it in practice. I think we're well-practiced now.
spk11: Got it. That's helpful. And then in the last quarter, you talked about the application to become a QHIN, and just you're wondering about the timeline for that to go operational, and then as a follow-up to that, the other participants mentioned Are the other applicants, are you encouraged by the level of industry interest? And then, you know, as everyone goes live, can you just talk a little bit about how that can impact the business going forward? Thanks.
spk20: So we're encouraged by the ability of our software to kind of scale to QHIN level. We have a number of opportunities there, talking with clients about our Merth Cloud Connect. So it's the the offering that helps client connect to any kind of any source at scale. And the application process hasn't come out for QHIN yet, but we feel like we're there from a technology perspective. We need to work through kind of the commercial terms, and we'll see what those guidelines are. But when we talk with clients about it, I'm encouraged because the idea of doing an interface one time for all clients, so for example, if you're in Phoenix, you connect to a hospital and then all of our clinics in Phoenix can connect to that hospital through us without having to do that work. It's just so much more efficient that it's got to, you know, kind of both speed interoperability and lower the price of healthcare because we did it one time. So from an effort perspective, it's just substantially better. So we're encouraged that there are other, you know, people in the industry thinking about this the same way. It could be really, straightforward to then just connect two QHINs, you know, a next-gen QHIN to another supplier's QHIN, and all of a sudden, all of that is interoperable from one connection between us both. We're already connected to all of our clients, so if, you know, another supplier was connected to all their clients, that one connection could bring enormous advantages and defragmentation to the healthcare marketplace and the medical records, as well as, you know, improve things like how you do care management across domains and across venues. So in summary, we're really encouraged. I think we're in the right place. We have the right technology. And as the application process becomes clear, we'll work through the rest of it. But I think it's turning out to be a good move for us.
spk11: And with, let's say, all the plumbing getting set up on the other end of this, are you Do you suspect that this will eliminate some of the bad acting of the info blocking in the industry or is the information highway, the presence of that, not necessarily guarantee a freer flow of information from a decision-making standpoint?
spk20: Yeah. Jack, sorry, I misspoke on the Q&A application. It has come out and we're going through it. But I agree with your premise that This will, you know, make data much more liquid than it was before. I think, you know, some of our other suppliers set up QHINs too. It should slow down any information blocking from any of those other suppliers or whether it's, you know, some aggregators like Commonweal or others. So those are all, I think, good. We can, you know, every one of the suppliers can kind of handle the volume of this and is built to already. And like I said, we're already connected to all of our clients. So for us to take the next step is really, okay, how do we do this at national scale? How do we think through, you know, how do we run this system and get value from it? So I think it's all good for, you know, the American healthcare system that, you know, these kind of regulations are coming into effect and we intend to capitalize on them.
spk10: Great. Thanks. I'll hop back in, Kiel.
spk06: Our next question comes from Jalinda Singh from Truist Securities.
spk14: Thank you, and thanks for taking my questions. I just want to better understand the top-line growth and margin profile for TSI healthcare longer term. It seems the deal is not adding any EBITDA in fiscal 23, which I understand is only four months, but you talked about the deal becoming creative to EBITDA in a year or so. Maybe talk about, like, What will drive that? Is it just cost management, cost synergies? What are the key drivers? Is it improving margins at TSI? Just maybe flesh out a little bit, some details there.
spk20: Thanks, Jalinder. It's a good question. So we're still making investments in our own internal technology this year. When we went to Investor Day, we talked about we're getting operating leverage from some of the ways that we're automating ourselves, meaning automating next-gen. So we've deployed systems to... better automate how we handle our support process. We've deployed things like AI that when one of our support staff are talking with a client, it suggests here might be the possible answer. So as we're hiring and scaling as we grow, we can bring people online to do their job more effectively and more productively quickly. We're also making a large investment in all the upgrades of Spring 21, which we've talked about, and obviously that'll have an end date sometime this year, but that's been a big investment to set up that center of excellence. It's kind of a one time to get through this Cures Act process, and then that will fade away or we'll turn that into another revenue generating capability with those employees. So there's some things that we're doing now to try to set ourselves up to scale for the growth, and that's why we said this year we're going to, you know, have our EPS be similar to last year as we take some of that margin and invest in our own business. And then that sets us up for operating leverage next year and the following years because we're planning on this being a multi-year journey. And I'll hand it to Jamie for other comments.
spk16: I think that's it, David. We've laid out a multi-year plan, and we would expect, I think of it more as our progress on the Rule of Forty score, so we will show some operating leverage.
spk19: But as David indicated in his prepared remarks, we will also accelerate revenue growth next year.
spk20: And on the EBS EBITDA side, too, you know, we can land that exactly with spend. So I feel like that's the easier part of the equation to work on. We've, I think, worked on and are achieving the harder part, which is double-digit revenue growth, or we'll certainly achieve that in fiscal year 24. I mean, just the 92% recurring nature of our revenue growth a record Q3, we can see fiscal year 24 very clearly now from a revenue perspective. We'll give guidance in our call in May, but, you know, we're spending money this year to still hit our EPS guidance range, but we're using that money to improve our cyber profile, to improve our productivity, to do more robotic process automation and some of these things that will have a good, you know, NPV for us and the present value for years. to take care of these things one time.
spk14: I'm assuming all those initiatives kind of apply to your TSI healthcare transaction. That's what I was actually referring to, right?
