Q1 2021 NextGen Healthcare Inc Earnings Call

Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time lines will again be placed on these nicole. Thank you for your patience.

[music].

2021.

<unk> results conference call hosting the call today from Nexgen, our Rusty French President and Chief Executive Officer entertaining Arnold Chief Financial Officer, today's call is being recorded.

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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 meeting at the federal securities laws, including without limitations statements related to anticipated industry trends, the company's plans future performance products perspectives and strategies rich.

And uncertainties exists 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 filings with the U.S. Securities and Exchange Commission, including the discussion under the heading risk factors in the company's most recent <unk>.

Port on the form 10-K, and any other subsequent quarterly reports on form 10-Q.

Any forward looking statements speak only as of today.

The company expressly disclaims any intent or obligation to update to these forward looking statements.

Our remarks on today's call include both our earnings results and guidance, which contains certain non-GAAP financial measures.

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 it comes up here and the comparable GAAP financial measure can be found within our latest quarterly earnings release that was filed with the.

Cc and its posted to the investors section of our website. This release also provides qualitative description of how we have calculated non-GAAP financial measure is contained in our guidance at this time I would like to turn the call over to Mr., Rusty Frantz, President and CEO of Nexgen, Sir you may begin.

Thank you operator.

In Q4, 21 for health care provider clad showed amazing resilience relics commitment and bravery and 11 was truly a large fire in.

Mission has never been more important personal and immediate.

As you look across our client base, we see clients innovating and creating new ways of engaging with their patients to ensure health care can function for everyone.

With our intense focus on the ambulatory space, we continue to have the privilege to work across the country and home appliance restart their practices billed volume back and restore financial stability on the interest to providing quality care for those that needed in the tough time.

You are seeing many clients take advantage of the break to double down on investing and transforming from the new normal we've seen some fine struggle in new guidance and helped to get re launch we're blessed to have the opportunity to help bring health care back the capabilities and scale to be a tree positive Fortunately effort.

As we look back at the quarter for next Gen standpoint, we continued to show the strength of our next Gen integrated ambulatory platform. Our continued robust commercial uncompetitive execution, our exceptional operational resilience strong client satisfaction the ability to make significant solution advancement.

Willingness to make decisive actions to manage cost and deliver financially in a very tough time.

In Q1 revenue came in at 130.9 million down less than 1% year over year in 4% sequentially.

Major drivers was a negative impact to our volume base business due to lower patient business volumes visit volume offset by a continued growth in subscription revenue as was great efforts by the team to deliver up most of non recurring service revenue.

Non-GAAP EPS came in at 21 cents, an increase of 31% year over year on 5% sequentially, reflecting the impact short sort of long term cost actions we estimate.

Free cash okay.

Point 4 million based on Dsos were 54 days, yielding 192 million unrestricted cash and giving us confidence and pay down a portion of our revolver. Shortly after we exited the quarter.

[laughter] bookings came in at 45.6 million, reflecting a strong performance in selling environment challenged by both an inability to meet with prospects and points in person.

Well its worried environment experiencing Tobin rated please be isn't visible age subscription services bookings accounted for 9.2 million, 46% increase year over year, well perpetual software license and hardware bookings fell to $4.9 million down 33% year over year, and 15% sequentially demonstrating the effectiveness.

Our increased focus on moving clients and prospects away from legacy for patent license for sure purchases.

I used description is occurring arrangements.

Client retention came in at 92.4% significant uptick for Q4, I fly Twentys already improved 91%.

We believe the magnitude again sparse were sold its uncoated freesheet, some decisions, but still except for TEP, except for attention to stay at or above our 91% modeled range as we move forward.

As we look at a unique and well executed quarter in the face the pandemic I'd like to touch on a number of key points.

We are seeing commercial success driven by the strength of next gens total solution track record client satisfaction and commercial capabilities.

Your operationally solid and highly resilient.

We have strong balance sheet and can generate free cash flow, even if it a pandemic.

We accelerated and our nearly complete with our business model transformation [laughter] perpetual licenses to recurring subscription revenue.

We have a great engaged to energize Nexgen team the foundation of our success here.

Stepping into the first point, we're seeing accelerated competitive success driven by the expanding capabilities our solution strong an increasing client satisfaction robust robust product and service quality and a strengthening ability to take share in a core markets, let's take a step into some of this drivers in Q1, we continue to make significant advances.

The market specific solutions that are enhanced the integration of key patient focused acquired assets tightly into the platform.

