NextGen Healthcare (NYSE:NXGN) Q2 2021 Earnings Conference Call - Final Transcript

NextGen Healthcare (NYSE:NXGN) Q2 2021 Earnings Conference Call - Final Transcript 2020-10-22T21:00:00+0000 Executives Rusty Frantz - NextGen Healthcare, James R. Arnold - NextGen Healthcare, Analysts Jeff Garro - William Blair & Company, Sean Wieland - Piper Sandler, Steve Halper - Cantor Fitzgerald, Sean Dodge - RBC Capital Markets, Matthew Gillmor - Baird, Sandy Draper - SunTrust Robinson Humphrey, Dave Windley - Jefferies, Donald Hooker - KeyBanc, Stephanie Demko - SVB Leerink, Gene Mannheimer - Colliers Securities, Operator - Welcome to the NextGen Healthcare Fiscal 2021 Second Quarter Results Conference Call. Hosting the call today from NextGen are Rusty Frantz, President and Chief Executive Officer; and Jamie Arnold, Chief Financial Officer. [Operator Instructions] 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 federal securities laws, including and without limitations, statements related to anticipated industry trends, and the Company's plans, future performance, products, perspectives and strategies. Risk and uncertainties that may cause results to differ materially from those expressed in these forward-looking statements, including among others, those risks set forth in the Company's public filing with the US Securities and Exchange Commission, including the discussion under the heading Risk Factors in the Company's most recent annual report on the Form 10-K and any subsequent quarterly report on Form 10-Q. Any forward-looking statements speaks 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 earning 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 press release that was filed with the SEC and is posted to the Investors section of our website. This release also provides qualitative description of how we have calculated non-GAAP financial measures contained in our guidance. At this time, I would like to turn the call over to Mr. Rusty Frantz, President and CEO of NextGen. Sir, you may begin. Rusty Frantz - NextGen Healthcare Thank you, operator. Q2 FY '21 is a great example of NextGen's operational and financial strength and our ability to continue to execute and advance our strategy during a complex time. On today's call, we will highlight the following. NextGen's strong Q2 performance across almost every operational metric, including revenue, earnings and free cash flow, as well as continuing strong growth in subscription services. Our delivery of the best overall client experience in the independent ambulatory market is showing up in commercial wins both inside and outside the base. Our intention to further capitalize on the commercial success of our expanded solution by opening significant long-term market opportunity through bringing our client base onto the Spring 2021 release, which notably includes our newly acquired patient experience platform. And at the close of our remarks, we will provide guidance for FY '21, as we now have better visibility and understanding of the range of business impacts from COVID. Let's start with Q2 operational performance. Our revenue for the quarter came in at $140 million, an increase of 4.3% year-over-year and 7% quarter-over-quarter. As it has been for a number of years, subscription services revenue continued its mid to high teens growth rate, accounting for $36.9 million and representing 17.4% year-over-year and 4.3% quarter-over-quarter growth. We saw a gradual return of our volume-based businesses throughout the quarter and as we had forecast, our volume driven lines RCM and EDI are at about 93% to 95% of pre-COVID volume levels. Additionally, we saw a spike to more classic levels on perpetual license revenue which pushed our software and hardware line up $3.3 million higher than each of the two previous quarters. Non-GAAP EPS of $0.30 increased $0.06 year-over-year and $0.07 quarter-over-quarter. This strong performance benefited from the $0.04 of short-term cost initiatives that have expired as of the start of Q3, contribution from the higher than expected perpetual license revenue, as well as excellent cost management across the organization. As we move through the balance of this year, we expect this number to move down to a more normal, fully-laden run rate. Free cash flow of $23.7 million highlights another great performance by our collections team. Based on our continuing track record and improved market conditions, we are comfortable further reducing the amount drawn on our revolver early in the pandemic, resulting us -- in us paying down a total of $115 million in Q2. This leaves an outstanding balance of $64 million as of September 30, and we are in a net cash positive position. Taking a deeper dive into commercial execution, we had a great quarter. Bookings of $31.2 million were up $5.7 million quarter-over-quarter, and they are down from a stellar $36.9 million year-over-year, last year did include a $5.5 million recurring deal. We are seeing some recovery of demand and we'll discuss our forward-looking views later on this call. Consistent with last quarter, we were successful in competitive takeaways, as more than 20% of our bookings came from takeaways, showing the growing strength of our solution coupled with an increasing brand tailwind from our clients satisfaction. As we continue on our journey to becoming a trusted advisor to our clients and a relentless focus on delivering the solution that enables our clients future, I expect to see our continue -- commercial success continue. And finally, let me turn to the legacy maintenance line. Retention once again came in strong at over 90%, and point of fact 92.9%. Given the rapid client and revenue growth in subscription services and recurring revenue and the relatively -- relative stability and now lesser importance of the legacy maintenance line, we will no longer be reporting on this metric unless it trends below our forecast range of 90%. We saw continued validation of our great client satisfaction in the latest release of the KLAS Interoperability Report. NextGen was identified as, "the only ambulatory specific EMR vendor to provide a strong usability experience for all interoperability workflows measured in the support." This is a great validation of how NextGen is giving our clients the unique capability to access the patient's entire available clinical records and put that information to use in the care process. To be able to treat the whole patient and create a great patient experience, these are absolutely essential capabilities. Many have and continue to talk of big game in their marketing materials. We are delivering. And not just delivering a lot of data. We are helping providers get to more informed clinical insights, not according to me, but according to our clients. As we look to the future, we are focused on the early success and demand around our patient experience platform. We also see the amazing opportunities for deeper integration across the broader portfolio further separating us from both traditional competitors, but also best of breed players. By delivering a truly integrated platform, we are both opening up further opportunity and becoming even stronger in our base. To that end, we have been investing in significant R&D aimed at delivering this next level of integration in our upcoming Spring 2021 release. At that point, we will further empower our why NextGen message across the marketplace, continuing to enhance our competitive position. In addition to valuable cross platform workflows and key capabilities, this release has two very important aspects. First, the Spring '21 release will have our new patient experience platform deeply integrated. In addition, this will be the release that enables our clients to meet the requirements stemming from the 21st Century Cures Act, which