spk20: Right. So, you know, taking TSI, which we've worked with for many years, really like the company, love the people, taking them from a privately owned organization up to a SOX-compliant you know, public company standard takes investment. And so we're working through those investments, whether it's on the IT side, the finance side, um, how, how we, how we run. Um, but you know, we'll get through those. And then as we said, it will be accretive in the first year.
spk14: Okay. And then, uh, I know we have talked about this in the previous call and you guys made some comments on this call too, about, you know, the impact of macro environment, but, uh, I don't know if maybe it's just me. I mean, it looks like you're a little bit more cautious this time, like you're watching the trends and macro impact. Have you seen any early indications in the impact on the sales cycle and decision process among your clients or even indications to put any spending on hold? Clearly, your bookings don't reflect that, but just curious, like why? Is there any change in tone or still you think that there is no impact as such?
spk20: Well, I mean, it does impact our clients from their ability to recruit staff, their bottom lines, right? But to the point of record bookings, right, we're doing well from a sales perspective. So we're not seeing an impact there. We feel good about the current quarter Q4 that we're in to end the year. So it's not affecting us from that perspective. Obviously, like anyone, we have our own cost internally where it affects us. You know, we've seen that, but we're mitigating that and feeling good about that. But the main piece is, I'll hand it to Jamie.
spk16: Yeah, David, it was more about, when we talked about it today, it was more in context of the software revenue and the software bookings in this quarter. Last quarter, we were kind of nonplussed about the bookings level, and we said it was kind of a timing. We clearly made it up, and through the first three quarters this year, our bookings were up 9% in total. What we did see this quarter that we called out was the lower software level, and so we're monitoring the macro trends, all this discussion about potentially a recession this year, and other conditions that affect our clients, we are seeing, you know, as we see the pipeline develop, there seems to be more of a preference for the SaaS product than the licensed product. And that's what we were commenting on.
spk13: Got it. Thanks a lot.
spk16: Yep.
spk06: Our next question comes from Sean Dodge from RBC Capital Markets.
spk22: Thanks. Good afternoon. Maybe just jumping off, Jimmy, on your last point there. So, David, your previous point around license sales, you had – it sounds like some conferences were going to pick back up in Q4. I guess the little bit of softness there in Q3, was that then from deals that simply slipped from Q3 to Q4? I guess have you actually seen a pickup in this already in Q4? Are those in the pipeline, or are you off to a quicker start with those this quarter than you have historically? Yeah.
spk20: Yeah, Sean, it's a little bit of a slip. And so we have high confidence because some of those may have even closed by now. So it gives you confidence that this quarter looks good. But I do think, like I said in our earlier answer, I think next year we're going to move the license revenue down from our own budgetary expectations because of the lumpiness. And we're seeing that trend because we're selling everything as subscription. So that's kind of expected. It's been coming down, as we've said before, for multiple years. It used to be $60 million five years ago. Now it's around $30 million. It won't go to zero, but it'll keep getting a little bit smaller as all of our new offerings and surround offerings are all subscriptions. So that's where we're seeing a lot of growth in the business.
spk02: Okay. That's very helpful. Go ahead, Jamie.
spk16: No, I was just going to say it is If you look at the longer-term trend over, as David said, five or six years, you see a very, very clear trend line. It did change as we started to come out of COVID. We're just being, you know, we're calling it out, but we have an adequate working set for this quarter. So we just want to highlight it. We try to be transparent.
spk22: Okay, and then... With cross-selling continuing to be an important part, David, you mentioned the surround solutions, that being an important part of the growth algorithm going forward, what's the backdrop like there now? And what I'm trying to get at is just the motivation for clients to swap out and consolidate ancillary systems on NextGen. Is that kind of the main factor there, just your ability to integrate all of these solutions more seamlessly and present them with kind of one offering or Or is there some element when you bundle all these together, can you just price all of these in a way that's a little bit more competitive than standalone point solutions could?
spk20: Yeah, so we think integration wins. So integration is an easier way to manage a system. So you have less interfaces between us and maybe point solutions. It's easier to host, right? So we can host everything for a client in AWS and have an integrated system. cloud offering, and it's less from a cyber perspective to protect as well as less to manage. So if you're a physician office, you're under pressure from a revenue perspective. You're thinking, okay, I'm going to have less systems. We think the same thing when we're looking at our own cost internally. We want to simplify the number of suppliers that we work with, and we'll pick integrated suppliers to do more with fewer people. And, you know, as you do more, you expect – you know, to see a return. There's nothing else from your own staff because there's less systems that they have to know how to work. So I think that trend's playing out. I think it's favorable for us from an integrated provider perspective, and it should continue. We see people still wanting to buy these solutions. It's easier to add one on than it is to go contract with somebody new and go through that process.
spk08: Okay. That's great. Thanks again.
spk06: Our next question comes from Jessica Tistan from Piper Sandler.
spk21: Hi, thanks for taking the questions. I just wanted to follow up a little bit on the TSI margin questions. Can you maybe talk about the gross margin profile and then the EBITDA margin profile of that business, maybe near term and then also steady state, just because I think there are a couple of different specialty EMRs that you guys will be maintaining as you scale that business. Thanks.
spk20: Well, it's not multiple EMRs. So they use our EMR. They have content that's specific to three specialties, the pulmonology, rheumatology, and cardiology. That's really attractive to us because we haven't gone after those specialties. But they use our EMR. So over time, the EBITDA profile looks really good. It'll look like our own EBITDA profile. And in some ways, they do better in some places than we might do. Long term, I think the EBITDA profile will approach ours. And Jimmy, I don't know if you want to add any color on the gross margin.