As our believes that tight integration cross platform work Cross platform workflows integrated service offerings are all key differentiators and significant drivers of commercial success.

It's great to see our global solution and R&D teams continued to deliver on timing on schedule and on quality in the midst of everything our long term integrated platform strategy was strengthened in March with the most recent release of next Gen Enterprise, our integrated HR P.M. Court system designed to run complex and growing ambulatory practices.

Yes, that's forward along with future releases complete asked access to all aspects of our integrated ambulatory platform, including the recently acquired assets.

Now I want to highlight just a few key an exciting elements lived what next gen fortune.

Starting with the patient our new patient experience platform provides a fully integrated approach to patient provider interactions, including integrated virtual visits patient self scheduling pre visit check in inpatient payments our clients are already putting it to use as a point is executed more than 425000 secure virtual.

Visits in Q1 alone versus roughly 40000 in Q4 asked why 20.

All of the patient satisfaction rate above nine.

Many of these business might not otherwise have occurred as a result of a pandemic, you're seeing virtual business level off a bit as our clients patients upfront in person experience with their same provider option that is not available to live with pure tele health, but as a key benefit of next gens tell a practice.

In addition, our behavioral health sweep continues to see plot of positive traction in the market. We're excited to officially announced next week. Our most recent release that incorporates the capabilities. We acquired in the Topaz acquisition announced last October.

In addition by bringing virtual visits to this market, we are enabling many necessary behavioral health Miss it would not have happened otherwise quick reminder, we expanded into the behavioral health market last may we're an estimated 44 million adults are impacted nearly 60% do not receive treatment at a given year.

If we are uniquely possession position to address this problem when they billing caregiver synonymous with integrating coordinated behavioral care, but also physical pair with an integrated experience and a single patient record to meet the pressing needs of total walnuts within our communities.

And our solution is thriving in an environment of strong solid client satisfaction any police increasing client momentum delivering a great client experience during a pandemic continues to separate us from others, because they didn't make meaningful progress in our quest to be a trusted advisor to our clients. In fact, it has a number one priority among our five that's why 21 strategic objectives.

We are bringing intensive education and training programs to enable every team member to focus on the client success as well as enhancing our ability glut.

And do a successful future our goal is to truly weve trusted them I sort of the fabric her culture.

Along those lines are Nexgen advisor team recently launched instituted plant listening tour tumors early October 19, pandemic again, having real time insights is essential to plan to our own response to the pandemic.

However, the Nextadvisor teams also able to ask this trusted advisors to many of our clients sharing best practices and innovations and other groups and initiated successful. It's these types of interactions that truly create clients for life and the ability to help form the go forward strategy.

Our client success focus has resulted in an exceptional client satisfaction momentum for the first time since we have been ranks by class. We had exceeded a score of 80 across the board on our he HR up from 59 started that tender.

My chair complementing our now best in class I just management solution. In addition last month the class Executive noted the we're the only company. They can remember to improve in every single feedback area. They measure worthy feet, considering we'd already improved for the high seventys.

Such a bus and still increasing client satisfaction a solution.

Ambulatory clients for the future all combined with an increasingly maturity I use and do the footprint sales came at opened up competitive takeaway opportunities even during CAD coated with six competitive takeaways, the largest being over a million and for the six being pure recurring deals, reflecting our focus on moving away from perpetual license arrangements.

It seems really hitting their stride, we are seeing significant demo volume, giving us confidence in a sequential step next year's bookings number but down from a very strong quarter last year.

Quoted that demo volume at especially with new prospects as our aforementioned patient experience platform as a patient consumer increase would be increasingly become the center of health care, we're well positioned to enable the patient provider collaboration that is essentially on delivering scalable affordable accessible proactive high quality care.

The patients that can be truly engaged in their health.

Moving on in the midst of the pandemic Nextgen continued to demonstrate that we are an operationally solid in highly resilient business.

There are strong control the up works on controlling the operational matters of the business showed a proven ability to adjust cost to react to the external situation. In Q1, we took both temporary and permanent cost reductions both sets of actions enabled us to minimize impact to our employee base. During this pandemic, while still delivering on the earnings line in preserving cash during uncertain times.

As discussed in the last call, we took a number of temporary options in the quarter, including voluntary executive salary reductions suspension of 24, I'd say matching contributions to versus 48 hours for many of our volume based workforce in the delay Merit increase these temporary actions represented about four cents a favorability in the corner and why.