come due in August '22, and affect and are required for the vast majority of our client. [Technical Issues] Operator - Mr. Frantz? James R. Arnold - NextGen Healthcare Given him a second, please. Operator - No problem. Rusty Frantz - NextGen Healthcare Jamie? Operator - And Mr. Frantz, you are reconnected. James R. Arnold - NextGen Healthcare Yes. Rusty Frantz - NextGen Healthcare Jamie, where do we leave -- where do we leave our hearers. The glories of remote work. Okay. So I'm going to start back just a little bit, and I apologize for repeating for anyone. As we look into the future, we are focused on the early success of demand around our patient experience platform. We see the amazing opportunities for deep integration across the broader portfolio further separating us from both traditional competitors, but also best of breed players. By delivering a truly integrated platform, we are both opening up further opportunity and becoming even stronger in our base. To that end, we've been investing in significant R&D aimed to delivering this next level of integration in our upcoming Spring 2021 release. At that point, we will further empower our why NextGen message across the marketplace continuing to enhance our competitive position. In addition to valuable platform workflows and key capabilities, this release has two very important aspects. First, the Spring '21 release will have our new patient experience platform deeply integrated. In addition, this will be the release that enables our clients to meet the requirements stemming from the 21st Century Cures Act on August '22, which affect and are required for the vast majority of our clients. To that end, NextGen will be investing to ensure our base is migrated on to the Spring '21 release in the fully integrated patient experience platform. This effort creates significant opportunities. We have seen our attachment revenue for new capabilities grow quickly unlike satisfaction is highest for clients on our latest releases. By bringing clients quickly under the Spring '21 release and by standardizing on the patient experience platform, we can contract for such high value modules like self-scheduling for patients, virtual visits and patient pay all integrated. As we bring the client base into the future, we also be truly activating this increasingly broad market opportunity. As we accelerate into the Spring '21 release, we are also seeing benefits within the R&D line from two primary dynamics. The first is a continued reduction in the need for sustaining activities attacking technical debt as a result of our work on quality. The second is the continued success in becoming more efficient from an investment standpoint. The global resource planning work we have done, the software lifecycle improvements as well as the development of nimble and capable flex capacity have all combined to allow us to maintain roughly flat to slightly down from a raw dollar standpoint. We have done this while delivering increasing capacity without compromises to quality. From an implementation standpoint, we are starting to invest here ahead of the Spring '21 rollout. This cost will show up in the back half of the year, further establishing the back half of '21 as the representative baseline of how we will look at entering FY '22 from an opex standpoint. In a few weeks, our user group meeting usually held live in-person has naturally migrated to virtual this year. While usually we see 2,500 to 3,000 of our existing client team members come join us along with a few prospects, this year, we already have 5,000 existing client team members, but have also created a reduced track for any ambulatory team member regardless of which other vendor they are currently on. This is not a sales presentation about NextGen, but rather a small example of the very high value strategic and tactical content we continuously provide to all NextGen clients as part of their overall experience. We see this as a great opportunity to continue to NextGen journey to becoming a trusted advisor to all ambulatory providers as we support a one of a kind, integrated approach to the three pillars of ambulatory care, medical, oral and behavioral health. Now to give more color on the financials. Let's turn to Jamie for a deeper dive into the numbers. James R. Arnold - NextGen Healthcare Thank you, Rusty, and thank you to everyone on the call. Now the Q2 financial results. Total revenue of $140 million increased $5.7 million or 4% compared to the same period last year, and up 7% from Q1 FY '21. In light of the circumstances that we faced entering this quarter, our results are above-expectation. Recurring revenue of $125.7 million increased $5.1 million or 4% compared to a year ago, with an increase of 17% in subscription services, 4% in managed services, which was offset by a decline of 3% in maintenance and support and flat for EDI and data services. While doing a year-over-year comparison ties the information in the earnings call to the GAAP financials in the 10-Q and press release, I believe the more informative comparison for recurring revenue is comparing the current quarter to the preceding quarter. Quarter-over-quarter recurring revenue had a net increase of $6.2 million or 5%. Subscription revenue increased $1.5 million or 4%, which is consistent with the general trend over the past several years and in line with our expectation for the future. More significantly for the quarter, volume driven revenues rebounded after the significant COVID impact in Q1 with increases of $3.7 million or 1% -- or 17% for managed services, and $1.4 million or 6% for EDI and data services. Volumes on the same store basis increased consistently over the quarter, resulting approximately 93% to 95% of pre-COVID levels. Maintenance and support decreased $500,000 or 1%, which is consistent with historical trends and expectations. Recurring revenue is 90% of our total revenue, in line with the prior year and the prior quarter and in line with our expectations. Nonrecurring revenue of $14.3 million increased $600,000 or 5% over the same quarter last year. Software license and hardware revenue of $8 million declined $200,000 or 3% year-over-year, but increased $3.3 million quarter-over-quarter. The quarter-over-quarter increase reflects a catch-up of the pent-up demand from impact of COVID on our run rate or lower dollar add-on transactions, as well as several large transactions, both in the base as well as outside the base. These large dollar transactions closed as license purchase rather than subscription making this line lumpy and somewhat hard to forecast. More importantly, it makes a significant impact on the bottom line that is disproportionate to the revenue increase. Non-recurring services revenue of $6.3 million increased $900,000 or 16% compared to a year ago due to our efforts to close out service contracts. We believe non-recurring services will stay in this range or moderate slightly. Bookings came in at $31.2 million in the quarter, down 15% as compared to the same quarter a year ago. Note that we -- last year, we had a $5.6 million contract. Two highlights of the quarter include continued -- continuous improvement in book or continuous strength in bookings of virtual visits and replacement wins with NGE, which represented about 20% of the total bookings for the quarter, further reinforcing the wisdom of the sales management reorganization we announced last year. Cost of goods increased by $3.2 million or 5% primarily due to higher amortization of capitalized development cost and inquired intangibles and higher subscription services and higher managed services, cost associated with the return of transactional volume. Gross profit increased 4% to $71.1 million and gross margin declined 50.8% compared to the prior quarter of 51%. Turning to our operating