Q3 2020 Earnings Call
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Welcome to the next 10 health care fiscal 2023rd quarter results Conference call.
Seem to call today from next Gen. Our Rusty Frantz, President and Chief Executive Officer, and Jamie <unk>, Chief Financial Officer, today's call is being recorded.
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This time I'd like to turn the call ever came Mr., Rusty Frantz, President and CEO of an action Sir you may begin.
Thank you operator, and thank you to everyone for joining us. This afternoon Iridium next Gen health Care's fiscal third quarter F. why 20 results.
Q3 of which 20 it was another solid quarter for next Gen. As we continued to execute on our strategic plan.
In Q3 revenue came in at 137.7 million compared to 130.9 billion, a year ago, representing more than 5% year over year growth and a nice step up from Q2 at 134.3 million.
Our non-GAAP EPS of 23 cents compared to 18 cents Q2, EPS, why 19 and inline with our expectations.
Bookings for the quarter came in at $30.6 million compared to 32.8 million in the same quarter last year.
Operating cash flow for the quarter was 23.6 million at next Gen generated 16.9 million in free cash flow as our cash generation capabilities allow us to continue to retire debt.
The three acquisitions in the quarter Topaz information systems met fusion and auto health brought our total outstanding debt up to 37 million, which we should pay down quickly maintaining a very strong balance sheet as well as supporting continued investment in our end to end platform integration.
Legacy maintenance retention came in at 90.3% over the trailing 12 months roughly flat to last quarter and slightly ahead of our F. why 20 modeled level of 89%.
As we look back at Q3 deal flow. We saw continued success and signing larger all in deals in this quarter. We saw eight deals greater than 500000, including further material expansion at a large deal signed last quarter.
As we continue to expand the breadth and capabilities of our solution our clients continue to grow and we evolve into a trusted advisor for our clients. We're seizing further increase in average deal size.
We are establishing multiyear roadmaps to transport, how our clients work, both today and into the future well beyond the classic implementation of a p. how many HR.
As we shared with you in Q2 in Investor Day, We made a few structural changes in the Salesforce in October we made two adjustments the first supposed to realign our sales management structure to enable better focus on specific specialties and better mentoring for the sales reps working in the specialties.
Well this change is absolutely the right thing to do for the future.
It is having some impact in near term deal flow as new managers learned that regions and teams. Our second move was the <unk> expand our sales executive team, who are the our new footprint hunters by reallocating dollars to quota carrying reps previously spent on sales specialists supportable, we are increasingly competitive in the replacement market and see opportunity.
He to gain share over the next few years.
New client wins take time, and we expect this investment to materially show on the bookings line in the back half of that fly 21.
From an M&A standpoint, we added to the previously discussed acquisition of Topaz information systems, a behavioral health solutions provider with the announcement of the acquisitions of both med fusion and auto health, a patient experience platform and a tele medicine or virtual visit solution.
With these acquisitions, we now have the capability in place to truly only end to end patient experience.
Fusion and auto help unlock our ability to offer a solution that is fully integrated into our broader platform to address a key dynamic in health care the rising consumerism.
These acquisitions with strong capabilities and patient and taken patient pay as well as patient self scheduling position us well to meet this important and growing need and a truly integrated way.
Today, our clients are using a complex multi vendor approach to meet these needs and we believe that an integrated approach will reduce risk and complexity, leading to a better solution with a lower total cost of ownership.
We've seen a good deal of excitement from our clients about these new capabilities and look forward to rolling them out broadly.
We continue to make meaningful progress and client satisfaction.
As of today, we're maintaining our leadership position in class for best and for a practice management. It for this 11 to 75 segment and our a close second in the over 75 provider segment. Our each Saar score has risen to 78.5, putting us in second place in the industry and almost 20 points higher than we were 40 years ago, We look forward to seeing how the final best in.
Class tallies come out for calendar 2019 attempts are net promoter score for next Gen. Enterprise continues its move into positive territory, increasing by almost 60 points over the last four years. We're also gratified to be the only multi specialty vendor in the top few in the newly released class Ophthalmology HR reports.
Right and 80.3, and having 94% of our clients say they would buy from us again.
These improvements and satisfaction across the board give us confidence that our investments in gaining new clients are well positioned as we move into asked why 21.