Restored or I will leave workers to full time, coinciding with the exploration of certain benefits under cares, we still except the CCEP sexy similar favorability in Q2 for all the short term actions expire, resulting in a more normal and representative cost structure in Q3 and beyond.

[noise] naturally we're also always improving the longer term cost efficiency the business in Q2 was no different.

The fact, we were able to deliver significant longer term cost reductions through continued reduction of facilities costs as well as continued transition to a lower cost eight ws footprint. Among other things expects to continue to focus primarily on non head count structural cost reduction throughout the year.

We continue to enhance the intrinsic value the business as well, notably through the transformation from a perpetual license business to a subscription and recurring revenue business over the first five years. My tenure, we've been executing a gradual transition to the higher quality recurring model, but on the last call announced the intent to significantly accelerate the transition going forward well.

This will have a near downtown term downward effect on gross margin. It both builds on our robust 91% recurring revenue line I mean, it's the yield significant operating leverage over time.

Continue to win competitively bison selling with the subscription model, including both the core and surround products have been generally offsetting maintenance level of revenue fall off with higher value subscription revenue.

The title abroad uncertainty it is a true luxury and a testament to our next gen team that weve maintained and even improve a strong balance sheet and generated free cash flow in this quarter.

This quarter, we ended the quarter and the positive net cash position, having generated $18 million a cash from operation.

The primary driver of the strong DSL performance at 54 days as was less distressed from clients that had been anticipated as we entered the quarter. We continue to monitor the client base and <unk> and allowed for some expansion of Dsos going forward. However, our analysis of the current situation gave us comfortable comfort and paying down $50 million on a revolver from cash on hand.

And following quarter ABS, we'll continue to evaluate the situation going forward and intend to pay down revolver as appropriate.

Significantly enhanced an already.

Extraordinarily strong corporate culture, well protected and enhanced our capabilities during coated.

Our employee experience monitoring moved up 37% in the last year seven points rather in the last year.

We've all make sacrifices financially to protect our team members to the greatest degree possible.

We have kept all of our team safe and healthy.

We have further enhance an already robust diversity programs, but have no augmented that focus with a trend prioritization of inclusion we've come a long way. The in this in this area as an organization and we are committed to continuing that journey over the next few years [laughter] indicated constantly with the organizations that everyone understood.

And our strategy priorities and Heath us.

Team is the foundation of everything the accomplish and be sure everyday in the middle of the most important meeting in health care not between a provider to patient.

When you look at what makes you want successful on what makes it so confident in the future and as we dive into the numbers in the Jamie I'd like to you to remember these things.

We are seeing commercial success driven by the strength of next trends total solution track record client satisfaction and commercial capabilities.

We are operationally solid and highly resilient.

We had a strong balance sheet and can generate free cash flow even in a pandemic.

We're making a strong near final transformation to recurring subscription revenue.

We have a great indeed, energize nexgen team the foundation of our success here.

Now, let's see how that all shows up in the numbers Jamie.

Yeah.

Thank you rescue [noise].

Thank you everyone on the call.

Before I go through the numbers I want to express my admiration and depreciation for the health care providers in first responders with Selflessly work under previous we own imaginable conditions.

Now the Q1 results total revenue of 130.9 million decreased one they are one per cent compared to the same period last year. It was down 4% from the fourth quarter fiscal commodity.

Total revenue was down compared to prior periods in light of the circumstances I believe our results are above expectations.

Recurring revenue of 119.5 million increased $100000 compared to a year ago.

Based on an increase of 17% subscription services offset by declines of 12% managed services for personal etiology and data services and 3% inmate reentry sport.

Recurring revenue more interesting it informed.

Formative comparison.

His current quarter to the preceding quarter in this case Q1, F. why 21 compared to Q4 or 520.

Quarter over quarter recurring revenue haven't met decrease of $5 million.

Scripts in revenues increased two and a half million or 7.5%.

This performance was well consistent with the general trend over the past several years and enjoyed a modest boost from the Q4 largely march virtual visit bookings, but unlike previous quarters. This increase was offset by declines in all three other recurring revenue board.

Maintenance and support decreased 1.1 million, 3%, which is generally consistent with trends and expectations.

More significantly for the quarter and unlike the historical trends covert true driven declines in patient volume.

Decreases at 4.3 million or 16% for managed services and 2 million or 8% retailing data services.

During the quarter, we so volumes significantly before the client initially and then recovered to approximately 90% a pre cobot levels, where they have stayed.