expenses. SG&A of $42 million increased $2.9 million or 7% from the $39 million a year ago. This increase is primarily due to an increase in legal expenses and an increase in personnel costs including stock-based compensation and salaries and benefits associated personnel that came over from the acquisitions closed in Q3 of FY '20. This was -- these increases were offset by decreases in travel conferences and infrastructure expenses. R&D of $17.7 million decreased $2.1 million or 11% from the $19.8 million a year ago. The decrease is due to higher R&D capitalization, which reduces net R&D expense and decreases in traveling other infrastructure expenses. Our GAAP tax rate for Q2 was a benefit of 14% with non-GAAP tax rate of 20%. To conclude my comments on the income statement, our Q2 GAAP EPS was $0.16, compared to income of $0.09 a year ago. Our non-GAAP EPS of $0.30 increased 6% compared to the prior year. Turning to the balance sheet, we ended the quarter with $103.4 million in cash and equivalents, and $64 million balance outstanding on our revolving line -- revolving credit agreement. DSOs in the quarter were 49 days, a decrease of eight days from last year and down five days from the last quarter. I want to credit our account services personnel and commercial teams for working with clients in this tumultuous time. Based on strong collections and overall market conditions, we have repaid $115 million this quarter against the revolving line of credit. Our capex, excluding R&D was $100,000 for the quarter. Capitalized R&D was $6.5 million for the quarter. In closing, I am pleased with our performance this quarter and proud of the organization for their resilience and determination. I am looking forward to continued progress as we work towards the new normal. This concludes my review of the second quarter financial results, and I will now turn the call back to Rusty to provide our full year outlook. Rusty? Rusty Frantz - NextGen Healthcare Thank you, Jamie. And please confirm you can hear me. James R. Arnold - NextGen Healthcare I hear you. Rusty Frantz - NextGen Healthcare Okay, thank you. Thank you, Jamie. And now, let's take the outlook forward. I'd like to discuss both our view of the rest of the year as well as the assumptions about the effects of the pandemic that we -- that are built into our forecast. Looking at the past volumes taken as well as factoring in the acceleration we currently see in COVID, we're modeling volume staying in the 90% to 95% range for the back half of the year. On the booking side, based on the progress in the first half of FY '21 and the same intensity assumptions for COVID that drive the volume estimate, we expect to see a full return to the demand environment as we move through the balance of that -- balance of FY '21 and into FY '22. We expect continued strong growth in subscription services. This line continues to be the dominant growth driver for NextGen, we expect that mid-teens year-over-year growth to continue through the rest of FY '21 and we saw opportunity to further accelerate in the future. Perpetual license revenue has come down overall, but remains lumpy as evidenced by this quarter. While we have modeled it -- moderating, fluctuation this number has a significant impact on the EPS line given the high margin nature of the revenue. On the volume based side of our business, we look at the expansion of COVID and its potential impacts with a cautious eye. As we look at the remainder of the year, our volume estimates five fewer days in the back half and the front half and patient deductible resets in our Q4 will drive a relatively flat to slightly down forecast for the remainder of the year. Legacy maintenance will continue its slow multiyear decline as we continue to add fewer perpetual licenses, given our outside and inside the base bookings are increasingly showing up in the recurring revenue and subscription sides of our business. And on the cost side, as stated earlier, we have ended the short-term cost reductions, resulting in a resumption of $0.04 of quarterly spend. Our guidance includes the first-half benefit of $0.08 of cost savings, will not be repeated in the back half of the year, nor in FY '22. As discussed earlier, we will invest ahead of the significant deployment of Spring '21 with our new patient experience platform and that whole investment will first show up in Q3 and Q4 and extend through next year. Importantly, we've been able to avoid the need to expand R&D investment through the aforementioned increased cost efficiency, and a spec and robustness of the underlying software, we will be able to support our strategy at current spend levels. That says increased -- that being said, increased commercial success and/or further M&A could cause us to revisit that decision as we move into future years. Finally, we will continue to evaluate, reduce and relocate parts of our facilities footprint with an eye towards employee safety, a great percentage of remote team members in the future and the most favorable geography from a location, talent and cost standpoint. That process is and will be ongoing, as we are now aggressively evolving NextGen into our future state. Based on these dynamics, we expect to see revenue for FY '21 coming in between $535 million and $551 million, with EPS coming in between $0.83 and $0.93. To deliver this kind of year in the face of the pandemic, overcoming significant impact from patient volume drops, delivering key new capabilities like virtual visits at scale, winning competitively with virtual selling all the while, extending our capabilities and client satisfaction, it's just an amazing performance by our NextGen team. As we look past '21, we will leave it at this, while much of this year's recurring revenue numbers already been booked, we must continue to execute commercially as we set up next year's growth, most notably in subscription services. More to come as we move towards year-end and FY '22 begins to take shape. In closing, I want to start by thanking our entire client base. We are proud to be an important supporting actor in the great work you do. We are delivering financially both results and cash generation. Our primary growth driver subscription services is delivering enviable growth at significant scale and positive margin all within the broader profitable cash generating framework of NextGen. We have moved from fixing technical deficiencies to delivering a broad, highly robust strategically positioned solution. We've an increasing addressable market for our solutions across those three pillars of ambulatory care, medical, oral and behavioral both internal to our client base as well as in less satisfied client basis with less capable vendors. We have an employee culture that shows up every day and our clients feedback and gratitude. Thank you to the entire NextGen team that I get to be a part of. We look forward to a bright future together. And now, we'll take questions. Thank you all. Q & A Operator - [Operator Instructions] Your first question comes from Jeff Garro with William Blair. Jeff Garro - William Blair & Company Hey, good afternoon, guys, and thanks for taking the question. I wanted to ask about the move to more subscription deals in bookings. I know that was a point of emphasis last quarter. You called out the bolus of license revenue in the most recent quarter. So if you could give any background on those discrete deals in this quarter that would be helpful. And then an update on how the outlook is for the push to subscription going forward. Rusty Frantz - NextGen Healthcare Yes. So first of all, Jeff, great question. As we -- the actual shift to subscription started happening really almost within about a year of me joining the organization. So it's been going on for a number of years. We haven't talked