Q2 2022 NextGen Healthcare Inc Earnings Call

October 28, 2021

[music].

Yeah.

Welcome to the Nextgen healthcare fiscal 2022 second quarter financial results conference call hosting the call today from Nextgen is David sides, President and Chief Executive Officer, Jamie Arnold Executive Vice President and Chief Financial Officer and Matt.

Schillo Vice President of Investor Relations today's call is being recorded and now I will turn the call over to Matt scale out.

Okay. Thanks, operator, and before we start I'd like to remind everyone that comments made on this call may include statements that are forward looking within the meaning of the federal securities laws, including and without limitations statements related to anticipated industry trends the company's plans future performance.

<unk> perspectives and strategies risks and uncertainties exist that may cause results to differ materially from those expressed in forward looking statements, including among others. Those risks set forth in the company's public filings with the U S Securities Exchange Commission, including the discussion under the heading.

<unk> risk factors in the company's most recent annual report on Form 10-K, and any other subsequent quarterly report on Form 10-Q any forward looking statements speak only as of today. The company expressly disclaims any intent or obligation to update. These forward looking statements are wrong.

<unk> 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.

GAAP financial measure and the comparable GAAP financial measure can be found within our latest quarterly earnings release that was filed with the SEC and is posted to the Investor Relations section of our website. This release also provides.

Qualitative descriptions 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 our new President and CEO David sides.

You, Matt and thank you to everyone participating on the call today.

In the month or so since I joined Nextgen I've spoken with many of you, but for those who I haven't already talked with I want to share how excited I am to join a company with great products.

Loyal customers.

<unk> focus on client success.

All of which is manifested in our strong results. We produced in our first in our fiscal second quarter.

Jim.

Let me start by sharing why I joined Nextgen.

Spent many years in executive roles in this exciting industry.

I've watched next gens progress with interest from a distance and I found the company's rapid rise in product quality and reputation.

As reflected in improving class research scores.

Quite impressive.

It is difficult to turn around customer perception.

Once I inject engaged in the CEO search process.

This rapid turnaround was driven largely by insightful long term investments made by the current leadership team.

That nextgen addresses attractive markets with a well defined strategy and an enhanced ability to execute through both its commercial capabilities and expanding portfolio of solutions.

And finally with a constant focus on enabling and improving the interaction between the health care provider and consumers.

Tony has a solid foundation to support accelerating growth.

All of this makes me quite bullish about our opportunity.

Now, let me tell you what I've been doing since joining the company.

I've met with every member of the board and the leadership team as well as many of our team members at all levels of the organization.

I've spent time with a wide range of clients and I participated in many of our discussions with investors is the company preparing for its annual shareholder meeting on October 13th.

From these encounters I wanted to share a few observations.

First the.

The next Gen team from the board to the frontline is first class.

And I am, especially excited about the new members of our board and the expanding breadth of experiences and insights they bring to an already diverse and experienced board.

Human capital retail health care and clinical expertise.

I believe our engaged board will be vital to shaping next gens future direction.

Yeah.

I am encouraged by the depth of the experience and capabilities of the executive leadership team as well as their attitude and focused on doing what is best for our clients employees and shareholders we have a.

Great culture throughout the organization and I look forward to promoting the same high level of dedication and focus in everything we do.

Second our clients are unique in so many ways.

Where they are in terms of size specialty or mission.

What they haven't commented that they are putting their trust in nextgen.

And we know we have to earn their trust every day.

For my ongoing client discussions I can't emphasize how strongly these providers want nextgen healthcare to succeed which includes winning in the market.

And then in the quarter just ended we continued to win business against all competitors big and small.

In fact over the last six years. This was a record bookings quarter and includes a handful of transactions valued over $1 million each.

Our clients also shared that their healthcare providers continue to seek ways to produce better outcomes for their patients.

And our clients share their insights into where this industry is headed.

Which in turn helped shape, our long term strategy in future offerings.

Our dedication to the ambulatory health care provider and their patients is unwavering and we will continue to strive to help physicians be physicians again.

And finally, our shareholders.

Ongoing investor engagement is important at Nextgen and we are acting on their feedback.

At our recent annual shareholder meeting investors sent a vote of confidence in the board this leadership team and our growth strategy.

<unk> shareholders approved the plan to reincorporate Nextgen healthcare in Delaware and important step for the company's future, particularly considering how much the company has paid out and litigation costs in fiscal second quarter alone.