In Q3, we hosted our user group meeting over 2400 clients attended in the feedback was phenomenal.
And our post about survey we saw another increase in the number of clients who would recommend next gen.
13% boost from last year.
Also during Q3, we saw one of our clients bridges Healthpartners achieved significant results and savings with our population health solution.
They were able to achieve Medicare shared savings of $8 million with an overall effort anchored by next Gen population health analytics.
From a solution standpoint, we're on track for our next major release of next Gen Enterprise in the spring currently in beta test.
This release contains the launch of our new soak note.
As we work flow and much more.
We will also be expanding our mobile capabilities to meet the needs of markets such as behavioral health.
In Q3, we also launched our financial and operational analytics platform further, enabling our clients to achieve the efficiencies and financial performance that enable their success.
We're also seeing success with our next Gen health data hub, citing our six agreement with an H.I.E. clients, including two new logos.
This expansion of our HIAA footprint, along with our significant support and enablement of secure data sharing via the via the care quality frame framework.
Is emblematic of our support for frictionless data sharing between providers, we continue to focus significant energy on enabling providers to see the entire patients record across the entire continuum of care all to enable better care and better outcomes.
Finally, we are approaching the go live in Q4 of our first integration into paradigm, specifically for insurance chart pools and expect to see the labs capability go live in the first half of that by 21.
We're excited to see these capabilities, which bring great value to both patients and providers come live.
With only one quarter to go we're putting more precision into our appetite 20 guidance, we will narrow our full year revenue range from 540 to 550 to 541 to 547 million at our EPS range to 80 to 84 cents.
We expect Q4 revenue to be another step up from Q3, extending our run of sequential revenue growth to four straight quarters discontinued in sequential growth shows the value and effect of our significant transition for perpetual license to subscription and recurring bookings.
We are excited about the opportunities in front of us and the continuation of organic revenue growth and 521.
As we deliver on our plan as we see our competitive in competitiveness increase and our ability to execute improve our confidence only gross.
Now, let me turn to Jamie for dive into the numbers.
Thank you Rusty and thank you everyone on the call.
Total revenue of 137.7 million increased 6.9 billion or 5% compared to the same period last year and inline with our expectations.
Recurring revenue of 124.8 million increased 7.3 million or six 6% compared to a year ago with increases of 10% and subscription services, 11% in managed services and 6% for electronic data interchange in data services recurring revenue is 91% of.
Total revenue slightly higher than the 90% in the prior year.
Subscription revenue of 33.2 million increased 3.1 million compared to a year ago, primarily driven by analytics and Nexgen SAS.
Support maintenance revenue of 39.9 million increased 200000 year over year as revenue from new contracts and CPR increases offset attrition.
Managed services revenue of 26.8 million increased 2.6 million compared to year ago.
Mainly due to growth in the hosting in RCM services, but also includes approximately 1 million onetime benefit from the recover from our recovery from a client we previously reserved due to collection issues.
RCM services is front and center in proposals, both inside our customer base as well as for prospective new customers.
Hi, and data services revenue of 24.9 million increased 1.4 million year over year largely due to.
Increases in existing and new customer volume.
Nonrecurring or onetime revenue was 12.9 million.
100000, or 3% reduction over the same quarter last year software license and hardware revenue of 7.2 million declined 2 million or 22% year over year consistent with the trend that we discussed in previous quarters.
Non recurring services revenue of 5.7 million increased 1.5 million or 37% compared to a year ago due to growth in analytics and professional services.
Bookings came in at 30.6 million in the quarter down 6% on a year over year basis, primarily due to the change in sales organization as discussed by Rusty.
Cost of goods sold increased by 6.4 million or 10% due to higher amortization of capitalized development costs of 1.9 million and higher managed services and DDR, Dave data services cost due to increased transactional volume.
Gross profit increased 1% to 69.6 million in gross margin declined to 51% compared to the prior year quarter, 52.9% due to the increases in cost of goods sold just discussed.
Turning to our operating expenses SGN, a 42.8 million increased 1.5 million or 3.6% from 41.3 million a year ago. The price increase is primarily due to increases in acquisition related costs and legal expenses.