spk16: Yeah, David, I want to go back to why we acquired TSI is more so than talking about the margins are going to look pretty similar to ours. But the reason we acquired TSI is their specialty content and their high level of service that they provide to their customers. which, so the content is in rheumatology, cardiology and pulmonology. These are specialty areas that they had built content and we didn't have it. So we think it opens up new areas for us and can help accelerate our growth for the next gen enterprise domain. And the other thing is, some of the things, they provide services to their customers. They have some offerings that their customers value and we will bring those to our next-gen clients also. So it's more about the opportunity it creates on the top line is how I think about it.
spk21: Got it. And then I think just as you were discussing the TSI revenue acceleration potential, you might have mentioned that the sales force was kind of limited at the time of the acquisition. I'm wondering were the costs associated with ramping the sales force for that business fully reflected in the fiscal 3Q? And then, if not, just when might those investments begin to appear? Thanks.
spk20: Well, we didn't own the asset that long in 3Q, so you'll see it ongoing. But it should offset with the growth we think we'll see from that business, too. So it'll be in going forward, but it's in all of our guidance.
spk21: Got it.
spk06: Thank you.
spk20: Thanks.
spk06: Next question comes from George Hill from Deutsche Bank.
spk12: Yeah, good evening, guys, and thanks for taking the question. David and Jamie, kind of a macro question, as cost-cutting and HR levels and staffing levels seem to be a trend across the industry. I know this is always a sensitive topic, but I know that it was hard to hire employees during the upswing. We're seeing a lot of layoffs across a lot of macro tech sectors. During this downswing, I guess I'd ask you how you feel about cost structure and staffing, and does the company see this more as an opportunity to opportunistically hire people and bring on talent? Or as you look at the demand environment, is this something where you're kind of trying to match staffing levels to end market? And, you know, the questions kind of spawned from the SG&A spend in the quarter was, you know, kind of flattish to downish slightly year over year and below where we had expected. So just kind of a headline cost and headcount question, please.
spk20: Yeah, thanks for your question, George. I think we see it as an opportunity to acquire talent. So when we see Salesforce, Twitter, those kinds of organizations laying off in large numbers, we think, wow, there's probably a great architect in there who could be building software with us in a more resilient industry of healthcare. So we're thinking about it as this is a good time for us to start growing and thinking about how can we acquire really great talent We always look at our cost basis, and, you know, we talked a little bit earlier about how we're thinking about getting efficiency and making investments in systems to automate our own staff and the productivity of our own teams. That'll continue. I think we'll be through most of that in this fiscal year, and then that's why we'll see, you know, kind of earnings growth. Next year, it's one of the leverage points for us, but we're, you know, we're pleased to to be hiring in this environment now that Jamie provides some color.
spk16: Yeah, David, what I would say is we've worked really hard over the last few years to build a scalable infrastructure. We will continue to invest in technology that increases our efficiency. And, you know, we've managed our headcount very tightly even during the growth periods of the last year and a half, and we will continue. David's point about bringing on, you know, the opportunity for some of these layoffs, it's for us to get certain skill sets that have been hard to find. So we will be selective in it, and that's all part of our – our plan to demonstrate operating leverage over the coming years. So you have to be very disciplined to make that a reality.
spk08: Okay, I appreciate the call.
spk06: And once again, if you'd like to ask a question or you'd like to have a follow-up question, please press star 1 on your touchtone phone now.
spk08: Well, there's no other questions.
spk20: Thanks for joining. It was a good quarter, great quarter as far as a bookings perspective. Still being able to sell in this market. Very excited about the prospects going forward. Double-digit growth coming up here very shortly as we start fiscal year 24 in April 1st. Thanks for your continued interest in NextGen Healthcare.
spk05: This does conclude today's program. Thank you for your participation. You may now disconnect. Thank you. you Bye. Thank you. Thank you. Thank you.
spk15: music music
spk06: Welcome to NextGen Healthcare Fiscal 2023 Third Quarter Results Conference Call. Hosting the call today from NextGen are David Sides, President and Chief Executive Officer, and Jamie Arnold, Chief Financial Officer. Today's call is being recorded. All lines have been placed on listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star then the number one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. We ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you require operator assistance, please press star zero. At this time, I would like to turn the call over to James Hammerschmidt, Senior Vice President of Finance and Investor Relations of NextGen. James, you may begin.
spk18: Thank you, operator. Before we start, please note that we will be making forward-looking statements during the presentation and the QA part of the call. These statements are based on management's current expectations and assumptions and are subject to risks and uncertainty. Factors that may cause actual results to materially differ from expectations are detailed in our earnings release and SEC filing. This call will also reference certain non-GAAP financial measures. Information about non-GAAP financial measures, including reconciliations to U.S. GAAP, can be found in our earnings release, which is available on our investor relations website. At this time, I'd like to turn the call over to our President and CEO, David Seid.