Recurring revenue is 91.3% of our total revenue slightly higher than the 90.6% in the prior year.

Nonrecurring revenue of 11.4 million decreased 1.1 billion ordinary person over the same quarter last year software license in hardware revenue of 4.7 million declined 2.4 million or 33% year over year.

This combined is consistent with trended previous period, although at a slightly higher rate of decline, it's still better than we expected to be coming quarters.

Non recurring services revenue of 6.6 million increased 1.3 million or 24% compared to a year ago due to our efforts to close out service contracts signed in these earlier period, we believe non recurring services revenue will return to near pre Kobin levels.

Bookings coming in at 25.6 million in the quarter down 21% on a year over year basis, primarily as many clients were focused on reopening their practices to highlight for the quarter includes strong bookings a virtual visits in the six replacement rigs within G.

Which reflects the sales management reorganization, we announced in Q3 last year is starting to produce results.

Cost of goods increased by 1.1 million were 2%, primarily due to higher amortization of capitalized development costs of 1.5 million lower managed services in either behind data services cost.

Due to lower transactional volume largely offset by the higher subscription services cost.

Gross profit decreased 3% to 64.5 million gross margin declined to 49.3% compared to prior year quarter a 50.5%.

Turning to our operating expenses.

40.7 million increased 600000, or one and I have personally.

40.1 billion a year ago.

The increase was primarily due to an increase in legal expenses as well as the inheriting some personnel cost from back acquisitions made last year.

Primarily in the third quarter offset by decreases in traveling conferences.

And infrastructure expenses.

R&D of 18.2 million decreased 3.8 billion or 17% from the 22.1 million a year ago.

The decrease is due to lower personnel cost.

Slightly higher R&D capitalization, which reduces net R&D expense.

As well as some reduction in travel and other operating expenses.

German and restructuring charges of 2.6 million primarily related to severance in operating expenses associated with their head count reduction in may.

Our GAAP tax rate for fit for Q1 was 200% with a non-GAAP tax rate of 20%.

To conclude my comments on the income statement, our Q1 GAAP EPS was a loss of one penny compared to income of two cents a year ago.

Our non-GAAP EPS of 21 cents increased five cents compared to the prior year.

Turning to the balance sheet, we ended the quarter with 192.3 million in cash and equivalents.

And 179 million balance outstanding on our revolving credit agreement.

Yes, those in the quarter were 54 days a decrease of three days from last year and Frac from last quarter I want to give credit to our account services personnel in commercial team for working with clients in this tumultuous time.

Subsequent to quarter in based on strong collections in overall market conditions, we have repaid $50 million against the revolving line of credit.

Our capex, excluding capitalized R&D was 600000 for the quarter.

Capitalized R&D was 5.6 million.

For the quarter.

In closing I am pleased with our performance in the quarter and proud of the organization for their resilience and determination I look forward to continue progress as we work towards the new normal.

This concludes my review of the first quarter financial result, and I will now turn the call back to Rusty.

Thank you Jamie.

She went up by 21 was the toughest quarter and the one we were proudest of so far during my tenure at next Gen.

We should or ability to move more purposely and aggressively towards subscription and recurring revenue, we should or ability to remain financially strong while continuing to play offense and we've demonstrated that our solution is robust future facing in highly differentiated.

Looking forward. However, we still see the macro environment is being too and predictable for us to be comfortable providing guidance.

That being said we wanted to give you a view to how we are currently modeling the impact to visit volume as the primary macro dynamics.

Currently we have been seeing roughly 90% volume those cobalt has accelerated recently, we've seen a slight downtick into the high Eightys Oh, we believe that volume, we relatively stable to improving as people have learned how to interact with their providers in the coded world those virtually none person. Therefore, we have model of is averaging between 90% to 95% over the last three.

Quarters of our financial here.

Naturally this will continue to have some impact interbody baselines.

We also expect demand at the end towards independent ambulatory space to be slightly delayed slowing bookings a bit through the financial years, our clients returned to normal financial operations and higher patient.

As we continue to ask my 21, we expect to see the continued market shift of bookings in the subsequent revenue.

From perpetual to subscription.

As stated this will have a near term downward effect on gross margin, while increasing future hopper homepage and quality of revenue.

And finally looking forward, we'll see favorability of another approximately four cents of temporary cost reduction in Q2 sunsetting beginning in Q3.

In closing, it's an honor to be part of the team doing great things for health care during such a critical time and to support the front lines of care.