R&D of 20 million decreased 700000 for 3.4% from 20.7 billion a year ago, the decreases due to slightly higher R&D capitalization.
Impairment and restructuring charge of 2.5 million are primarily related to cost associated with a reduction in expected sub lease income on the vacated space in Sorrento Valley, California in North Canton, Ohio, along with severance in operating expenses, our GAAP tax rate for Q3.
20 was a benefit of 46% with a non-GAAP tax rate of 22%.
Slide 20, we will continue to use to non-GAAP tax rate of 22%.
To conclude my comments on the income statement, our Q3 GAAP EPS of seven cents was flat compared to a year ago, our non-GAAP EPS.
Yes of 23 cents.
Increase three cents compared to the prior year.
Turning to the balance sheet, we ended the quarter with 26.8 million in cash and equivalents.
37 million balance outstanding on our revolving credit agreement.
Dsos in the quarter were 53 days a decrease of six days from last year and down four days from last quarter.
Our capital expenditures, excluding capitalized R&D was 1.7 million for the quarter capitalized R&D was 4.9 million for the quarter.
As I turn to guidance, we expect the fourth quarter to reflect the continued organic performance as well as two specific items, which are largely from the recent acquisitions first Q4 recurring revenue will reflect approximately 2 billion over the Q3 run rate due to the impact of full.
Quarter revenue from the recent acquisitions.
Second.
<unk> expenses will increase to reflect the full quarter costs from the acquisitions as well as some normal started a year cost increases.
The combined effect of both of the refresh referenced factors would they have been EPS from Q3 by four to five cents per share leading to updated and tightened outlook for the full fiscal year revenue of between 541 in 547 tighten from 540 to 550 million and non-GAAP EPS.
Between 80, and 84 cents per share tightened from 79 to 87 85 cents per share.
In closing I have generally pleased with our performance in the third quarter and believe the strategic acquisitions, we completed in the quarter enhance our long term position in the market.
I look forward to closing the year strong. This concludes my review of third quarter financial results I will now turn the call back to Rusty.
Thanks, Jamie.
Q3 represents another solid quarter as we transition into organic revenue growth, we continue to execute effectively from a client satisfaction as well as a solution delivery standpoint.
We're making the decisive moves to both expand our solution and our crucial commercial capabilities to support the multiyear growth ramp.
I am excited for where we are and look forward to the future I'd be remiss if I Didnt say, thank you to the entire next Gen organization for the continued performance and the continued focus on making our clients lives more effective and more rewarding.
I look forward to Q4.
Operator, when we open up for questions.
Yes, Sir ladies and gentlemen, just as a reminder.
Ask your question. Please press Star and then the number one on your telephone keypad.
Again that of Star and then the number one.
And your first question comes from the line of Sean Wilan with Piper Sandler.
Yes.
Thanks.
So I want to first start and on Big picture do you have any thoughts there is some controversy today around FX pushed back on proposed interoperability and information blocking rules.
I wanted to get your take on that in your views on.
The proposals in DC around into profitability requirements.
Thanks, Sean.
So I won't comment on other vendors activities.
However, what I would say is that wellness and lowering the cost of care are truly enabled by putting a patients complete medical record in front of their physicians, most notably at the front line of wellness, which is their community physicians I.
I struggled a little bit to understand why blocking that data under the under the.
That data exchange under the under the banner of patient privacy really makes sense, especially given how much patient identified data is already being shared by some health systems with other companies that aren't directly involved in the treatment of patients.
It seems a little contradictory in emblematic of business and competition being put before care.
Now for next from next Gen, we're really bringing our clients into the world of interoperability and bringing them free of charge because we believe it's the right thing to do for both care and quality.
And yet still many of our community physicians are challenged by the lack of data sharing across institutions in their geography, which deprived some of critical information necessary for affect the patient care.
Let me now I personally struck myself as a parent to pull together my son's records across multiple hospitals, and then have unfortunately resorted to faxes and carrying a three rig binder just to ensure that the docs have a complete view of is pretty complex health history and so it's it's concerning to think that as patient identified data could potentially be shared with parties not involved in this care.
But not with the very doctors that are treating them.
That's helpful. I appreciate those comments and then you had mentioned in your prepared remarks about about Vera dime and I just wanted to dig into that a little bit.