spk20: Thank you, James. In May of last year, we described our multi-year journey to deliver double-digit revenue growth, operating leverage, and disciplined capital management. And I'm pleased to report strong execution and solid results across all three fronts in the quarter. But before I go into my prepared remarks, I'd like to address an important topic. On January 6th, we became aware of unauthorized access to a limited part of the NextGen network. Upon investigation, we learned the company was the target of a sophisticated cyber attack. We immediately executed our internal response procedures and contained the threat, secured our network, and have returned to normal operations. Our forensic review is ongoing, and to date we have not uncovered any evidence of access to or exfiltration of client or patient data. Based on our investigation to date, this incident impacted select administrative non-client files within our network. In total, this affected less than 1% of the devices used by our employees. Out of an abundance of caution, as soon as we noticed the threat, we severed connectivity to some systems and notified clients who were impacted in a timely manner. the vast majority of clients continue to operate as usual without any disruption. Those systems have all been securely restored and operations have returned to normal. While unfortunate, we are happy to note that previous investments in cybersecurity paid off. We will continue to invest in keeping our systems safe and secure for our employees, clients, and the patients they serve. Now back to our progress in the quarter, I'd like to start with growth. Our integrated solution creates a foundation to deliver insights at the point of care, which allows for us to partner with clients to improve outcomes. This differentiation is resonating in the market, especially among leading integrated care organizations looking for a holistic platform to deliver medical, behavioral, and dental care. Our bookings in the quarter reflect this differentiation, where despite the macroeconomic environment, we continue to see success in gaining new logos and cross-selling our surround solutions. There were six deals over $1 million, spanning both inside and outside the base. Bookings from net new clients represented approximately 30% of sales in the quarter, bringing our full year average back above 25%. We continue to see opportunities to help our clients address the problems they face in today's environment, such as staffing shortages, wage increases, and higher patient volumes. These challenges create demand for our managed cloud services, revenue cycle, and patient engagement solutions as our clients look to gain practice efficiencies and improve financial outcomes while continuing to deliver quality care. These factors, in addition to strong client retention, have resulted in continued growth acceleration across our diverse revenue streams. This is especially clear in our recurring revenues, which is been building momentum and exceeded 10% growth in the quarter. While our commercial efforts are focused on delivering growth in fiscal year 23, our solutions and development organization are innovating to build new offerings that drive growth in fiscal year 24 and beyond. We believe there's tremendous opportunity to expand our platform, especially when we look at the patient intake process and other front-end offerings that are currently in early testing with clients. We see strong proof points that our solutions are delivering value and a clear return on investment. I look forward to updating you all on the progress the team is making when we approach the start of our new fiscal year. Moving on to our operations and investments we're making to scale. Our ability to deliver operating leverage starts with the foundation of our employees and our culture. We just recently conducted our annual vote survey, that is voice of the employee, which measures employee engagement across 14 dimensions. I'm pleased to say employment engagement has increased for the sixth year in a row and is well above the benchmark, with strong improvement in culture, working environment, and client focus. We've been thoughtful in managing our headcount throughout the year, from the expansion of our sales development rep program, creating the upgrade center of excellence, and moving to a remote-first, work-from-anywhere organization which allows us to access talent pools on a global scale while minimizing our facility footprint. The company is focused on making investments and taking the actions required to show operating leverage. We will continue to optimize our resource mix, rationalize vendor spend, and rethink processes and technologies to improve our productivity as we close out the final quarter of fiscal year 23. Now turning to our capital allocation effort, We believe total shareholder return is enhanced by taking a disciplined and deliberate approach to capital acquisition and deployment. Our strategy is focused on investing in innovation, accelerating growth through M&A, and returning capital to shareholders through opportunistic buybacks. Following our last earnings call, we raised $275 million in convertible debt and concurrently purchased approximately 2.1 million shares for $40 million as part of the offering. These proceeds, in addition to our cash generation and credit facility, provide ample capital to execute on our inorganic growth agenda. We also announced the acquisition of TSI Healthcare, a longstanding partner in the first acquisition the company has done in almost three years. TSI expands the addressable market served by our enterprise domain, unlocking new attractive specialties such as cardiology, rheumatology, and pulmonology. The company provides purpose-built clinical content and a differentiated service offering, which when paired with our strong commercial channel, will drive long-term sustainable top line and bottom line growth. Given the similarities in culture and in the line strategy, I'm pleased to say the integration effort is going well as we start making foundational investments back into the business. Looking forward, we maintain an active M&A pipeline and will continue to assess future acquisitions especially as it relates to capabilities that accelerate our effort behind next-gen insights. We believe data, analytics, and value-based care enablement will continue to be an attractive opportunity for the company to pursue. Lastly, I'd like to acknowledge the passing of NextGen Healthcare's founder, Sheldon Raisin. Billy was an intensely passionate and entrepreneurial innovator. By digitizing health records and automating workflows decades before the HITECH Act mandated the use of EHRs, Shelley has improved the lives of thousands of clients, tens of thousands of providers, and millions of patients. He will be missed. In building upon his legacy, the company is more focused than ever to innovate and deliver better health care outcomes for all. And now, I'll turn the call over to Jamie to provide details on our financial performance in the corridor. Jamie?