On corporate governance, and aligning pay for performance. The board is taking action to eliminate certain roles like the chairman Emeritus board seat and the associated fees.

As well as eliminating meeting fees.

For fiscal year 'twenty, two executive equity grants the comp committee approved performance shares with vesting tied solely to increase shareholder value.

We also clearly heard the need to deliver shareholder value.

I know I speak for the entire leadership team when I say, we take our responsibility as stewards of shareholder capital seriously and we continually strive to generate long term shareholder value.

We also heard the request to return excess capital to shareholders.

We want to do so in a tax efficient way. So the board approved a share repurchase program.

Jamie will provide more details in his section coming up.

And with the goal of applying shareholder value and appreciating shareholder value in mind.

Already applying my experience and a fresh set of eyes to the entire company.

As I review, the Companys product offerings and pipeline I see considerable assets.

That with focused investment and execution and unlock the full potential of Nextgen healthcare.

We will continue to drive adoption of solutions addressing that provider and the consumer what we call the surround solutions to drive significant growth from this high value offerings for the foreseeable future.

I also see potential opportunities to further unlock value.

We're effectively pointing certain of our assets toward attractive high growth markets, which potentially offer significant return on investment.

While it's a bit too early to provide details today the growth potential is exciting.

Look forward to discussing these opportunities at a more appropriate time.

Before I turn the call over to Jamie I wanted to provide an update on spring 'twenty one.

At the Investor Day in March the company spent considerable time reviewing the benefits of the enterprise spring 'twenty one upgrade.

I understand the excitement and value around this program upgrading.

<unk>, both the enterprise system and a new patient experience platform together is a first for the company and our clients.

Let's next Gen is approaching this program in a new way, adding significant resources and working closer with our clients than ever before.

Our early adopter phase has provided an opportunity to discover and overcome obstacles that typically arise in a real world setting before rolling out to the entire install base.

Working closely with our early adopters.

<unk> have been identified and resolved we've established an upgrade center of excellence.

Which provides our clients with both resources and best practices in order to accelerate the upgrade process and ensure an excellent experience for spring 'twenty, one and all future upgrades.

Approximately 40%.

Of our target clients have signed up to implement spring 'twenty, one indicating that our clients are anxious to move on to our patient experience platform, what we call PSP.

As you May recall, <unk> will help the clients simplify and streamline the process of adding incremental surround products as needed we.

We believe the interest in our <unk> platform is a strong signal to future cross sell opportunities.

And we are confident in achieving our target of $100 million of incremental contracted annual recurring revenue.

From our surround solutions by the end of fiscal year 'twenty four.

<unk> is a multiyear program.

And we prefer and we plan to provide future progress updates, but at a less regular cadence and quarterly.

Instead, I would point, our investors to our quarterly revenue lines, such as the positive trends in our high margin recurring revenue and subscription revenue growth.

And with that I will ask our CFO, Jamie Arnold to provide the important details.

Thank you David.

Great to welcome you aboard.

Let's begin with a few operational highlights.

<unk> came in at $39 1 million in the quarter up 25% on a year over year basis, and 14% quarter over quarter.

We believe this momentum speaks to the advantages of our solutions in certain medical specialties and the attractiveness of the breadth of our solutions.

And for another quarter in a row, new client wins accounted for over 25% of bookings.

Additionally, I'm pleased to report we closed a handful of seven figure deals in the quarter spanning both existing and new clients.

One example is a California based multi specialty groups.

With over 1200 providers, serving over 120000 patients across many centers.

They recognized how our comprehensive offering supports.

They're very medical specialties as well as their need for integrated virtual visit capabilities. We look forward to supporting this client and their mission going forward.

Now on to the fiscal second quarter financial results, starting with total revenue the company generated $149 3 million, an increase of 7% year over year.

Of this total recurring revenue accounted for $135 6 million or <unk>, 91% of the total and was driven by strong performances across all lines.

Software subscription services at $41 1 million in the fiscal second quarter is now clearly our largest revenue category delivering growth at 12% year over year.

The stronger than expected growth reflects that our clients continue to adopt our surround solutions like telehealth and mobile to better engage their patients and improve the patient and provider experience.

Managed services revenue of $29 5 million grew 13% due to continued growth in our managed cloud services and continued strength in revenue cycle management.

Q2 client and counter volumes were stronger than we initially expected as the impact from the Delta variant wane throughout the quarter.