You said it started with sharp Poles and lab data is coming into in early 2021.
Expand on that a little bit what exactly do you mean, what are you doing there.
So what that means is so say for example, you apply for life insurance. This allows the life insurance company of course with your blessing to be able to pull your chart and then verify that you are appropriately insurable right and so we see this is kind of a win for the patient.
And then on the lab side, what it is it's a hub and spoke model. So theres, you've got the big guys quest and labcorp than theirs.
Hundreds of other labs out there and so when a provider sends a request or an order for a lab out to one of those.
Okay. That's on the hub and spoke model in Maritime then that lab can be elect the order can be electronically submitted in the lab can be electronic lab results can be electronically returned to the HR and so it's really once again, it's a it's something that is really providing benefit for the patient in the provider. Another third part of paradigm will be only de identified.
Data and really looking at that and how can we help support life science research, but but in a de identified not a patient identified standpoint.
That's helpful. Thanks, and just one last quick one is that was there any revenue tied to very time in the quarter.
Very minimal.
Okay. Thank you very much.
Okay shot.
Your next question comes from the line Matthew Gilmore with bad.
Hey, Thanks. So the question I wanted to ask about the bookings performance that you mentioned was down a little bit year over year and that was due to the the sales.
Changes, but was there any particular area within bookings that were stronger or any particular areas impacted by the sales Reorg and then.
Our sales leadership change I should say and then you know Rusty I think you mentioned a timeframe when you thought the bookings would pick back up but we miss that comment. So could you just repeat that when you thought it.
Start growing again.
Yeah for sure so as we re as as we redesigned the management layer and added a bunch of new sales executives. We had two things go AUD. One is that got new managers with new sales reps and so from that standpoint, it just being able to pick up deals being able to add value in deals.
It took its going to take a little bit of Titan, We really expect we may see a little more effect in Q4, but we expect to be fully through it by the end of this financial year.
I would also say that as our team has continued to have larger.
We've seen a little bit of a falloff in some of the smaller deal volume and that's just more of a question of moving from perhaps focus on things that are smaller, but close more quickly and really now moving our focus to kind of the all in deals, which do have a slightly longer sales cycle now that the pickup in bookings that I actually was referencing was not kind of.
The organic pickup from the team that we've had in place, but it's as we've added sales executives and we added sales executives are these are new footprint hunters, we added sales executives really at the Q2 Q3 turnover.
You bring somebody on and new footprint generally takes about 12 months to really start being productive and so that's what we said was we said we expect the result that we expect the impact of that expansion of the salesforce to really start to materialize in the back half of 21 does that make sense.
It does yeah, thanks, and just as a quick follow up.
I think Jamie made a comment that RCM services were sort of front and center of all the discussions you're having with sales and I was curious what you would attribute that to is that a market why phenomenon or just maybe a recognition of of your capabilities in your performance for revenue cycle.
I think it's a little bit of both right I mean, certainly as folks are put under more and more financial pressure.
And and frankly as as consolidation in the independent ambulatory market continues to happen you are starting to see folks focus on more operational effectiveness on the back end and a lot of these provider organizations are realizing that they really need to partner with a vendor to do that.
From our standpoint, if you think about things like the launch of our financial analytics. We now have the ability to actually go in and ingest eight clients historical financial data and then do analysis on it and really shows on where their denials are coming from and really help them to understand that they that theres a.
Real opportunity if they are to engage with a technology enabled revenue cycle management capability like we had really transition to we've gone from a relatively manual system to something that is highly automated and very analytics driven and that's that's certainly its opening up conversations commerce.
Stations in ways that they didnt before.
And then if I could slip one quick one and it did you disclose sort of what the revenue was from some of the acquisitions was at around $2 million.
We didnt, we did not discuss.
Okay.
I assume you're not.
Let me, but is there an analyst day, we had said that it would be less than a million dollars. Okay and this in this quarter in this quarter and that's why I highlighted the increment above that it will occur in Q4.
Fair enough audit for the full quarter.
Thanks, guys.
Yep.
Your next question comes from the line of Donald Hooker with Keybanc.
Great good afternoon. So.
