Q2 2021 NextGen Healthcare Inc Earnings Call

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[music].

Welcome to the Nextgen healthcare fiscal 2021 second quarter results conference call.

Hosting the call today from Nexgen are Rusty Frantz, President and Chief Executive Officer, and to Jamie Arnold Chief Financial Officer, today's call is being recorded.

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Before we start I would like to remind everyone that the comments made on this call may include statements that are forward looking within the meaning of federal security laws, including and without limitation statements related to anticipated industry trends and the Companys plans future performance products perspectives and strategies.

Risks 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 Companys public filings with the U.S. Securities and Exchange Commission, including the discussion under the heading risk factors in the company's most recent annual form.

<unk> annual report on the form 10-K, and any subsequent quarterly report on form 10-Q any forward looking statement 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 contain certain non-GAAP financial measures for our earnings results. The GAAP financial measures most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between each non-GAAP financial.

Measure and the comparable GAAP financial measure can be found within our latest quarterly earnings press release that was filed with the FCC 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 next Gen. Sir you may begin.

Thank you operator.

Q2 for 21 is a great example, next gens operational and financial strength.

Our ability to continue to execute that advance our strategy during a complex time.

Today's call will I call. It the bowling Nexgen 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 of 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 my remarks, we will provide guidance for at least 21 as we now have better visibility and understanding of the range of business infection code.

Let's start with Q2 operational performance 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 consists 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 base businesses throughout the quarter and as we had forecast our volume driven lines RCM and EDI.

All right about 93% to 95% pre committed 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 was 30 cents increased six cents year over year and seven cents quarter over quarter. This strong performance benefited from the four cents 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're comfortable further reducing the amount drawn on our revolver early independent, resulting us they're not paying down a total of $115 million in Q2.

This leaves an outstanding balance of 64 million as of September Thirtyth, and we are in a net cash positive position.

Taking a deeper dive into commercial execution, we had a great quarter.

He is a 31.2 were up 5.7 million quarter over quarter, and they're down from a stellar 36.9 year over year last year did include a five and a half million dollar recurring deal.

We're 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 joined the growing strength of our solution, coupled with an increasing brand tailwind from our clients satisfaction as.

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, except I expect to see our continued commercial success continue.

And finally, let me turn to the legacy maintenance line retention.

Retention once again came in strong at over 90% in 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 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 latest release of the class interoperability report.

Next Gen was identified as and I quote the only ambulatory specific itamar vendor to provide a strong usability experience for all interoperability workflows measured in this report.

This is a great validation of how next Gen is getting our clients unique about capability to access a patient's entire available clinical record 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 a big game and their marketing materials. We are delivering not just delivering a lot of data you're helping providers get to more informed clinical insights not according to me according to our clients.

As we look to the future. We are focused on the early success in demand around our per patient experience platform. We.

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 delivery.

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 or upcoming spring 2021 release.

At that point, we will further empower our wide next gen 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 20 spring 21 release, we'll have our new patient experience platform deeply integrated in it.

In addition, this will be the release that enables our clients to meet the requirement stemming from the 20 Onest century Cures Act.

Which which comes due in August 2022.

The effect and are required for the vast majority of our client.

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[laughter].

Yeah.

Mr Brands.

Given given second please.

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And Jamie yes.

Yes, Jamie where do we leave off where do we leave our hear us.

[laughter].

Yeah.

The glories of remote work, okay. So I'm going to start back I'm, just a little bit and 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 no.

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 are delivering a truly integrated platform. We're both opening up further opportunity and becoming even stronger in our base to that end, we've investing in significant R&D aimed at delivering this next level of integration in their upcoming spring.

2021 release at that point, we will further empower our why next gen 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, we'll 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 20 Onest century Cures Act on August 22, which affected are required for the vast majority of our clients.

To that end next gen, we'll be investing to ensure our base is migrated onto the spring 21 release of a fully integrated patient experience platform. This effort create significant opportunities we've seen our attachment revenue for new capabilities grow quickly. Unlike satisfaction is highest for clients on our latest releases.

Moving quite quickly under the spring 21 release 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're also seeing benefits within the R&D line from two primary dynamics.

The first is a continued reduction in the need for sustaining activities as hacking technical debt as a result of our work on quality 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, weve done this while delivering increasing capacity without compromising the quality.