about it as much, but it's been quietly and very rapidly building into a very significant portion of our revenue and one that continues to grow really as we see for the foreseeable future. Now what we said was, we are actually now removing kind of the incentives for our team to sell perpetual and really balancing that neutrally or even slightly towards recurring, and with the thought that we're just going to let the natural kind of organic demand for perpetual licenses happen, but we're always going to be leading with subscription. Now what we found is that certainly as demands come back, first of all, there was some pent-up demand in our base. But also there are clients who absolutely prefer that model. What I would say is, because it's really based on discrete pieces of demand, for example there was one very large deal that came in, in September, that had a significant amount of recurring of a perpetual revenue. These things are going to happen and because the number is pretty small now, it's going to be a little bit lumpy. And the reason I call it out in the call is only because when that lumpy revenue comes in, sometimes it has some very accelerating effects on the EPS line compared to maybe some other pieces of revenue. Jeff Garro - William Blair & Company Got it. That's very helpful. And one more for me is on the Spring '21 release. It sounds like a little bit more emphasis on one of your new product releases than we've heard historically. And it sounds like this release could have a positive impact on several fronts and might be from specific add-on products or more competitive displacements or better retention. I just love to hear more comments on kind of where and how you see that new release play out positively and how we should think about the potential timing of that impact. Rusty Frantz - NextGen Healthcare Yeah, well, sure, I mean, first of all, the reason we talk about this release is, we've been doing a tremendous amount of work behind the scenes to build out all of the different capabilities necessary to truly empower an ambulatory organization's success. And we have built a lot of these things, but the real proof in the pudding for the client and the thing that makes you a one-stop shop is when one plus one equals three across the assets and capabilities of the portfolio, and that's really platform integration. That means that workflows span from one part to another, and that it's a consistent experience for the practice. And so this release really is the culmination of a number of years of work and we've been doing a great job of cross selling various capabilities of the platform to both existing and new clients. But as that platform gets knit together, we stop having as many of the best of breed conversations, we really start having a best of platform conversation. Now as we rollout through next year, first of all, I mean the release comes to release in spring. So you'll really see the meat of the migration really starting -- my guess would be towards the end of the summer. Now as we bring people on the new patient experience platform for the portal itself, that's not our revenue event, but when they start adding new capabilities like self-scheduling and the like that also becomes a revenue event. And then on top of that, it opens up the opportunity for us to continue to bring new patient facing capabilities to the table that enable our practices to create a great patient experience, but it also enable that constant collaboration between a patient and a provider that truly delivers the right result, which is so much more important in risk-based arrangements. Jeff Garro - William Blair & Company One more follow-up there. Just on your comment on [indecipherable] type conversations, does this become a catalyst for even a greater amount of all in deals at some point? Rusty Frantz - NextGen Healthcare Absolutely. I mean, that's really what we're seeing. We're seeing clients come in and really looking at the entire -- the entire platform and that really, I think that is a testament to just some of the work we've done to date. But the spring release really brings that up to a whole another level. Jeff Garro - William Blair & Company Got it. Thanks for taking the questions. Rusty Frantz - NextGen Healthcare Yeah. Operator - Your next question is from Sean Wieland with Piper Sandler. Sean Wieland - Piper Sandler Thanks very much. Just want to follow-up on Jeff's question. So, could we get a little bit more specific on the requirements of the CARES Act as it pertains to the Spring '21 release like what are some of the specific deliverables that need to be installed in your client base by August of '22 that are driven by regulatory requirements from the -- I'm sorry the Cures Act, no, the Cures Act. Rusty Frantz - NextGen Healthcare From the -- from the Cures Act. Yeah -- Sean Wieland - Piper Sandler Sorry. Rusty Frantz - NextGen Healthcare It's very much around data blocking and data sharing, I'm actually not prepared to give that you, Sean on this call. But it is something that we can certainly provide more guidance on especially as we get closer, simply because it's just not something that we're not -- we're not that close to release yet, but what I will say is that when our regulatory team looks at our client base, the vast majority of our client base will need to comply with this act -- with the regulations in the act and at this point based on the scope of the government and the timing, we're on a good path to get on there. Sean Wieland - Piper Sandler Okay. And for your existing customer base, is that a bookings opportunity for you to upgrade them to the Spring '21 release or no? Rusty Frantz - NextGen Healthcare It's not a bookings opportunity but what we do have the opportunity to do is pull through a lot of other capabilities that they would not have had access to and has integrated fashion before they were on the new patient experience platform, but it also is an opportunity to come into them during the upgrade and really walk through all the benefits, if they also acquire a proper health, if they also acquire a managed financial services and those type of things. And what I'd say is we've already seen a good bit of attachment of our acquired and new assets to existing clients and our feeling is that as we go through this cycle, we'll continue to see that attachment rate increase. Sean Wieland - Piper Sandler Great. I missed, why -- what's the reason behind the spike in the perpetual license in the quarter? Rusty Frantz - NextGen Healthcare The reason behind the spike of perpetual license was simply that we had some clients come in that just really were wedded to that type of model. And when it comes down to it, you've got a choice, either try to force them down a recurring path when they are absolutely wedded to this and have them walk or sign the business. And so while we're neutral from a sales comp standpoint and we're tilted towards recurring from a management standpoint, what I'd say is the clients are still sometimes going to buy the way they want to buy. Sean Wieland - Piper Sandler Cash is king. Thank you so much. Rusty Frantz - NextGen Healthcare Yeah, for sure. Yeah, let me just say one other thing on it there, Sean. My hope is that we've kind of gotten to the unaffected demand level on perpetual revenue and my hope is that what we'll see is -- we'll see this go relatively flat in the next year simply because we're not tilting the field one way or another from a sales comp standpoint. And so because of that you should, I'm hopeful that you won't see the major shift in margin production that comes based on a significant mix shift in perpetual. Sean Wieland - Piper Sandler All right. Got it. Rusty, I mean, Jamie, one quick one R&D cap rate in the quarter. James R. Arnold - NextGen Healthcare R&D