It's also an honor to continue to lead our team on a multiyear journey journey as an increasingly diverse inclusive organization as we strive to be afraid place where everyone feels like they can be their best cells can belong can have a great future and a little fund along the way regardless of who that best self is.

We will keep making progress as we do with everything that we set our minds to.

As I sit here five years in 30 days and doing amazing tenure in the best job I could ever asked for I'm grateful for the continuing opportunity.

They save out there, let's open it up to questions.

As a reminder, press star one if he would like to ask a question at this time.

A question press the pound.

Your first question Jeff.

William Blair and company.

Yeah. Good afternoon, guys. Congrats on the corridor and thanks for taking the questions I want to start on bookings and said to lay it out. It if you could repeat the number that that'd be helpful. And then just looking for a little bit more detail on what product categories stood out in the quarter.

And then if you could help quantify a little bit further on activity from existing clients versus new footprints I think that'd be helpful as well.

Yes, so the overall number was 25 six.

Jamie one of my past this one on deal.

I don't think Jimmy was expecting that.

Gave me the good news you sorry, I had your muted sorry, [laughter] go ahead, J REIT trying to drive trying to keep my dog from answering the question versus.

The.

Well, we don't want to get into.

Granular bookings it did.

You know is a consistent pattern or expectation I commented that the virtual visits.

Was again strong performer for us.

And in total it was approximately 4 million of the bookings bookings, Jeff totaled 25.6 million.

So virtual business was a.

Good contributor again this quarter and then.

So you remind me your question again sorry.

Yes, I was I was surprised with was I was surprised with the I did not expect to see competitive displacements within this quarter.

No that was something that was somewhat surprising in gratifying on many of those deals were completely executed virtually.

And.

When when.

When you're actually taking new footprint the entire waste through all sales cycle virtually a lot of times. What that means is that you have a really strong hand to play in that particular specialty because they brought you into a process you didnt find the process.

Probably makes sense and and all very helpful.

I guess I'll follow up asking about the pipeline and.

Again, it's exciting to here that the sales team can execute completely virtually but I guess from from here I'm curious on where the pipeline stands in terms of existing clients looking to to purchase and integrate more products.

More of the Nexgen platform and then as.

Travel and see clients face to face opens up how you see that.

Playing into the ability for land, even more new footprints.

Surprisingly enough there's a good chunk of our footprint that represents the fact that we invested in hunters last year and member. We told you is gonna be two to three to four quarters before they really started to produce well no amazing kogut happens and all the sudden here we are and so we're actually seeing a lot of new.

In the pipeline a lot of it based on people being very excited about experienced platform.

That is a true step into their future.

And so now we are seeing a good bit of cross sell activity as well, but I I would say.

I had been surprised because the new activity is actually full stack activity, it's not surround product activity.

So it's it's the full integrated ambulatory platform.

And so that's that's pretty gratifying to us because what that really means as people have recognized how robust and how far. It next gen enterprise has come and on top of that they are really seeing value of the assets that we've layered around it most notably when they're really looking at patient engagement.

Great to hear one more point of clarity when you talk about full stack that activity is is that more typically percentage of collection model or is there a good amount of flat or subscription fee models or contracts in there as well.

You know that one to Jamie, but what I would say is yeah. So when I'm talking about full stack I'm talking about the entire each RPM pop health mobility to physician mobility patient experience, the everything, but hey, Jamie what would how would you see the.

Percentage of revenue versus for subscription breakdown.

This is primarily.

Our subscriptions.

At least this quarter they were subscriptions.

As opposed to being a percentage of revenue.

Yes, I mean interestingly enough.

Yes subscription services revenue was up 17% year over year, this quarter and 7.5% sequentially. So so back to kind of the earlier commentary you know the perpetual the subscription lift is is working and we're seeing growth and consistent grinding outgrowth in.

Subscription area this business.

Great. Thanks for taking the questions again.

Absolutely.

Your next question is from Sean.

Hi birthday.

[noise] hi, thanks, very much and congrats on a on a good quarter in a tough environment.

I want to first get into the sensitivity of the recurring revenue to utilization, particularly managed services managed services. As you said was down 16% sequentially, how does that compare to visit volume among your providers are net cash collections.

So I mean, what we what we said Sean because we haven't gone that deepen that but what we've said is is that it's it's relatively volume correlated always maybe Jamie you want to give a little more color on that.

I would say it strongly correlated to the volume in managed services.

Good.

The.

We do have some components of managed services there are not directly tied to.