From an implementation standpoint, we are starting to invest here ahead of the spring 21 rollout. This.

This cost will show up in the back half of the year for the full further establishing the back half of 21 as the representative baseline of how we will look at entering F Y 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.

Well, usually we see 2500 to 3000 of our existing client team members come join US along with a few prospects. This year, we already have 5000 existing client team members, but have also created a reduced track for any ambulatory team member regardless of which other vendor. There currently on this is not.

This is not a sales presentation about next gen, 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 is a great opportunity to continue next gens 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 lets turn to Jamie for a deeper dive into the numbers.

Thank you Rusty 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 of my 21.

In light of the circumstances that we face during this quarter our results were above expectation.

Recurring revenue of a 125.7 million increased 5.1 million or 4% compared to a year ago with an increase of 17% and subscription services, 4% in managed services.

Which was offset by a decline of 3% and maintenance of sport.

Flat for EDI data services.

Doing a year over year comparison ties the information on the earnings call to the GAAP financials in the 10-Q and press release I believe it is more informative comparison for recurring revenue is comparing the current quarter to the preceding quarter 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 expectations for the future.

More significantly for the quarter volume driven revenues rebounded after the significant covert impact in Q1 with increases of 3.7 million or one or 17% for managed services and 1.4 million or 6% for email and data services.

Volumes on a same store basis increased consistently over the quarter to result in approximately 93% to 95% of Greek yogurt level maintenance and support decreased 500000, or 1%, which is consistent with historical trends and expectations because.

Recurring revenue is 90% of our total revenue.

In line with the prior year in the prior quarter and in line with our expectations.

Nonrecurring revenue of 14.3 million increased 600000 or 5% over the same quarter last year software.

Software license and hardware revenue of 8 million declined 200000.

3% year over year, but increased 3.3 million quarter over quarter the costs.

The quarter over quarter increase reflects a catch up of the pent up demand from impact.

Of Cove, it 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 is.

These large dollar transactions closed his license purchase rather than subscription, making this line lumpy in somewhat hard to forecast more importantly, it makes a significant impact on the bottom line. It is proportionate to the revenue increase non recurring services revenue of 6.3 million increased 900000.

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 dollar contract.

Highlights of the quarter include continued continuous improvement in book or continuous strength in bookings of virtual visit and replacement wins with LNG, 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%.

Merely due to higher amortization of capitalized development costs, and inquired and acquired intangibles.

And a higher subscription services and higher managed services.

Our cost associated with the return of transactional volume growth.

Gross profit increased 4% to 71.1 million in gross margin declined to 58 point, 50.8% compared to the prior quarter, 51%.

Turning to our operating expenses as you know your 42 million increased 2.9 million or 7% from 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 me acquisitions closed in Q3 is that why 20. This was all 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 travel and 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 16 cents.

Cents compared to income of nine cents a year ago are now.

Our non-GAAP EPS of 30 cents 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 dollar balance outstanding on our revolving line.

What revolving credit agreement yes.

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 into <unk> and commercial teams for working with clients is this tumultuous time based.

Based on strong collections and overall market conditions market conditions, we have repaid $115 million this quarter against the revolving line of credit our.

Our capex, excluding R&D was $100000 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.

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.

Thank you Jamie and please confirm you can hear me.

I hear you.

Thank you thank you Jamie.

Thank you, Jamie and now let's take a look 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 have that are built into our forecast.

Looking at the past volume is taken as well as factoring in the acceleration. We currently see in kind of it. We're modeling volume is 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 that's why 21 and the same intensity assumptions for covered that drive the volume estimate I mean.

I'd like to see a full return to the demand environment as we move through the balance of that balance of F Y 21 and into F 22.

[noise], we expect continued strong growth in subscriptions subscription services. This line continues to be the dominant growth driver for next Gen. We expect that mid teens year over year growth to continue through the rest of that fly 21, and we saw an opportunity to further accelerate in the future.

Perpetual license revenue is 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 base side of our business, we look at the expansion of Covidien its potential impacts of the cautious side as well.

As we look at the remainder of the year, our volume estimates five fewer days in the back half than the front half and patient deductible resets in our Q4, it will drive a relatively flat to slightly down forecast for the remainder of the year.