So as we think about fiscal year, 21, and sort of seeing your growth sustain at these grade levels by present, plus what kind of bookings should we think about you needing to generate in the coming quarters I mean, what does.
Can you help us sort of triangulate around.
Around sort of bookings conversion and what you need to do because I guess bookings were a little bit little bit weaker as you explain this this particular quarter.
Yes, so I think as look as we look first of all we've laid in.
Tremendous amount of subscription bookings as you look at our overall bookings break down and so thats very helpful. Because that perpetual license at the perpetual licenses the very perpetual license fall off that we found that we really faced at the beginning of the year simply creates goodness as we go into next year, because we don't have that hundred.
That 80% drop in a client's revenue stream as you get passed the perpetual license right and so so as we sit here today My I would say we were looking at this year to be a little softer than expected so somewhere to flat to slightly up from a bookings standpoint, but as we look at that we feel good about that.
Up tailing because of the nature of the subscription bookings, we feel that good and that driving revenue growth as we get into next year and revenue growth above this year's growth rate.
Jamie we had anything to that I would it just want to highlight would you point did you touched on which is because the bookings mix changes this year from the previous years not in the amount of nonrecurring when you add in those incremental recurring revenues most of that shows.
Next year, so that will feed.
Booked revenue growth next year.
Okay Super and then maybe it seem like you had some progress.
You know sort of a stabilization of sort of your attrition rates.
Hi, or your client retention rates, which everyone.
And then refer to date.
The.
I just love to hear any commentary on there in terms of.
Kind of some of the drivers there and in terms of what you're seeing with with epic and Cerner.
Yeah.
So we still do have hospital owned and affiliated footprint that certainly exposed to some of the large single platform vendors in the critical care space and so thats really that's really where we see the attrition driving above what we feel like as kind of thought the long term gross attrition, which is about 8% that's kind of.
Our feeling.
We're running a little had but as I've said before it's a volatile number.
And we feel like 11%. This year was the right model. We may we may be that by a bit but we feel like that the right model level. However, as we move into next year, we brought that down to 10% as we expect number one the effect of.
The shrinking hospital owned an affiliated base, but number two the continued driving a satisfaction within our independent ambulatory base, which is the majority of our base and so we're seeing better and better retention in that core.
And.
Finally, we expect they know us as the as surrounding as the surrounding ring become smaller it has less of an effect on our overall attrition does it make sense.
Thank you. Thank you for that I appreciate it.
Yep.
Your next question comes from the line of Sandy Draper with Sanchez.
Thanks very much.
Question, maybe first on the sale side Rusty.
I know you probably don't want to give exact numbers, but when I think about.
The additional salespeople new Hhonors I guess, you're adding is that a net offset against.
Specialists, you're not going to replace you're not adding I'm just trying to you currently growing your salesforce is adding new hundreds or are you sort of swapping specialists for hunters.
Yeah, it's a great questions any so you think about it when we acquire a new solution for example, like our mobile platform and Trotta.
For a period of time and in this case, a little more than two years, we were focused on having sales specialist because we didn't want to see a drop.
And what we wanted to do is make sure that we're bringing the expertise to the sale as we sit here two years plus later, our expectation is frankly that primary quota carrying reps fully understands how to bring that forward.
And so.
We can slimmed down the specialist force simply because now we have really trained and in part of the knowledge and built some experience in the primary quota carrying team to deliver and then as we as we slipped that down we can simply reallocate those dollars to more quota carrying reps.
Okay got it that's really helpful. Appreciate the resi and then maybe a quick follow up for Jamie.
Can you just remind me on years scripts and bookings do you tapped out as an annual number or if it's a three year contract feiger annually ruled out any dot annual nonrenewal steady that question. So we examine will address the answer [laughter], even rusty can handle that financial question.
[laughter], if thats a little to hate got them I played CFO a couple of quarters.
Yes.
Okay. Thanks, guys.
No whereas.
Ladies and gentlemen, just as a reminder, if you buy to ask a question. Please press star and then the number one on your telephone keypad.
You do have a question not from the line of Ben That's Jefferies.
Hey, good afternoon, guys just a quick follow up on the Salesforce enhancements, you're making are those efforts largely done at this point or are you still in the process of bringing on new people.