The patient volume they in managed services. We also include the hosting or managed cloud services for people, which isn't tied to it but.

That probably makes the factor.

70% volume driven 30% is still.

Have a.

Client driven or.

[music].

It's not directly tied to the volume at least in a quarter.

But but I'll, let that go on.

As you know you know I mean.

Visit volume and when that visit turns into revenue of course are not exactly perfectly correlated and time to either.

Right and so activity clouds that a little bit as well.

Oh I understood, but I asked the question because your say that your model that you're modeling, 90% to 95% utilization versus pre cobot level. So we can think about about that.

Relative to about 70% of the managed services like that fair No. That's no no no no. Let me correct that Rusty [laughter], because we have factored it it in the fact that 25% to 30% so.

Is is.

It's not body related so the numbers that must be gave you had factored in that some portion is directly tied to the volume Charlie.

Got it so we should be modeling.

Okay got it can you quantify that downward effect on gross margins that you think you're going to see.

Not at this time.

But as we start to move forward into a time when we're providing guidance, we'll do a better job quantify Matt.

Is it bigger than the bread box.

[laughter], here's here's what I'd say right. If I was to look at subscription revenue I'd say, we're bringing in subscription revenue would give or take about a 70% margin level.

And perpetual is done that.

Okay.

And then last one I thought Rusty you said that you saw bolus of non recurring services revenue in the quarter, but I didn't hear any shout out on any kind of onetime merchant services did I hear that wrong, Yeah, I know I did mention it Sharon.

My comment.

We were able to close out some of these contracts that had been signed in previous periods and the number is in the one and a half to 2 million range.

We were able to close out the kind of.

Over and above what I.

I would have normally expected when rusty talks about the Bose.

Okay Super Thanks, very much.

Yep.

Your next question is from Sean Dodge with RBC capital markets.

Hey, Good afternoon. This is Tom is color on for Sean Thanks for taking the questions.

I've got one on telemedicine, you get a little more detail on how those conversations are going and how that's sort of evolved in the past few months.

Provide are still kind of comfortable with that $79 per provider per month fee structure.

Yes.

And what I'd say, though as is the conversations have evolved.

In a couple of different ways.

One is.

First everybody's looking for a life offering now they won't actually a house on beach front.

And so expectations are increasing among the provider base right. It's not enough to simply I know when face time came along that was great, but but you actually want to have an entire meeting any webex right and so what we're finding is is that now it's starting to go into more of kind of enterprise RFP cycles.

Where people are really looking at the entire platform, a tele health and how does it integrate into their business and as we see that that really makes us. We're at we're definitely advantaged in that area, especially in a client base because of the integration directly into documentation reimbursement scheduling. It's the same thing whether you're virtual or not virtual.

Right and so so we're starting to really see more of the enterprise procurement cycles were also as I said, we're starting to see.

I am per provider spiked and then it peel back a little bit in part of that was because people started coming into the office.

Okay.

All right. Thank you and I've got another.

Question on kind of micro services platform you just any slowdown here at all as both the pandemic are able to virtualize a lot of the work that needs to be done on that.

Yes, well I'd say, what we're doing is you know the is interesting because the pandemic what the pandemic has done is it's perhaps slowed down the risk horizon a little bit.

Which has enabled us to be a little more commercially oriented in how we're developing the micro services platform and so route where we're actually doing is being more opportunistic rather then allocating significant capital ahead of time for a platform. So that will come later, we're just more re factoring in building and as we go along.

And that's really cobalt has changed that calculus because [noise].

Our clients need integration of these core assets today.

And and so that you were kind of building it as we go if you will.

Okay, great. Thank you very much.

Yep.

Your next question is from a Donald Hooker with Keybanc.

Oh, great. Good afternoon. Good afternoon, congrats on a quarter I'm going to talk about when.

Somebody else that does well.

So just thought maybe calling on this last question, obviously at the Investor day last year, because a lot of focus on sort of the transition modernization of your technology platform.

Microservices or whatnot, how do we think about you know not happen and is there any change to your commentary in terms of your R&D spending or.

You had a pretty aggressive herb outlook, who are investing back into the business I'm. Just wondering just hear you recommit to that or not.

Right now what I'd say is right now we're focused on you look we're in a kind of a new reality here and so I'd say right now as I look through the year I'm not looking to decrease R&D and I'm not looking to expand R&D.

As we get into next year, we'll as we started to talk through next year and as we start to provide guidance for this year, we'll probably talk a little more broadly on it.