Legacy maintenance will continue at 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 four cents of quarterly spend our guidance includes the first half benefit of eight cents of cost savings that will not be repeated in the back half of the year nor enough I 22.

As discussed earlier, we will invest ahead of the significant deployment of spring 21, with our new patient experience platforms and that'll investment will first show up in Q3, and Q4 and extend through next year.

Importantly, we have 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's that being said increased commercial success and are further M&A could cause us to revisit that decision as we go.

Move into future years.

Finally, we will continue to evaluate reduce and relocate parts of our fill facilities footprint with an eye towards employee safety, a great percentage of remote team members in the future and them.

And the most favorable geography from a location talent in cost standpoint that process is and will be ongoing as we are now aggressively evolving next gen into our future sales.

Based on these dynamics, we expect to see revenue for Athleta 21, coming in between 535 million and 551 million with S. coming in between 83 and 93 cents.

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 next Gen team.

As we look past 21, we'll leave it at this well much of this year's recurring revenue number is 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 Thats why 22 begins to take shape.

In closing.

I want to start by thanking our entire client base.

We're proud to be an important supporting actor in the great work you do.

We are delivering financially both the 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 next gen.

We've moved from fixing technical deficiencies to delivering a broad highly robust strategically position solution.

We have been increasing addressable market for our solutions across those three pillars of ambulatory care medical Orland 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 next centene that I get to be a part as we look forward to a bright future together.

And now I will take questions. Thank you.

As a reminder to ask a question you would need to press star one on your telephone can withdraw your question press the pound key please.

Please stand by.

Thank you Wendy roster.

Your first question comes from Jeff Garro with William Blair.

Hey, good afternoon, guys. Thanks for taking the question.

I want to ask about the move to more subscription deals in bookings I know there 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.

Yes, So first of all Jeff Great question, you know as we you know the actual ship 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 you know it's been quietly and very rapidly building into a a very significant.

A good portion of our revenue and one that continues to grow.

Really as we see for the foreseeable future.

No.

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 and what we found is 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, 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 <unk> of a perpetual revenue.

You know these things are gonna happen and because the number is pretty small now it's going to be a little bit lumpy and the reason I called it out in the call is only because when that lumpy revenue comes in sometimes it has some some some barry.

Accelerating effects on the EPS line compared to maybe some other pieces of revenue.

Got it that's very helpful and one more for me is on the spring 21 really it sounds like a little bit more emphasis on one of your new product releases that we've heard historically and it sounds like this relief could have a positive impact on several fronts.

And you know might be from specific add on products or more competitive displacements or or better retention.

I just love to hear your comments on kind of where and how you see that you really play out positively and you know how we should think about the potential timing of that impact.

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 putting for the client and the thing that makes you a one stop shop is.

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 then it's a consistent experience for the practice and so.

This release really is the culmination of a number of years of work and Weve been doing a great job 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 roll out 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 up Mike My guess would be towards the end of the summer now as we bring people into new patient experience platform for the portal itself, that's not a 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 practice is to create a great patient experience, but also enable that constant collaboration between a patient in a provider that truly delivers the right result, which is.

Much more important in risk based arrangements.

No I phone one more follow up there just I guess.

How about a less best of breed type conversations that does it become a catalyst for for even a a greater amount of all the deals at some point.

Absolutely I mean, that's really what we're seeing we're seeing clients come in and and I'm really looking at the the entire the entire platform and that really I think that is a testament to just some of the work weve done today, but the spring release really brings that up to a whole another level.

Got it thanks for taking the questions.

Yep.

Your next question is from Shawn Wilan.

Hi, first hand.

Thanks, very much and just wanted to follow up on Jeffs question. So could we get a little bit more specific on the requirements of the cares Act as it pertains to the spring 21 relates like what are some of the specific deliverables that need to be installed in your client base by August 22 that are driven by rail.

That are driven by regulatory requirements from the <unk> I'm, sorry, the cures Act nobody cares and from the <unk> from the Cures Act yeah, sorry, it's it's very much around data blocking and data sharing I'm actually not prepared to get that deep into it. So on this call, but it is something that we can certainly provide more guidance honestly.

As soon as we get closer simply because that's just not something 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 with the regulations and the App and.

This point based on the scope of the government and the timing we're on a good path to get them there.