cap rate was 27%. Sean Wieland - Piper Sandler Thank you. Operator - Your next question is from Steve Halper with Cantor. Steve Halper - Cantor Fitzgerald Hi, just a quick housekeeping question. You talked about $27 million of cash flow, was that operating cash flow in the quarter? Rusty Frantz - NextGen Healthcare That's free cash flow, I believe. Steve Halper - Cantor Fitzgerald Free cash flow. Can you give us the operating cash flow number? I guess I can back into it. James R. Arnold - NextGen Healthcare I can give it to you, give me one second. Steve Halper - Cantor Fitzgerald Is that $33 -- $34 million? James R. Arnold - NextGen Healthcare $30.2 -- $30.2 million. Steve Halper - Cantor Fitzgerald $30.2 million? James R. Arnold - NextGen Healthcare Yes. Steve Halper - Cantor Fitzgerald Okay, thank you. Rusty Frantz - NextGen Healthcare Yeah. Operator - Your next question is from Sean Dodge with RBC Capital Markets. Sean Dodge - RBC Capital Markets Thanks, good afternoon. Rusty, you touched on, I think a little bit in the last part of your prepared remarks, but on the EPS guidance, the midpoint of the range you placed them like 6% growth and that's despite some amount of drag from the pandemic on the volume sensitive businesses. Can you help bridge that to what the view as to a couple of quarters ago, which was the investments you've been making in replatforming would keep EPS flat through fiscal '22... Rusty Frantz - NextGen Healthcare Right. Sean Dodge - RBC Capital Markets And what you've laid out here, just kind of in the margin of error there or has something changed, or are those investments you mentioned that will ramp over the next couple of quarters? Does that cause a lot of this to just revert next year? Rusty Frantz - NextGen Healthcare No, it's actually -- that's why I made the comments on our close our efficiency of R&D, I mean, think about it, there is no travel. We have a lot of windshield time, right. People are working very effectively remotely. But on top of that, as we talked about, we've also been continuing to expand our Bangalore development center facility over time as well, which when you pull all those things together, what you're seeing and what we're seeing is that we're actually being able to deliver the capacity that we would have delivered before and yet within the same budget. And that's been really -- that's been really a market change. And COVID I think there has been a lot of response -- has had a lot of responsibility there. Now, what I would say is, and I talked about a little bit from a facility standpoint, I mean we're starting to really see something not too far away from where we are is our new normal. And so based on that, I'm looking at continuing to lock in the efficiency gains of being a very virtual organization to collaborate as well. But also the other thing is as we've really seen some significant reductions in and technical and defect rate out in the field, which have kind of hung in there, all the way through the pandemic, that's also enabled us to focus a little more of a revenue, which would have been focused on defects more on building new capabilities but also architectural improvement not to be lost as we're continuing to re-factor parts of the architecture to make the product, more scalable, to make the platform more scalable, and more extensible. But does that -- does that help? Sean Dodge - RBC Capital Markets Yes. Yeah, absolutely. And I guess. So if we kind of post-pandemic in thinking maybe more demand side you've talked before about the likelihood or the potential to pandemic really accelerates the transformation of ambulatory care and then, I'm curious as we're now another several months into this from the interaction you are going to have with your clients, are you seeing more really rethink how they do business and what they're going to rely on you for or was that just a little bit of an initial knee-jerk reaction and things are kind of going back to the roadways pretty quick. Rusty Frantz - NextGen Healthcare No, I'd say -- I'd say the richness of the conversations about how clients are going to evolve into the future has increased by tenfold. In fact to the point where actually I had my CMO, Betty Rabinowitz create -- Chief Medical Officer, leads a group called Texas -- I mean, called the NextGen Advisor site, called the NextGen Advisors and they're actually out there acting as thought leaders putting out very valuable content to the client base because the client base is aggressively looking towards how they compete in the future, how do they thrive in the future. And so we've been having a lot more of those kind of conversations. And then I also the interesting things, Sean is, when I look at -- when I look at our competitive success, it's not -- I mean, I said this before, right, it's not single, it's not like we're selling in a little beachhead product. These are full stack replacements. And full stack replacements are really indicative of the fact that clients are needing something different. They're needing something more. And so I think when you think about the amount we've invested in the future versus maybe some of our less fortunate competitors, clients are looking at that breadth and saying I need somebody that can bring all of that to me. And so I think -- look, I think we are seeing people engaged with their future. And then I think when I look at vendors, I'm looking at the vendors who have prepared for that future. Sean Dodge - RBC Capital Markets Okay. That's exciting. Thanks and congratulations on the quarter. Rusty Frantz - NextGen Healthcare Thank you. Operator - [Operator Instructions] Your next question is from Matthew Gillmor with Baird. Matthew Gillmor - Baird Hey, thanks for the question. I wanted to ask about the patient experience platform, sounds like that's an area with some good momentum. Can you remind us how we should be thinking about the opportunity to deploy that platform within the base and I know part of that's tied to the release. And then could you help us think about what -- what drives client decision making for that platform. Is it the telehealth capabilities or does it relate to the self-scheduling, the check-in and payments? Rusty Frantz - NextGen Healthcare Well, I think, yeah. So I'll start with the -- I'll start with the second one first and then I may ask you to repeat the first one. But when I think about the second one, Matt I think about what actually is empowering the patient experience platform is partially the capabilities that are there today, virtual visit, self-scheduling, patient pay, having a really good portal. Those are all important, but it's actually what's driving a lot of the conversation is a fundamental realization that the way that providers need to engage with their patients must change. It must evolve and unless they're going to a platform approach where they've got seamless integration between those things, they're not going to have the patient experience that they truly need. And so it's a -- I'd say it's much more kind of back to the question that Sean just asked, it's much more around the fact that they are realizing that they've just moved into consumer land and for -- and then if you look at, for example, our folks doing great work in behavioral health and federally qualified health centers, it's that, I've got to figure out how to engage with my either my clients or my patients to make sure that they are really getting to the result they need to get to. And if I don't have that patient engagement, if I don't have that road map to a future better placed, I may not be able to treat them for one reason or another. Right. And so it's, I think that's really the, like I said, it's interesting how it's kind of gone from the you're provider burn out to the you're the patient in relatively