spk16: Thank you, David. Now turning to the third quarter fiscal year 23 financial results. Total bookings came in at $44.8 million. This represents a 19% increase from the third quarter of last year and a 20% increase from last quarter, bringing year-to-date bookings growth to 9%. Software license bookings were below recent trends, which has an outsized impact on both quarterly revenue and earnings. Total revenue for the quarter was $161.9 million, an 8% increase year over year. Recurring revenue accounted for $148.7 million, or 92% of total revenue. This equates to 11% year over year growth, excluding the impact of the TSI acquisition Our organic growth for recurring revenue was 8%, primarily due to the strong performance in transactional and data services and managed services. Most of the contribution from the TSI acquisition is reflected in the subscription revenue line. Non-recurring revenue for the quarter was $13.2 million and represents a 14% decrease compared to the same quarter last year. and a 17 percent decrease from last quarter. While we expect Q4 software bookings will return to the prior six-quarter trend, we are closely watching for changes in client purchasing preference that could be affected by the macroeconomic environment. Gross margin of 47.3 percent was down approximately 310 basis points compared to the same quarter last year, and down 94 basis points compared to the prior quarter. As noted in the discussion about non-recurring revenue, software revenues are off recent trends, which had a significant impact on gross margin decline. Additionally, as discussed on last quarter's call, we have made significant investment in our upgrade center of excellence and professional services, as well as a shift in product mix. Margin improvement will continue to be a focus and SPRIN related to upgrades should start to moderate in the back half of fiscal year 24. Turning to operating expenses, SG&A of 46.2 million decreased by 2% compared to the same quarter last year due to lower variable compensation as well as cost reduction actions we have been executing such as reducing facilities footprint. Net R&D expense was 19.6 million for the quarter and represents 12% of total revenue. This is a 1% increase compared to the same quarter last year. We had a GAAP tax provision of $1 million this quarter with a GAAP effective tax rate of 11.5%. Our non-GAAP tax rate remains at 20%. On a GAAP basis, Q3 fully diluted net income per share was 12 cents compared to net income of 8 cents per share in the fiscal third quarter of 2022. On a non-GAAP basis, fully diluted earnings per share for the fiscal third quarter of 23 was 26 cents compared to 24 cents in the year-ago quarter. Turning to the balance sheet, we ended the fiscal third quarter with $241.6 million in cash and equivalents and no balance outstanding on our line of credit. Free cash flow for the quarter was a negative $6.9 million. As David noted, in November, we issued $275 million convertible senior notes with net proceeds to the company of $266.5 million after debt issuance costs. Key terms include a 3.75 percent coupon rate, five-year maturity period, and a conversion price of $25.68. we can call them on or after November 20, 2025. For more detail, please refer to the debt footnote in our financial statements. Concurrent with the convertible debt offering, we purchased 2.1 million shares for $40 million at an average cost of $19.02 per share. Since the authorization of our share repurchase program in Q3 of fiscal 2022, we have purchased a total of 4.8 million shares for 85.8 million at an average cost of $17.68 per share. As of December 2022, we still have $74 million remaining in the share repurchase authorization. On November 30th, we acquired TSI Healthcare. The acquisition provided minimal impact to our Q3 financial performance since it represents only one month of actuals. We expect the acquisition to contribute between $10 and $12 million of revenue for fiscal year 23 and will be accreted to earnings within a year. As mentioned earlier in the call, the impact to revenue will be mainly in the subscription revenue line. Turning to our fiscal 23 financial guidance, as noted in the press release, we are updating our prior guidance to account for the acquisition of TSI and the convertible debt offering. We now expect fiscal 23 total revenue to be in the range of $642 million to $650 million, which represents a year-over-year growth of 8.3% at the midpoint. Moving to adjusted EBITDA, we are maintaining our prior guidance range of 110 to 115 million and our prior fiscal non-GAAP EPS range of 93 to 99 cents. In closing, I believe the company is well positioned to meet our long-term objectives based on our strong bookings performance in Q3, operational execution, and disciplined deployment of capital for smart acquisitions like TSI. And now, let me turn the call back to David for closing comments.
spk20: Thank you, Jamie. NextGen continues to execute with a focus on driving growth for both us and our clients, and we're making the investments required to deliver long-term profitability and scale. Our overall positive outlook reflects the tailwinds we created by solely focusing on ambulatory care our resilient business model, and our focus on driving shareholder value. In summary, I am pleased with this quarter's results, and it sets us up for sustainable double-digit revenue growth in fiscal year 24, which starts for us in April. This is one year earlier than we set at our investor day in May, which targeted double-digit growth in fiscal year 25. We will provide fiscal year 24 guidance in May, after we announce our fiscal year 23 year-end results, and I am incredibly proud of the commitment and care shown by the NextGen family, both to each other and to our clients. This concludes my comments. Let's move to questions. Operator?
spk06: At this time, if you'd like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. We'll take our first question from Stephanie Davis, SGB Securities.
spk04: Hey, guys. Thanks for taking my question. Just a quick one from me when I think about what takes up most of your guys' time. I think about the progress of NextGen as first, you know, your predecessor, David, he had to focus really on turning around user experience. It felt like your first priority was getting to that double-digit growth target. Now that you're there, is it just pure execution or is there anything else in mind as your next big goal?
spk20: I think it's pure execution from here. So some of the new organic products that we're coming out with in the insight domain, we're seeing good early client interest. And so we'll talk about those more. But, you know, some of the things we talked about, behavioral health, last quarter we had a really good sales quarter for behavioral health. which is a new organic area for us. So those were part of the contribution to having a record sales quarter. So I think from here it's just execution, getting those new products out, driving the margin expansion that we know is there now that we have the revenue growth, and then continuing to be smart on how we deploy capital that we've raised and make really smart acquisitions. Just doing that from here should get us where we want to go.
spk04: Not a bad place to be. And just a quick follow-up, then, when I think about the quarterly cadence of margins for the year, is the uptake in 4Q, should I just assume that's license sales shifting from 3Q to 4Q and helping the margins?