Okay and for your existing customer base is that a bookings opportunity for you to upgrade them to to the spring 21 release or no.

That'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 as integrated a fashion before they were on the 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 pop health. They also acquired <unk> financial services and those type of things and what I'd say is we've already seen a good bit of attached.

Of our acquired and new assets to existing clients and our feeling is that as we go through this cycle will continue to see that attachment rate increase.

Great I Miss what why what's the reason behind the spike in the perpetual license in the quarter.

I'd respond to 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 know you've got a choice either force try to force them down or recurring path. When they are absolutely wedded to this and have them walk or side the business and so while we're neutral from a sales comps.

Standpoint, and were tilted towards recurring from a management standpoint, what I'd say is the clients are still sometimes going to by the way they want to buy.

Cash is king.

Yes for sure Yes, let me just say one other thing on it that Sean.

My My Hope is 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 into 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 wear hope my hope.

For that you won't see the major shift in margin production that comes based on a significant mix shift in perpetual.

All right got it Rusty I mean, not getting one quick one R&D cap rate in the quarter.

R&D cap rate was 27%.

Thank you.

Your next question is from Steve Halper with Cantor.

Hi, just a quick housekeeping question.

Question. The you talked about 27 million of cash flow was that operating cash flow in the quarter.

As free cash flow free cash.

Free cash flow will give us the operating cash flow number I guess I can back into it.

Yeah, I can give it.

Can you give me 133.

33, 30, 34 million 30 points to 30.2 million.

30.2.

Yes.

Okay. Thank you.

Yep.

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

Thanks, Greg.

Good afternoon.

Rusty you you 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 implies something like 6% growth and that's that's despite some amount of drag from the pandemic on the the volume sensitive businesses can you help bridge that to what the view was just a couple of quarters ago, which was.

The investments you've been making in Replatforming would keep EPS flat through fiscal 22 right in what you've laid out here just kind of in the margin of error, there or is something changed or are those investments you mentioned that will ramp over the next couple of quarters does that caused a lot of it to just revert next year.

No. It's actually you know that's and that's why I made the comments on our with our efficiency of R&D. When you think about it there's no travel we had a lot of windshield time.

But 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 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.

Sure and yet within the same budget and that's been really it's been really a market change and co that I think it's 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 facility standpoint, and were starting to really see see something not too far away from where we are as our new normal.

And so based on that I'm I'm I'm looking at continuing to lock in the efficiency gains of being a a very virtual organization that collaborates well, but also you know the other thing is as we've really seen some significant reductions in and technical and defect rate out in the field, which are 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 is we're continuing to re factor partially architecture to make the product more scalable to make the platform more scalable and more extensible.

But does that does that help.

Yeah, Yeah, absolutely and I guess, so if if we kind of stable you know post pandemic in if they can make it more demand side you you've talked before about does the likelihood or the potential to pandemic really accelerate the transformation of ambulatory care and Im curious is we're now.

Another several months into this from the interaction you've been having with clients.

Are you seeing more really rethink how they do business in and what they're going to rely on you for or was that just a little bit of an initial knee jerk reaction in things are kind of going back to their old way pretty quick the I'd say I'd say the richness of the conversations about how clients are going to evolve into the future has has increased.

Hi Tech default you know in fact.

In fact to the point, where actually I had my CMO Betty Rabinowitz create chief Medical Officer.

Leads a group called the Texas I mean called the next Gen advisers, sorry called the next Gen advisers, and they're actually out there acting as thought leaders, putting a 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 and so we've been having a lot more of those kind of conversations and then I also you know the interesting things on is when I look at when I look at our competitive success, it's not I mean, I've 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 you know full stack replacements are really indicative of the fact that clients are needing something different there being something more and so I think when you think about the amount we've invested in the future versus maybe some of our are less fortunate competitors clients are looking at that breadth and saying I need somebody can bring.

All of that to me and so I think I think.

Look I think we are seeing people engage with their future and then I think when they look at vendors that are looking at the vendors who have prepared for that future.

Okay. That's that's exciting things in congratulations on the quarter. Thank you.

Thank you.

And as a reminder, ladies and gentlemen, if you would like to ask a question. Please press Star then the number one on your telephone keypad.

Your next question is from Matthew Gilmore with Baird.

Hi, 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 with within the basin 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 that the tele health capabilities or does it relate to the south scheduling to check in and.