But but what I'd say you know is that.

As we have now allocated R&D a lot more of our R&D is is arc is geared right now to building the opportunistic microservices that span the platform based on the assets, we have today rather than more of our long term build strategy and so what I I wouldn't it I would not expect to see that.

Bolus of R&D show up I think we're backing away from that a little bit because we have some more time.

What I would expect to see US is to continue to build that out as we deliver commercial projects.

Okay, well, maybe another financial question you guys have talked about this strategic move and torn SAS.

For few quarters, and you have warned us that gross margins are going to be pressured.

Can you remind us kind of given that the pacing seem to have picked up there and just so we don't get over our skis and whether the right is there an assumption in terms of gross margin pressure, we should sort of assume generally going forward really what I know, it's what it's what I talked to shot about which is yes look you're looking at migrating from something that's well well up.

Into the upper double digits down to something is at about 70% to 70% that being said that 70% is also 70% as the year after in the year after year after.

Right.

Uh huh.

But but you're going to lose as you flip from perpetual to subscription on the same ACB, you're going to lose some margin.

Now when you look at the TCV and this is something that you know look as we as we go forward part of what we're looking at is as we made some pretty significant strategic changes here as you know how do we best Express the business for you.

I would say that total contract value because actually something we walked away from many years ago, because there's such a mismatch in there, but I think there's an opportunity to better expressed the value of our bookings because when you think about this transition to that we've gone through to a much larger amount of recurring bookings and subscription bookings instead of perpetual bookings, it's much higher quality red.

And you and it has a much higher TCV than that same amount in a perpetual bookings, even though in year. One that same amount perpetual has a better margin profile.

Oh, that's fair.

But that's one one other question kind of high level and there's not a great answer to this but since then it would just curious to pick your brain here in terms of if we think about sort of the environment going into the fall.

Kind of maybe some folks are thinking there could be a second wave of cobot 19, maybe a real bad one maybe.

But your your clients have have really adopt a lot of technology them.

No I hear a lot about virtual care and remote registration on things like that I mean is there sort of.

How do you think about like the downside of another big wave here as you're going to be really different or with these new technologies in place. It's kind of an open ended question, but I'd love to hear ethics first goal I mean, I mean heaven forbid you have this the terrible part as we've all kind of learned how to deal with it.

Mhm right I mean I look at.

I think my behavior now is no less safe that might behavior in April but it's much more educated.

And I think that's I think that I think when it comes down I mean medical treatment is one of them as long as hierarchy of needs right and so people are I don't think you're going to see the same level of impacts the volumes I mean knock on wood because I you know look I, but I have a friend, whose whose bound with the right now it's a it's so.

Terrible thing.

Okay, but I appreciate what else would say is look weve [laughter].

We went home in two days and never lost to be we've moved cost in this organization.

We can sell in a virtual environment, we're saying sharing a virtual environment. So from the standpoint of this business. We will do the things we need do and we will still be operationally resilient and we will still play offense on the Bakken.

Super Thanks for that Ah thanks for the thoughts.

Yep.

Your next question is from David Larsen <unk>.

Hey, congratulations on a good quarter can you talk a little bit more about the six wins, what drove that who you're competing with and you know maybe just give them or color on that thanks.

Well I'm, not I'm, not going to get done and individual competitors.

What I would say is is that they were in specialties that we've chosen as a primary focus.

It was it was we won on the strength of the entire platform. That's what we're selling these space and so we're selling that vision and a lot of our competitors are selling pieces and parts.

When you match us up capability to capability in this into markets that we know we have a strong hand to play like Ortho for example, or in the federally qualified health center market.

[laughter] here pretty unbeatable, unless somebody goes super low and price.

And like I said that these things moved as quickly. It's it's also because we're starting to increase our relevance in the market.

And that's really starting to show up in what I said as things that are showing up on our door step that we didn't even know about.

Simply because they want us to bid because next gen. Starting to have a lot of luster on it.

Okay and I like the full solution set that you have you have and try to you have Eagle dream. It seems like you have a lot of capabilities that you've added over the past couple of years each of which I think are very important from the ambulatory physician perspective can you maybe talk a little bit more about your sort of expected.

Retention or attrition rate. However, you want to measure it like I think you're at 91% retention right now.

It's not going to pick up over the next couple of quarters was or one or two maybe large accounts that rolled out I think it'll pick up but understanding that it ticking up is good yep.