spk20: Yes. I mean, that's basically it. And then I think next year, too, we think over time, as we, you know, we've talked about this before, we sell more subscriptions. We're going to, you know, temper our expectation for recognizable in our next year plan and account for that by, you know, taking out some cost to allow for that reduction and, you know, kind of higher octane revenue so we can see the growth that we're looking for from that next year. But, yeah, it's mainly you'll see a rebound next year, as Jamie said in his comments, or next quarter, I mean, in the recognizable license revenue. And we'll be, you know, as we talked about, on the full year number. as we projected in the guidance.
spk03: Super helpful. Congrats on a set of forget it year. Envious.
spk07: Thank you.
spk06: Our next question comes from Jack Wallace from Guggenheim Securities.
spk11: Hey, thanks for taking the questions. Just a quick question on the hacking incident. Has that had any impact with your current
spk20: and potential clients um and i got a couple follow-ups no not so far um you know unfortunately it's more common than you would think nowadays um we were we were glad to contain it you know through no client systems affected at all no client data no patient data no provider data none of those systems were were compromised at all so you know We had a few, less than 1% of devices that were compromised. We quickly shut that down within a day of realizing that. So we contained it and then restored everything, communicated with any clients who might have had a process disruption because we didn't answer a support call or other kind of ancillary things. But overall, all of the practice that we've done and all of our policies and procedures served us well during this. As you can imagine, we're speeding up some of our investments in cyber that we had planned. We implemented a number of those even in the last couple weeks. And overall, we're fortunate it's not material. It doesn't affect our results financially. We've had good conversations with our clients. They appreciate the honesty and transparency. And from here, we'll adopt a really strong culture, and we've learned from it. It's one thing to do the tabletop exercise. It's another to do it in practice. I think we're well-practiced now.
spk11: Yeah, that's helpful. And then in the last quarter, we talked about the application to become a QHIN. And just you're wondering about the timeline for that to go operational. And then as a follow-up to that, the other participants or the other applicants, are you encouraged by the level of industry interest? And then as everyone goes live, can you just talk a little bit about how that that can impact the business going forward.
spk20: Thanks. So we're encouraged by the ability of our software to kind of scale to QHIN level. We have a number of opportunities there, talking with clients about our MERS Cloud Connect. So it's the offering that helps client connect to any kind of any source at scale. And the application process hasn't come out for QHIN yet, We feel like we're there from a technology perspective. We need to work through the commercial terms and we'll see what those guidelines are. When we talk with clients about it, I'm encouraged because the idea of doing an interface one time for all clients. For example, if you're in Phoenix, you connect to a hospital and then all of our clinics in Phoenix can be connected at hospitals through us without having to do that work. It's just so much more efficient that it's got to kind of both speed interoperability and lower the price of health care because we did it one time. So from an effort perspective, it's just substantially better. So we're encouraged that there are other people in the industry thinking about this the same way. It could be really straightforward to then just connect two QHINs, a next-gen QHIN to another supplier's QHIN, and all of a sudden all of that is interoperable from one connection between us both. We're already connected to all of our clients. So if another supplier was connected to all their clients, that one connection could bring enormous advantages and defragmentation to the health care marketplace and the medical records, as well as improve things like how you do care management across domains and across venues. In summary, we're really encouraged. I think we're in the right place. We have the right technology. And as the application process becomes clear, we'll work through the rest of it. But I think it's turning out to be a good move for us.
spk11: And with, let's say, all the plumbing getting set up on the other end of this, do you suspect that this will eliminate some of the bad acting of the info blocking in the industry or Is the information highway, the presence of that, not necessarily guarantee a freer flow of information from a decision-making standpoint?
spk20: Yeah. Jack, sorry, I misspoke on the QN application. It has come out. We're going through it. But I agree with your premise that this will make data much more liquid than it was before. I think some of our other suppliers set up QNs, too. slow down any information blocking from any of those other suppliers or whether it's, you know, some aggregators like Commonweal or others. So those are all, I think, good. We can, you know, every one of the suppliers can kind of handle the volume of this and is built to already. And like I said, we're already connected to all of our clients. So for us to take the next step is really, okay, how do we do this at national scale? How do we think through, you know, how do we run this system? and get value from it. So I think it's all good for the American healthcare system that these kind of regulations are coming into effect, and we intend to capitalize on them.
spk10: Great, thanks. I'll hop back in queue.
spk06: Our next question comes from Jalinda Singh from Truist Securities.
spk14: Thank you, and thanks for taking my questions. I just want to better understand the top-line growth and margin profile for TSI healthcare longer term. It seems the deal is not adding any EBITDA in fiscal 23, which I understand is only four months, but you talked about the deal becoming creative to EBITDA in a year or so. Maybe talk about what will drive that. Is it just cost management, cost synergies? What are the key drivers which you know, is that improving margins at TSI? Just maybe flesh out a little bit of some details there.
spk20: Yeah, thanks, Jalinder. It's a good question. So we're still making investments in our own internal technology this year. When we went to Investor Day, we talked about we get operating leverage from some of the ways that we're automating ourselves, meaning automating next gen. So we've deployed systems to better automate how we handle our support process. We've deployed things like AI that when one of our support staff are talking with a client, it suggests here might be the possible answer. So as we're hiring and scaling as we grow, we can bring people online to do their job more effectively and more productively quickly. We're also making a large investment in all the upgrades of Spring 21, which we've talked about, and obviously that'll have an end date sometime this year, but That's been a big investment to set up that center of excellence. It's kind of a one time to get through this Cures Act process. And then that will fade away or we'll turn that into another revenue generating capability with those employees. So there's some things that we're doing now to try to set ourselves up to scale for the growth. And that's why we said this year we're going to, you know, have our EPS be similar to last year as we take some of that margin and invest in our own business. And then that sets us up for operating leverage next year and the following years because we're planning on this being a multi-year journey. And I'll hand it to Jamie for other comments.