short order. And so, what was the first part of you questions. Matthew Gillmor - Baird Yeah. Yes, sorry, the first part was just helping us think through how we should think about the opportunity to deploy that patient experience in the year base and I guess what I was looking for was sort of where penetration is and sort of what the revenue opportunity is -- Rusty Frantz - NextGen Healthcare So the great news about it is that the penetration of self-scheduling is pretty much, it just really started, we've actually been seeing some good attachment there. Virtual business, we've talked about, we're starting to approach 1 million visits on virtual visits, patient pay is something that is also coming in. So it's actually you know if you think about it, we've shown in the past that we can be successful in creating satisfied clients and cross-selling to them. Think of visits opening that cross-sell up all the way to the patient. And when it comes down to it, the patient provider interaction is the value transaction creation in healthcare. It is where the value of healthcare is created. And our absolute goal and intent is to play a very valuable role within that interaction. And that's what -- that's the opportunity embodied in the patient experience platform because like I said, some of the base capabilities, we don't have. And so this really creates an opportunity for a huge number of providers over time. Matthew Gillmor - Baird Got it. That's really helpful. I guess I wanted to ask one numbers question too, which was -- is there a number we should think about in terms of acquired revenue that was in the quarter or is it sort of too messy to pull out -- Rusty Frantz - NextGen Healthcare I'd say -- it's one of the things we look at, but we're not prepared to talk to at this point in time. Matthew Gillmor - Baird Okay. Rusty Frantz - NextGen Healthcare What I would say is, look, as we, and I think I really intimated on the call, expect us to start paying a good bit of attention to the subscription services revenue and the recurring revenue lines whereas the perpetual and non-recurring stuff kind of becomes a rider on the growth wave, right. And that's kind of the way we look at it and we really see that's for subscription revenue growth as really the primary indicator of both the health and the increasing value of the organization. Matthew Gillmor - Baird Okay, thanks very much. Rusty Frantz - NextGen Healthcare Thank you. Operator - Your next question is from Sandy Draper with Truist Securities. Sandy Draper - SunTrust Robinson Humphrey Thanks very much and good afternoon, and congrats on a nice quarter. Rusty Frantz - NextGen Healthcare Thanks, Sandy. Sandy Draper - SunTrust Robinson Humphrey Just following up on that line of questioning from Matt around that. I think last quarter you actually sort of quantified about $4 million. I don't know if that was just from virtual visits or if it was from broader patient experience platform, but are you willing to sort of give us an update or relative size of that? Rusty Frantz - NextGen Healthcare Not at this point in time. What I'd say is that $4 million, I think it was additional bookings, specifically in the quarter on virtual visits. It did not apply to the rest of it, but we are really just at the front end of rolling out, Sandy. And so what I'd like to do is I'd like to hold off until we get a little more statistically significant momentum. But then we will start sharing with you some of the, some of the aspects of how this pull-through is working. Sandy Draper - SunTrust Robinson Humphrey Okay, got it. That's -- I certainly understand that. Next question probably for Jamie. Just looking at the recurring revenue gross margin holding in, I'm just trying to think, when -- I maybe would have expected, because you guys did better than I thought coming back with managed services in EDI. I think of those being fairly fixed cost-ish or a decent component, so with the -- I was sort of thinking, we may have seen a little bit more flow through on recurring gross margin. So I'm just trying to think about the puts and takes longer term about, is this a line that you're trying to hold steady as you see the mix and you get scale, it can go up or they're going to be pressures. Just I didn't expect it to be flattish when you got beat the way you did relative to my model. Thanks. James R. Arnold - NextGen Healthcare Yeah, so the -- Rusty Frantz - NextGen Healthcare Jamie, go ahead. James R. Arnold - NextGen Healthcare Yeah, what I would say is that EDI is, it is a variable cost, almost 100% variable. Managed services, the RCM component is -- there is a fixed component to it, I think of our internal employees. But we do use contractors that become more variable, we can change that relationship fairly quickly. And so it's, I would probably say when I think about the margin for RCM, it's probably half is sensitive to volume, particularly in a -- when you're moving it in the short term, but if you start talking about larger increases then our -- the need on for our employees goes up. So it's probably becomes even more variable, if that makes sense, because there's a lot of people we kept on during this period, Sandy, to continue servicing our existing clients. Even if they were only working part time, we had to keep working their accounts and we use this as an opportunity to kind of clean up lingering teams, we don't get touched on. So that's what I think -- when I think about the cost associated with the recurring revenue streams in those two areas in particular. It is -- it's highly variable with the EDI, less variable in the short term with RCM. Sandy Draper - SunTrust Robinson Humphrey Okay. Rusty Frantz - NextGen Healthcare And then of course the subscription services component is relatively, relatively stable. James R. Arnold - NextGen Healthcare Yeah, that's relatively -- Sandy Draper - SunTrust Robinson Humphrey Okay, helpful. And if I can squeeze in one more because it ties into the RCM. Rusty, are you having any different conversations with customers, specifically about RCM during the pandemic, are they thinking, you know what, given this, we've seen a shock, if we weren't outsourcing, we had a bunch of fixed cost that we got stuck with. We'd rather pass it over to NextGen or is it, hey, we were able to send our people home, they can work more remotely, go a bit more variable. So it's not as attractive. Have you seen a shift in the way -- Rusty Frantz - NextGen Healthcare I haven't seen a shift, Sandy. Yeah, I haven't seen shift yet but also pretty much everybody is still trying to figure out what the new normal is and not -- and people aren't necessarily ready to run out and change that relationship. Now that being said, we've seen some volume in RCM and we've seen some additional clients come in, but I haven't yet seen that wholesale shift. Now on the hosting side, I think we've seen a lot more of that. Sandy Draper - SunTrust Robinson Humphrey Right, got it. Okay, thanks. Those are my questions. Rusty Frantz - NextGen Healthcare Yeah. Thank you. Operator - Your next question is from Dave Windley with Jefferies. Dave Windley - Jefferies Hi, good afternoon and thanks for taking my question. I'm wondering, I appreciate Rusty your comments on the evolution of your -- of your integrated product. I'm wondering what you're seeing in the competitive landscape. Are they constrained, distracted? Is there or is there something about the competitive landscape that creates even more juicy opportunity as you bring this integrated platform -- this integrated released to market? Rusty Frantz - NextGen Healthcare I think so, I mean there is, look, not everybody has the benefit of the financial health we have, not everybody has the benefit of the ability to take on some short-term gross margin impact