Right I'm look I mean, I mean look I said it is a long time ago. We had some exposure to hospital hospital affiliated that that was going to run itself off overtime, we don't see significant competition in our base.

We're very good in the independent ambulatory base at some point in time, we've made as far as the quantified as we get better and better handle any slant data, but but just to be abundantly clear, we're not super worried about attrition in our high value independent ambulatory base nationally everyday you earn the right to keep your clients.

And the hospital hospitals and stuff is going to run its course, but it's as you know it's not that significant of a part of the piano.

Okay, Great and then just last question what percentage of your revenue subscription now Jamie please.

[laughter] subscription.

Second sorry recurring.

What does subscription and recurring recurring is 91% and.

So that would be.

Okay.

Thank you.

What's subscription Lenny.

I need a second person.

The next question.

As a reminder, that star one if he would like to ask your question at this time.

Your next question is from George Hill Deutsche Bank.

Hi, This is Charlotte on for George Thanks for taking my question given the current environment are you seeing sales cycle I'm like that or is the sales process just different and how varied as the by product.

Well, so we don't comment a by product.

Only by solution. It's one solution. So I think what I'd say, it's a really good question.

And what we're seeing is we're seeing what we're seeing as we're seeing people just be careful with decisions right and a lot of that means because they're they're getting their practices going back up they're not like hospitals that have balance sheets and procurement departments that are still working and there's still buying stuff, even though their volumes Wade.

Yeah right. This is the ambulatory and the ambulatory market, we do see more pressure.

On on buying cycles during times. During this time that being said you know I mean, we're very happy with the number we delivered and like you know as I said, we'd expect to be sequentially up though down from a strong performance last year at the in this quarter.

And so I think we're finding ways to be successful within this on a lot of it back to the point is is because we're starting to really separate ourselves, but also I think because.

The teams done a really good job that learning how to sell very effective virtually you know it's interesting.

They actually said that you actually reach a lot more people you can get much wider in higher in the organization because it's much easier to get on people schedule because in our to travel there.

And so great [laughter], it's a different world for sure. Thank you.

Let me answer your answer the question.

It was 27% of total revenue is subscriptions this period.

$131 million.

And that was up 17% every year in southern asked sequentially.

Yeah, It increase [noise].

Next question.

Your next question is from Stephanie Davis.

Leerink.

Hi, guys. Thanks for taking my question I had that two questions one a little easier when all of the harder. So I'll give the first am I right and then next London, Jamie [laughter] easy one right now.

[laughter].

Very fine.

When I look at your transition to a virtual environment. It looks like you had a much new transition.

Partially front that we can you talk about being with Android model and haven't preparedness Fred.

When you think about the future sales for your model do you see yourself kind of adopting this virtual feet on the street sort of model going forward and could be a help to your longer term margin.

Let's say, here's what I'd say to it.

First I mean, it's the end of the day, you're going to you're going to find out what the selling environment is because nobody wanted to go virtual and the first place until somebody until everybody had to.

Nobody wanted to be first.

That being said look I I would say that.

We've been really really effective virtually broadly in the organization.

I do believe there will still be style insight interaction returning more fully in the sales process. Today, there is very very little if any.

But you know broadly for the organizational standpoint, I would expect do you see us release, a good bit of our footprint.

Overtime.

Because I understand I.

Now that being said you know there's also footprint there right now the government is relax the HIPPA.

Constraints.

Because everybody has to work from home I'm. There are certain functions that have to be that wanted to go back to a more normal putting we'll have to performed in an office, but I would not expect to see US go much beyond that I'm in no hurry to take my people back to the office now so everybody's kicking button taken names out in the out from home.

Turning to more complex question, that's kind of a follow up to that I'm, assuming you do you have.

Continued wins and the booking but still ended being a little bit softer than the normal environment, just giving you have the.

And denigrating on.

How should we think about them back so you need to return can revenue growth.

I think broking.

It is then the dampening effect on the next 12 months, there could be something broader and you know I'm.

That one [laughter] I'm actually not going to let Jamie answer, though and stuff like that starts to tread.

That's a lot more forward looking I'm wondering if you could comment on that yet what I would say is.

I'm very confident in our future I, that's all I can say at this point in time, but if you tune in October I think we'll provide you with a much better answer.

Okay, Alright, I will give an answer then more thank you [laughter] yep.

And there are no further questions at this time.

Alright, Thank you everybody stay safe out there and look forward to talking to everybody in October.

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

Thank you.

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