spk16: I think that's it, David. We've laid out a multi-year plan, and we would expect, I think of it more as our progress on the Rule of Forty score, so we will show some operating leverage.
spk19: But as David indicated in his prepared remarks, we will also accelerate revenue growth next year. And on the EBS EBITDA side, too, you know, we can land that exactly with spend.
spk20: So I feel like that's the easier part of the equation to work on. We've, I think, worked on and are achieving the harder part, which is double-digit revenue growth, or we'll certainly achieve that in fiscal year 24. I mean, just the 92% recurring nature of our revenue growth a record Q3, we can see fiscal year 24 very clearly now from a revenue perspective. We'll give guidance in our call in May, but, you know, we're spending money this year to still hit our EPS guidance range, but we're using that money to improve our cyber profile, to improve our productivity, to do more robotic process automation and some of these things that will have a good, you know, NPV for us and the present value for years. to take care of these things one time.
spk14: I'm assuming all those initiatives kind of apply to your TSI healthcare transaction. That's what I was actually referring to, right?
spk20: Right. So, you know, taking TSI, which we've worked with for many years, really like the company, love the people, taking them from a privately owned organization up to a SOX-compliant you know, public company standard takes investment. And so we're working through those investments, whether it's on the IT side, the finance side, um, how, how we, how we run. Um, but you know, we'll get through those. And then as we said, it will be accretive in the first year.
spk14: Okay. And then, uh, I know we have talked about this in the previous call and you guys made some comments on this call too, about, you know, the impact of macro environment, but, uh, I don't know if maybe it's just me. I mean, it looks like you're a little bit more cautious this time, like you're watching the trends and macro impact. Have you seen any early indications in the impact on the sales cycle and decision process among your clients or even indications to put any spending on hold? Clearly, your bookings don't reflect that, but just curious, like why? Is there any change in tone or still you think that there is no impact as such?
spk20: Well, I mean, it does impact our clients from their ability to recruit staff, their bottom lines, right? But to the point of record bookings, right, we're doing well from a sales perspective. So we're not seeing an impact there. We feel good about the current quarter Q4 that we're in to end the year. So it's not affecting us from that perspective. Obviously, like anyone, we have our own cost internally where it affects us. You know, we've seen that, but we're mitigating that and feeling good about that. But the main piece is, I'll hand it to Jamie.
spk16: Yeah, David, it was more about, when we talked about it today, it was more in context of the software revenue and the software bookings in this quarter. Last quarter, we were kind of nonplussed about the bookings level and we said it was kind of a timing. We clearly made it up and through the first three quarters this year, our bookings are up 9% in total. What we did see this quarter that we called out was the lower software level and so we're monitoring the macro trends, all this discussion about potentially a recession this year, and other conditions that affect our clients, we are seeing, as we see the pipeline develop, there seems to be more of a preference for the SaaS product than the licensed product. And that's what we were commenting on.
spk13: Got it. Thanks a lot.
spk16: Yep.
spk06: Our next question comes from Sean Dodge from RBC Capital Markets.
spk22: Thanks. Good afternoon. Maybe just jumping off, Jimmy, on your last point there. So, David, your previous point around license sales, you had sounds like some confidence it was going to pick back up in Q4. I guess the little bit of softness there in Q3, was that then from deals that simply slipped from Q3 to Q4? I guess have you actually seen a pickup in this already in Q4? Are those in the pipeline? Are you off to a quicker start with those this quarter than you have historically?
spk20: Yes, Sean, it's a little bit of a slip. And so we have high confidence because some of those may have even closed by now. So it gives you confidence that this quarter looks good. But I do think, like I said in our earlier answer, I think next year we're going to move the license revenue down from our own budgetary expectations because of the lumpiness. And we're seeing that trend because we're selling everything as subscription. that's kind of expected. It's been coming down, as we've said before, for multiple years. It used to be $60 million five years ago. Now it's around $30 million. It won't go to zero, but it'll keep getting a little bit smaller as all of our new offerings and surround offerings are all subscriptions. So that's where we're seeing a lot of growth in the business.
spk02: Okay. That's very helpful. Go ahead, Jamie.
spk16: No, I was just going to say it is If you look at the longer-term trend over, as David said, five or six years, you see a very, very clear trend line. It did change as we started to come out of COVID. We're just being, you know, we're calling it out, but we have an adequate working set for this quarter. So we just want to highlight it. We try to be transparent.
spk22: Okay, and then... With cross-selling continuing to be an important part, David, you mentioned the surround solutions, that being an important part of the growth algorithm going forward, what's the backdrop like there now? And what I'm trying to get at is just the motivation for clients to swap out and consolidate ancillary systems on NextGen. Is that kind of the main factor there, just your ability to integrate all of these solutions more seamlessly and present them with kind of one offering or Or is there some element when you bundle all these together, can you just price all of these in a way that's a little bit more competitive than standalone point solutions could?