to make sure that we're maintaining our full capacity and our culture. And not everybody has the ability to invest off the balance sheet without creating leverage problems like we do. And so I think all of those things have kind of put us in a better position from a platform standpoint but also especially the more mature clients, they're looking at who do they think has real life ahead of them, who has got consistency. I mean this is a five to seven year, especially in the replacement market, a five to seven year replacement and people are a lot wiser. And so I think we got way better at the right time, just in time because as we come into this replacement cycle. I do think that it's just been interesting, I mean it's the same thing really from the sales and the incoming employees side. A lot of people are joining this company because of our culture and our potential. I can assure you that was not the case five years ago. And so, you know I put all those things together. They are kind of intangibles, but they're really not. And so I've been really gratified to see us especially these full stack replacements are really gratifying and there's, look, I don't want to get into individual competitors. But I would say is, I mean it's, you don't have to look too hard to find some stories of pressure. Dave Windley - Jefferies Yeah. And on your point on full stack replacement, you mentioned that a couple of times. You made some acquisitions, you've talked about your R&D investment. Is there anything that you still need to add or are you really kind of completely full stacked now. Rusty Frantz - NextGen Healthcare So I would say there is nothing that we absolutely need to add. That being said, I think there are areas that our clients would love to see us -- directions they'd love to see us continue to expand our focus on and continue to evolve in, right. And so we will continue like we have. I mean, I guess if I'm to talk a little bit about M&A, what I'd say is a couple of things. Number one, I wouldn't expect us to run way up the ladder on a really growthy higher -- high revenue assets because I think there are people on the private side, who will pay more than our commercial synergy case. But we've been very successful operating kind of in the string of pearls end or slightly larger and bringing in capabilities that we can put into our satisfied client base and our commercial structure that's so effective and deliver. But we have also shown we can integrate them and so look right now, I mean primary focus and a great value driver for the future is bringing everybody on to -- on to our Spring 2021 release and the patient experience platform and really bringing everybody on there, but then the question is once that's moving under its own speed, what else can we do for our clients. How else can we create value for them, top line or bottom line and share in the value we create. I think we've shown ability to do it. I would expect us to continue to do. Dave Windley - Jefferies Got it. And when we talked to you three months ago, we were all just coming out of the most severe part of the lockdown and everybody doing online and you had talked about, as you mentioned earlier in this call $4 million of virtual visit booking, has -- I know you don't want to quantify, but has the pace in the appetite for that continued or do you see that actually waning of some of the payers have kind of dialed back to reimbursement for virtual visits. Rusty Frantz - NextGen Healthcare I'd say what we've seen is -- we've seen two things. Number one, we've seen adoption, you always go through the bubble, when something crazy happens. And then you go to normal adoption. So we're now kind of on that normal adoption curve, which is a nice curve for us and it's adding AR over-year. What I also have seen though, is I've seen visit volumes drop a little bit and then stabilize, as our providers who are full service providers for patients in their communities, our realizing it is a tool and it's a tool that works in some situations, but you're seeing them continue to use it, but maybe not use it with the intensity that they did in the first part of COVID. As all of us have learned how to put a mask on and go places. Dave Windley - Jefferies Yeah. Got it. Got it. That's very helpful. Thank you. Rusty Frantz - NextGen Healthcare Yeah. Operator - Your next question is from Donald Hooker with KeyBanc. Donald Hooker - KeyBanc Great. Great, good afternoon and thank you for including me. So it sounds like retention issue is in the rearview mirror. I know in prior years, there had always been the Sword of Damocles hanging over you with these health systems kind of swapping you out, really no thought of -- kind of no thought of your own in a way and that was just always an overhang. Are you messaging to us that that overhang is sort of gone now and we're -- Rusty Frantz - NextGen Healthcare Well, say, here is a question for you. We've been reporting on attrition for five years, I think if you added up all the numbers, it's probably come to about 42% or something like that. I don't know, you can go through the addition and meanwhile, how far is the maintenance line dropped? And yes, we've been talking all about attrition on the maintenance line, which as you can see, it doesn't have that material effect on the P&L, and on top of that to your very good point. The health system in hospital stuff is not really that much of a problem at this point in time. There's not much opportunity like for that and so as I looked at it, I said look we can continue to talk about this perceived Sword of Damocles and look year one and two yeah, that's what it was. What we haven't talked about is, is how big the rest of the base is, because by extension, if you think about it, if you think about a 10% maintenance attrition number you would expect a massive drop across the P&L. And so, so to some degree, look, maybe we extended a little farther than we should have before I really kind of pulled this number back and started really addressing subscription revenue. But at the same time, we're always trying to be transparent and clear with the marketplace. But, yeah, no, I don't, I don't wake up and think about the maintenance line. I wake up and think about one thing and one thing only, and that's how do we continue growing the recurring revenue engine of this business in a way that continues to create a great strategic future and throws off free cash, which is kind of unique these days. Donald Hooker - KeyBanc No, that's great and then maybe one other question. Following up on the prior question I think was the last question and the question before around the competitive environment that the metric that jumped up and also was the 20% replacement of the bookings, which is interesting number. Was there any kind of one vendor that you picked on or was there any one theme just learning from that number, is there anything in that number we can learn from that we can take away from this conference call? Rusty Frantz - NextGen Healthcare Well, here's what I'd say. What I'd say is we have a broad client base, and we do well for all of our clients, but there are areas where we are specifically competitively advantaged and some specialties and some segments of the market and in those areas, we're having a lot of success, combined with of course great retention and some cross-selling outside of those areas and it adds up to be, we're pretty formidable shop right now and you look, I'm not going to, I don't want to call it, individual vendors, we all have our challenges right. But what I would say is, is that you know who the players are and everybody's in their own different situation. Ours is pretty transparent, and it looks pretty good for me outside. So probably looks good from the inside. Donald Hooker - KeyBanc