Well I think yes, I'll start with the I'll start with the second one first and then im asking for people first but I think it.

But you know when I think about the second one that I think about what.

What actually is empowering the patient experience platform is partially the capabilities that are there today virtual visit self scheduling pay should pay I'm, having a really good portal and those are all in.

Those are all important but it's actually you know 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.

It must evolve and less they're going to a platform approach, where they've got seamless integration between those things, they're not gonna have the patient experience that they truly need add.

And so you know it's it's a.

I I'd say, it's it's it's it's much more kind of back to the comp 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 <unk> and then if you look at for example are are great folks doing great work in behavioral health and federal Carbonell centers. It that I've got to figure out how to engage with my either my clients are my patients to make sure that they are really getting to the result, the need to get to and if I don't have that patient engagement.

I don't have that that that that 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.

Like I said you know it's interesting how it's kind of gone from the Europe provider burn out to the year of the patient in relatively short order.

And so was the first part in Boston, Yeah, Yeah, sorry. The first part was just helping US think through you know how we should think about the opportunity to deploy that patient experience and into your base and and I guess, what I was looking for what sort of where penetration and then sort of what the revenue opportunity is.

So the great news about it as the penetration of self scheduling is pretty much. It's just really started actually been seeing some good attachment there virtual visits we've talked about you know we're starting to approach a million visits on virtual business patient pay is something that is also coming in so it's actually now if you think about it weve.

Revenue in the past that we can be successful in creating satisfied clients and cross selling to them think of this is 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 health care. It is where the value of health care as creative.

And our.

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 you know.

A huge number of providers over time.

Got it that's that's really helpful. I guess I wanted to ask one numbers question to which was is there a number we should think about in terms of acquired revenue that that was in the quarter or is that sort of too too messy to pull out but I I'd say you know later bay, it's one.

It's one of the things we look at but we're not prepared to talk to at this point in time.

Okay. What I would say is as look as we you know and I think it really intimated on the call expect us to start paying a good bit of attention to the subscription services revenue in the recurring revenue lines, whereas the perpetual a nonrecurring stuff kind of becomes a rider on the growth way right and that's kind of the way we look at it we really see.

That's per subscription revenue growth is really the primary indicator of both the health and increasing value to the organization.

Okay. Thanks, very much thank you.

Thank you.

Your next question is from Sandy Draper with Truest Securities.

Thanks, very much and good afternoon, and congrats on a on a nice quarter.

Thanks, and just falling following up on that line of questioning from that 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 are you willing to sort of give us an update or relative.

Size of that.

Not at this point in time, what I'd say 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 sand isn't so what I'd like to do is it 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.

How this pull through is working.

Okay got it that that.

Certainly understand that next question probably for Jamie.

Just looking at the the recurring revenue gross margin.

Holding in yes, I'm, just trying to think when I.

I, maybe would have expected because you guys did better than I thought.

Coming back with managed services and media I think of those as being fairly fixed cost issue or a decent component. So with the B 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 take longer term about you know 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 are there going to be pressures just I didnt expect it to be flattish when you got beat the way you did relative to my model. Thanks.

Yeah. So the.

Yeah, what I would say is that.

[noise] IAI is.

It's a variable cost almost.

There were some variable.

Managed services the RCM component.

Is there is a.

There is a fixed component to it think of our internal employees.

But we do use contractors that become more variable.

We are we can change that relationship fairly quickly.

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 when you're moving it in the short term.

But if you start talking about larger increases than ours.

Our sales are the need on for our employees goes up so its probably becomes even more variable because 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 cleanup lingering things that don't get touched on so that's what I think.

When I think about the cost associated with with recurring revenue streams in those two areas in particular it is a you know it's highly variable with the high less variable in the short term with RCM.

Okay and then.

And then of course, the subscription services component is relatively relatively stable.

Yes, okay. Thanks.

Okay helpful and if I could squeeze in one more can 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.

That Africa, the Nexgen or is it hey, we were able to send our people home. They can work more remotely little bit more variable. So it's not an attractive have you seen that shift in the way I haven't seen it. She asked the other thing Andy Yeah, I haven't seen a shift yet but also pretty much everybody is still trying to figure out what the new normal is and not and people.