They're mostly done we've still got we've still got to open Rex to fill but for the most part we are we are fully staffed okay. Okay.
And then switching gears a bit on the auto acquisition.
You know, there's obviously a lot of talk about Tele health.
Solutions for the hospital space, but I'm curious what that looks like competitively in the ambulatory space do you see some of the larger players.
Fighting for share in ambulatory or is that still pretty untapped.
Well I'd say look so I'm going to separate what we're doing a little bit from Tele health.
Tele health. This is really today at least a lot more focused on primary care and it is not focused on enabling ambulatory primary care doctors to have tele health as much as it is bringing an entire resource and technology solution to the table.
We're bringing to the table, which is actually very relevant we have a large specialist population within our client base and our primary first foray into this is really more around virtual visits which for which for specialists is very important right. I mean, if you go to your dermatologist right and you want then want to have a follow up with them.
You would much rather just do that virtually rather than getting your card drive all the way to the office and certainly for the provider. It makes a ton of sense as well and so what we're bringing really first focusing on how do we enable constant and.
Fission patient engagement between the specialist and the patient so that you can truly especially as we move into value based care, where patient engagement becomes so important and continually understanding therapy adherence medication adherence and also progress and achieving wellness become very important for your performance.
In two sided risk based arrangements, we see this virtual visit capability as being very important for our client success, both in fee for service, but very much and value based care as well.
Okay and is this a solution that's more or less ready to go to market already end market or something that's going to require some work on your end.
Yes.
So this was actually so we've been a partner with auto health now for about a year, we've seen significant bookings volume and that some of that has started to come live.
We do have one of the reasons that we forward integrated this partner we acquired this partner was because they were a smaller startup that was capital constrained we see the opportunity to accelerate the robustness in the enterprise readiness of the solution, even beyond where it is today and so we're excited about it it's early.
Days, but we're definitely excited about it.
Alright. Thanks.
Hey, Ben I, just want to go back to your first question, which was is the Salesforce complete.
The hiring is almost complete but as Rusty said in his prepared remarks it will take.
Six to nine months for them to be fully trained to understand the solution and the ought to complete the complete offerings and begin to develop pipeline and CLO in close business from today and that's why you said.
Things should we should see the benefit of making this change.
Of the additional salespeople in the building here, yes in the back half of 21.
Okay makes sense. Thank you guys. Thank you.
Your last question one follow up question comes from Donald Hooker with Keybanc.
Yeah I wanted to ask a follow up question on the Med fusion acquisition and you guys talked about this at your Investor day, but when I think about you guys going to market with men fusion and distributing this across your your.
User base.
You are going to be bumping into some sort of other vendors out there I'm sure that are embedded in your user base and there's some big ones in small ones.
What does this sort of the sort of the white space. There were in terms of where there is sort of a clear shot it for you to.
Get mid mid fusion into maybe one of your own portal solution clients versus having to displace a third party.
Well I'd say.
The vast majority of our clients are actually on either our solution our unmet fusion in the patient access side on the patient intake side. There's a couple of different companies that are also in our client base and so that's an area where will bump a little more into folks.
But the.
It's interesting. So if you look at the meat of our client base right, which is I'd say the meat of our client base is kind of in the 25 to 100 provider range.
These aren't folks with big I T departments that are really good at assembling best of breed solutions. They tend to look more towards single platform solutions, because it has less complexity and their IP staff needs to focus on keeping internal infrastructure live and they tend not to have a lot of developers and so we do.
You see while we see some competition in kind of the in parts of the patient experience sector.
Say that we see an opportunity to really tightly integrate this and really have very tight communication between our core HR NPM platform and our patient experience capabilities and we think that that over time will give us a competitive advantage. It's we're not we're not ready to.
To start.
Really focusing on those areas yet right now were primarily focusing on patient access which is the portal on patient pay and sell scheduling, but we do see especially with the combination of met fusion and auto the ability for a patient intake to become a key part of it as well and so we were.
We're definitely focused on bringing a single integrated solution that truly enables our both our providers and their patients to really interact effectively.
Super Thank you.
And there are no further questions at this time.
Alright, Thank you everybody and we'll talk to you in a couple of months.
Ladies and gentlemen, thank you for your participation. This does conclude today's conference call you may now disconnect.