Good. Well, thank you. Thank you so much. Rusty Frantz - NextGen Healthcare Yeah. Operator - Your next question in queue is from Stephanie Davis with SVB Leerink. Stephanie Demko - SVB Leerink Hey guys, congrats on the quarter. And thank you for taking my questions. Rusty Frantz - NextGen Healthcare Thank you, Stephanie. Stephanie Demko - SVB Leerink I'm going to follow up on kind of an underlying theme of investing in these forward-looking solutions. You guys mentioned that M&A, it doesn't seem as likely right now given some of the valuations in our space. I know it's going to get -- Rusty Frantz - NextGen Healthcare I'd say, M&A, it's M&A and scale, right. I mean requiring significant EBITDA or growth revenue, that's what I mean when I say, when I say the high valuations. Stephanie Demko - SVB Leerink Would you have a hurdle rate, where you would just drop looking at a name or anything like that? And how do you kind of balance the buy versus build dynamic given it looks like your clients are really investing right now in these forward-looking solutions to stay competitive? Rusty Frantz - NextGen Healthcare It's a great question, Stephanie and I would say we're not so -- we're not so tight as to focus on WACC and hurdle rates and those kind of things. But what we really do is, look, we do look at accretion and we look at accretion timelines and magnitude of accretion. But before we ever get there to your -- actually the back half of your question. Before we're able to get there, the first thing we do is we evaluate the marketplaces and the capability groups around our solution and then we do make buy build partner decisions and quite often we partner, quite often we build about one out of every 10 things that we look at, we may be even start to go to the matter and from an acquisition standpoint. But it really -- really for us, for us the real metric is do we think we can drive this into our commercial machine and deliver great accretion for the shareholders as well as revenue growth and most notably subscription and recurring revenue growth. And I think those are the things that really -- that really primarily drive it. The challenge that I see is, is that some of the, some of the multiples being paid. We can't get to accretion on that even with the commercial synergy case. And in that case, it's hard for me to look for the shareholders in the eye and say, this is a good, this is a good step forward. Even though it's a big transaction, right. Big transactions can go big right. They can also go big wrong. And so, when I look at the success we've had kind of in this I mean HealthFusion was the biggest and that was a 180, Medfusion was much less than most have been in kind of the tender 40 range. Yeah, I think we -- I mean we've driven some nice accretion of those and it's an area where, because we've got the great commercial synergy case because we've got a commercial structure and happy clients, we can actually afford to pay more than others because it doesn't come with the kind of revenue and growth that it has already been put into the business. Stephanie Demko - SVB Leerink And have you given any thought just in broad strokes, what your top of your wish list would look like. Is it like a value-based care play? Is it something more outstanding virtual care or is it something completely different? Rusty Frantz - NextGen Healthcare You know what is right, what I'd say is I mean frankly if I tell you what I tell you the stuff we're looking at then everybody is going to go tackle. Stephanie Demko - SVB Leerink I mean, could you tell us the names and valuations [Speech Overlap] Rusty Frantz - NextGen Healthcare No, no, but I mean, I'm kidding aside. Yeah, look, I mean I think I've been pretty clear that that we're investing to make sure our patient experience platform is widespread across our client base. We're doing that, not just because we have virtual visits in tele and self-scheduling, we're doing it because creating a great patient experience and a great journey is essential to the client base, but also because we need to build that journey quickly and being able to plug any new asset quickly into the vast majority of our clients in a relatively frictionless way is pretty exciting. Stephanie Demko - SVB Leerink Understood. And then one quick one and just one more for Jamie. You mentioned there is a lot of catch up spend but also growth trends in the quarter. Can you talk about the balance between catch up versus just strong macro? James R. Arnold - NextGen Healthcare Stephanie, it's probably split about evenly between the two. So the increase quarter-over-quarter is what you're talking about, correct? Stephanie Demko - SVB Leerink Yeah. James R. Arnold - NextGen Healthcare Yeah. And it's the -- I would say the split is probably roughly even between the two. Stephanie Demko - SVB Leerink All right, perfect. Thank you, guys. Rusty Frantz - NextGen Healthcare Yeah. Stephanie, the one other thing I would say is that we're pretty excited about the ramp that we're starting, because one of the challenges that we've had in the past is whether we are underappreciated, undervalued, appropriately valued. We can have a long conversation of a glass of wine, but part of the reason why we're not chasing some of these super high price, high valued assets is that we're kind of the old fashioned generate free cash flow company and that tends to mean that our public currency right now is not quite at the point that maybe some others is are with slightly different structures in their P&L. Stephanie Demko - SVB Leerink All right. You did a very times revenue one day. Rusty Frantz - NextGen Healthcare Absolutely. All right, well thank you everybody. Operator, do we have another call. Operator - We do have one additional question in queue -- Rusty Frantz - NextGen Healthcare One more, all right, so it's like fell off, let's go late. Bring it on. Operator - Sure. Your final question is from Gene Mannheimer with Colliers. Gene Mannheimer - Colliers Securities Hey, guys. Thanks for squeezing me in and congrats on a good quarter. Certainly a lot of discussion around the subscription revenue growth which impressed in the mid-teens and not looking for guidance here, but given the momentum you're seeing and your focus on growing that line, I mean it seems to me, you'd be able to continue to grow that in the double digits for the longer term, is that, is that reasonable? Rusty Frantz - NextGen Healthcare Yeah. Gene Mannheimer - Colliers Securities Okay. Rusty Frantz - NextGen Healthcare I mean that's -- look our plan on subscription services. I mean, what I said was mid-teens. We expect that to continue well into the future. And also much because some of the discussions we've had in the last few calls and the last few questions, we have the opportunity, we believe to accelerate further from that given the health of our balance sheet. Gene Mannheimer - Colliers Securities Good, excellent. Just want to make sure I'm clear on that. And finally with respect to the competitive statistic 20% of bookings, how does -- how does that compare to historical metrics? Rusty Frantz - NextGen Healthcare I'm sorry, say it one more time. I apologize. James R. Arnold - NextGen Healthcare 20% Gene. Hey Gene, the 20% is an increase we've historically done about -- in 12% to 15% range. Gene Mannheimer - Colliers Securities Okay, perfect. Thank you. Rusty Frantz - NextGen Healthcare Thank you. All right, well thank you operator, and thank you everybody for listening in. And I apologize for a couple of hiccups along the way. Operator - [Operator Closing Remarks]

NextGen Healthcare (NYSE:NXGN) Q2 2021 Earnings Conference Call - Final Transcript

Oct 22, 2020 • 05:00 pm ET

NextGen Healthcare (NYSE:NXGN) Q2 2021 Earnings Conference Call - Final Transcript

Rusty Frantz