Not necessarily ready to run out and change that really should 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 the hosting side I think we've seen a lot more of that.

Right.

Got it okay. Thanks those are my question yeah. Thank you.

Thank you.

Your next question is from Dave Windley with Jefferies.

Hi, good afternoon. 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 it creates even more juicy opportunity as you bring this integrated platform disintegrated released to market.

You know I think so I mean, there's 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 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 like especially the more mature clients, they're looking at who do they think has real life ahead of them Who's got consist.

Let's see 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 of 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're kind of intangibles, but they're really not.

And so you know I've been really gratified to see us, especially these full stack replacements are really gratifying and there's like I don't want to get into individual competitors, but I would say is I mean, you know it's you don't have to look too hard to find some stories of pressure.

Yep.

And on your point on full stock replacement you mentioned not 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 are kind of completely full stack now [laughter]. 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 get directions they'd love to see us continue to expand our focus on and continue to evolve in right and so you know we will continue like we have you know I mean, I guess, if I'm to talk a little bit about M&A, what I'd say as a couple of things number one I wouldn't expect us to run way up the ladder on a really great.

Both the high 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 how did 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 so.

Active and deliver but we've also shown we can integrate them and so like right now I'm in primary focus and a great value driver for the future is bringing everybody onto onto our spring 2021 release and the and the patient experience platforms really bringing everybody on their but but then the question is once that's moving under its own.

Speed what else can we do for our clients how else can create value for them topline or bottom line and share and the value. We create I think we've shown an ability to do it I would expect us to continue so.

Got it and when we talk to you three months ago, we were all just coming out of the <unk>. The the most severe part of the locked down and and everybody doing visits online and your you had talked about as you mentioned earlier in this call for building a 4 million of a virtual visit booking.

Without I know you don't want to quantify but has the pace and the appetite for that continued or do you see that actually waning as some of the payers have kind of dial back the reimbursement for virtual visits.

I'd say, what we've seen is we've seen two things number one weve seen adoption you always go through the bubble when something Crazy happens and then you go to normal adoption were now kind of on that normal adoption curve, which is a nice kicker for us and it's adding a our every year on 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 sir.

Service providers for patients in their communities are.

Our realizing it as 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 code as as all of US have learned how to put a mascot and go places.

Got it got it that's very helpful. Thank you.

Yep.

Your next question is from Donald Hooker with Keybanc.

Great Great. Good afternoon, Thank you for including me.

So it sounds like retention issue isn't a rearview mirror I know in prior years there. It always been this sort of sort of damocles hanging over you with these thoughts health system.

You know kind of swapping your route really no no thought Oh, no fault of your own away.

And that was always an overhang. We are we are you know.

Are you messaging to us that that overhang is sort of gone now and we're looking at or is a question for you. We've been from a reporting on attrition for five years I think if you added up all the numbers would probably come to about 42% or something like that I don't know you can go to the addition.

And Meanwhile, how far is the maintenance line dropped.

Uh huh.

Yeah, and yet we've we've we've been talking all about attrition on the maintenance line, which as you can see doesn't have that materially affect on it on the piano wet 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 is nothing much opportunity like for that and so as I looked at it I said look we can continue to talk about this.

Perceived to sort of damocles and look you know your wanted to yeah.

Yeah, that's what it was when we haven't talked about is this how big the rest of the bases because by by extension. If you think about it if you think about a 10% maintenance attrition number you would expect a massive drop across the piano.

<unk>.

You know and so so to some degree look maybe we extended a little farther than we should have a before 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 yes, no I don't I don't wake up one thing about the maintenance line I wake up and think about one thing and one thing only and Thats, how 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 you know kind of unique these days.

That's great and then maybe one other question following up on the prior question I think was the last question. Another question before around the competitive environment that the metric that jumped up and they also was that the 20% replacement of the bookings, which is a interesting number was there any kind of one vendor that you picked on or was there any one theme just learning from that number.

Anything in that number we can learn from or we can take away from this conference call.

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 in some specialties in 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 know look I'm not going to I don't want to call it into the.

Joel vendors, we all have our challenge is right, but what I would say is is that you know you know who the players are and everybody's in their own different situation ours is pretty transparent I didn't.

Looks pretty good from the outside so it probably looks good for the inside.

Good.

Thank you thanks much.

Yep.