spk20: Yeah, so we think integration wins. So integration is an easier way to manage a system. So you have less interfaces between us and maybe point solutions. It's easier to host, right? So we can host everything for a client in AWS and have an integrated system. cloud offering, and it's less from a cyber perspective to protect as well as less to manage. So if you're a physician office, you're under pressure from a revenue perspective. You're thinking, okay, I'm going to have less systems. We think the same thing when we're looking at our own cost internally. We want to simplify the number of suppliers that we work with, and we'll pick integrated suppliers to do more with fewer people. And, you know, as you do more, you expect – you know, to see a return. There's nothing else from your own staff because there's less systems that they have to know how to work. So I think that trend's playing out. I think it's favorable for us from an integrated provider perspective, and it should continue. We see people still wanting to buy these solutions. It's easier to add one on than it is to go contract with somebody new and go through that process.
spk08: Okay. That's great. Thanks again.
spk06: Our next question comes from Jessica Tistan from Piper Sandler.
spk21: Hi, thanks for taking the questions. I just wanted to follow up a little bit on the TSI margin questions. Can you maybe talk about the gross margin profile and then the EBITDA margin profile of that business, maybe near term and then also steady state, just because I think there are a couple of different specialty EMRs that you guys will be maintaining as you scale that business. Thanks.
spk20: Well, it's not multiple EMRs. So they use our EMR. They have content that's specific to three specialties, the pulmonology, rheumatology, and cardiology. That's really attractive to us because we haven't gone after those specialties. But they use our EMR. So over time, the EBITDA profile looks really good. It'll look like our own EBITDA profile. And in some ways, they do better in some places than we might do. Long term, I think the EBITDA profile will approach ours. And Jimmy, I don't know if you want to add any color on the gross margin.
spk16: Yeah, David, I want to go back to why we acquired TSI is more so than talking about the margins are going to look pretty similar to ours. But the reason we acquired TSI is their specialty content and their high level of service that they provide to their customers. which, so the content is in rheumatology, cardiology, and pulmonology. These are specialty areas that they had built content and we didn't have it. So we think it opens up new areas for us and can help accelerate our growth for the next gen enterprise domain. And the other thing is, some of the things, they provide services to their customers. They have some offerings that their customers value and we will bring those to our next-gen clients also. So it's more about the opportunity it creates on the top line is how I think about it.
spk21: Got it. And then I think just as you were discussing the TSI revenue acceleration potential, you might have mentioned that the sales force was kind of limited at the time of the acquisition. I'm wondering were the costs associated with ramping the sales force for that business fully reflected in the fiscal 3Q? And then, if not, just when might those investments begin to appear? Thanks.
spk20: Well, we didn't own the asset that long in 3Q, so you'll see it ongoing. But it should offset with the growth we think we'll see from that business, too. So it'll be in going forward, but it's in all of our guidance.
spk21: Got it. Thank you.
spk06: Thanks. Next question comes from George Hill from Deutsche Bank.
spk12: Yeah, good evening, guys, and thanks for taking the question. David and Jamie, kind of a macro question, as cost-cutting and HR levels and staffing levels seem to be a trend across the industry. I know this is always a sensitive topic, but I know that it was hard to hire employees during the upswing. We're seeing a lot of layoffs across a lot of macro tech sectors. During this downswing, I guess I'd ask you how you feel about cost structure and staffing. And does the company see this more as an opportunity to opportunistically hire people and bring on talent? Or as you look at the demand environment, is this something where you're kind of trying to match staffing levels to end market? And, you know, the question's kind of spawned from the SG&A spend in the quarter earlier. was kind of flattish to downish slightly year over year and below where we had expected. So just kind of a headline cost and head count question, please.
spk20: Yeah, thanks for your question, George. I think we see it as an opportunity to acquire talent. So when we see Salesforce, Twitter, those kinds of organizations laying off in large numbers, we think, wow, there's probably a great architect in there who could be building software with us in a more resilient industry of health care. Uh, so I, we're thinking about it as this is good, a good time to be us to start growing and thinking about how can we acquire really great talent? Um, we always look at our cost basis and, you know, we talked a little bit earlier about how we're thinking about getting efficiency and making investments in systems to automate our own staff and the productive Euro of our own teams. Um, that'll continue. I think we'll be through most of that in this fiscal year. And then that's why we'll see kind of earnings growth. Next year, it's one of the leverage points for us. But we're pleased to be hiring in this environment now that Jamie provides some color.
spk16: Yeah, David, what I would say is we've worked really hard over the last few years to build a scalable infrastructure. We will continue to invest in technology that increases our efficiency. And, you know, we've managed our headcount very tightly even during the growth periods of the last year and a half, and we will continue. David's point about bringing on, you know, the opportunity for some of these layoffs, it's for us to get certain skill sets that have been hard to find. So we will be selective in it, and that's all part of our – our plan to demonstrate operating leverage over the coming years. So you have to be very disciplined to make that a reality. Okay, I appreciate the call.
spk06: And once again, if you'd like to ask a question or you'd like to have a follow-up question, please press star 1 on your touchtone phone now.
spk08: Well, there's no other questions. Thanks for joining.
spk20: It was a good quarter, great quarter as far as a bookings perspective. Still being able to sell in this market. Very excited about the prospects going forward. Double-digit growth coming up here very shortly as we start fiscal year 24 in April 1st. Thanks for your continued interest in NextGen Healthcare.
spk05: This does conclude today's program. Thank you for your participation. You may now disconnect.
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