Your next question in queue is from Stephanie Davis with acid VP there.

Hi, guys. Congrats on the quarter I think my taking my question.

Thank you Stephanie.

I'm going to follow up on kind of an underlying theme of investing solely button solution.

You guys mentioned that and then I'll just doesn't do most likely by now given some of the valuations and I think I know, it's unique I couldn't say M&A at scale M&A at scale.

Right.

In wiring significant EBITDA growth revenue, that's that's what I mean, when I say when I say the high valuations.

When do you.

What do you have a hurdle rate, where you would just drop looking at her name or anything like that and how do you kind of balance the buy versus build dynamic given it looks like your client, they're really investing right now and you saw in collusion stay competitive.

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 well, but we really do is look we do look at accretion.

And we look at accretion timelines and magnitude of the accretion, but but you know before we ever get there so you're actually the back half of your question before you ever get there. The first thing. We do is we evaluate the marketplaces and the 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 maybe even start to go to the matter and from an acquisition standpoint, but it really.

But it really is really for us but for us the real metric is do we think we can drop 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.

You know some of the southern.

Some of the multiples being paid we can't get to accretion on that even with the commercial synergy case and in that.

And in that case, it's hard for me to look the shareholders in the I'd say this is a good. This is a good step forward, even though it's a big transaction right you know big transactions.

Can go big right. They can also go pick her hog and so when I look at the success, we've had kind of in this.

You know I mean, healthfusion was the biggest and that was a Buck 80, you know med fusion was was much less than most have been in kind of the Tenda 40 range yeah.

I think we you know he was driven some nice accretion off 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 has already been put into the business.

And have you given any thought just in broad strokes you. Let your top of your wish list look like is it like a value based care play is it something more outstanding virtual care or is it something completely different.

Yeah, well, here's what I'd say, what I'd say you know because.

Frankly, if I tell you what I would tell you the stuff. We're looking at that everybody is going to go fishing tackle that any teller machines and valuation download [laughter]. What we're really talking about first offers gonna be no no, but I mean I'm not kidding. Aside you know look I mean, I think I've been pretty clear that that where we're at we're investing to make sure our patient experience platform is wide.

Spread across our client base.

We're doing that not just because we have virtual visits impella and self scheduling we're doing it because creating a great patient experience and a great journey is essential for the client base, but also because we need to build that journey quickly and being able to plug any new asset quickly into the.

The vast majority of our clients in a relatively frictionless way is pretty exciting.

Okay and then one quick one on 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 out versus just some background.

Definitely we you know it's probably.

Split about evenly between the two.

No.

The increase quarter over quarter is what you're talking about correct.

Yeah.

Yes, and it's the I would say the split is probably roughly even between the two.

Oh perfect. Okay, Yeah, it's definitely the ones. 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 [laughter], whether we're under appreciated undervalued or appropriately valued we can have a long conversation to have 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 fashion generates 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 are with with slightly different structures and their piano.

I will take you down to three times revenue Wendell.

[laughter] absolutely.

All right well. Thank you everybody operator, do we have another call.

We do have one additional question one more since I fell off let's go late breaking up.

Sure. Your final question is from a gene Mannheimer with Colliers.

Hey, guys. Thanks for squeezing me in and congrats on a good quarter.

Certainly a lot of discussion around the subscription revenue growth, which which impressed in the mid teens and not looking for guidance here, but given given the momentum you're seeing in your focus on growing that line I mean, it seems to me to be able to continue to grow that in the double digits for the for the longer term is that is that right.

Reasonable.

Yeah.

Okay, I mean, that's like our our plan on subscription services I mean, what what what I said was you know mid teens, we expect that to continue well into the future and all its also you know much because some of the discussions we've had in the last few call and last two questions and we have the opportunity we believe to accelerate further from that you know given given the health of our balance sheet.

Good excellent just want to make sure I'm clear on that and finally with respect to the competitive statistic, 20% of bookings is how does how does that compare to historical metrics.

I'm, sorry say it one more time.

I apologize.

No one Rob said, Jean Yeah, again, the 20% isn't increase weve historically done about a <unk> in the 12% to 15% range.

Okay perfect. Thank you.

Thank you.

All right well, thank you operator, and thank everybody for listening in and I apologize for a couple of the hiccups along the way.

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

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