EDI and data generated $26 million in revenue this fiscal second quarter up 6% over the year ago period as transaction volumes continue to improve.

Software maintenance and support revenue of $39 million was slightly up over the prior year period due largely to a onetime benefit recognized in the quarter.

And nonrecurring revenue of $13 $7 million decreased 4% over the same quarter last year with software revenue coming in strong based on a couple of large transactions offset by slight decline in services.

Gross margin of 51, 3% represents an increase year over year and quarter over quarter of 110, and 50 basis points respectively.

This improvement reflects a reduction in amortization of acquisition related software technology a.

A revenue mix shift offset.

Partially as we add staff to support the spring 'twenty one rollout.

Now turning to operating expenses.

SG&A of $63 9 million increased by $21 9 million compared to a year ago due to increased cost associated with the shareholder dispute and related cost.

Net R&D of $18 5 million grew 5% over the year ago period.

It represents 12% of total revenue.

Net R&D spend reflects increased gross spend due to project timing and slightly lower capitalization, which increases net R&D expense.

Our GAAP tax rate was approximately 17, 5% with a non-GAAP tax rate of 20%.

On a GAAP basis Q2 fully diluted net loss per share was <unk> 10.

Compared to net income of <unk> 16 per share in the fiscal second quarter of 2021.

On a non-GAAP basis fully diluted earnings per share for the fiscal second quarter of 'twenty. Two was 29 <unk> compared to 30 in the year ago quarter.

Turning to the balance sheet, we ended fiscal second quarter was $75 3 million in cash and equivalents and no balance outstanding on our line of credit.

Dsos in the quarter were 44 days a decrease of two days from the previous quarter.

Free cash flow this quarter was $13 3 million impressive considering that we paid $11 4 million associated with the Hussein lawsuit.

We expect a lingering impact from the proxy contest in fiscal third quarter.

And partial repayment of pandemic related employer tax deferral free cash flow generation should return to historical levels for the fourth quarter of fiscal year 'twenty two.

In addition to this afternoon's earnings release, we also announced board approval to purchase up to $60 million of our stock.

This new program represents a strategic use of the company's cash while retaining sufficient flexibility to fund ongoing and future investments in the business.

We maintain a disciplined approach to capital allocation, where we believe we can drive the greatest value for our shareholders.

This new program underscores our confidence in our balance sheet and strong cash flow generation. We believe our positive business momentum provides us with ample capacity to return cash to shareholders, while continuing to execute on our growth strategy.

Now to our fiscal 2022 financial guidance.

As noted in the press release, we are raising our fiscal 'twenty two revenue guidance to a range of.

$584 million and $590 million.

The fiscal second quarters performance was clearly strong and well balanced and the impact of the Delta variance was less impactful than feared however.

However, as we discussed last quarter, there are approximately five fewer business days in the back half of the fiscal year compared to the front half.

And patient visit volumes are historically lower in the fiscal fourth quarter due to deductible resets, which will have an impact on our managed services and Adi.

And those of you that followed the story for some time know that the potential timing of a few large software transactions can impact any single quarters performance, but over time the trend typically smoothes out.

With strong fiscal second quarter performance, we now expect subscription services revenue to grow approximately 10% for the full fiscal year.

Gross margins for fiscal 'twenty, two we will continue to reflect the increased personnel cost associated with spring 'twenty, one upgrade process and slightly higher amortization of previously capitalized R&D.

As noted in prior calls we are.

Making ongoing investments in sales and demand generation to continue our commercial momentum and making investments in R&D to enhance our offerings.

These investments will accelerate throughout the remainder of this fiscal year and yet we are raising our non-GAAP guidance to a range of 90 to 96 per share.

In closing I am pleased with the overall momentum and diversified growth we generated in the quarter.

Next Gen is making the right investments to drive total revenue growth long term and now let me turn the call back to David for closing comments.

Thanks, Jamie and again excellent performance this quarter driven by the entire organization.

Let me reiterate how pleased I am to join Nexgen. During this exciting period, we have terrific long standing relationships with our clients and continue to win new clients every quarter.

With our current solutions I see significant untapped potential in our addressable markets and with a focus on commercial execution, Nextgen will drive accelerating and profitable revenue growth.

We look forward to leading the execution of our long term strategic growth plan and accelerating the companys momentum.

Let me close by summarizing My first next Gen shareholder letter issued earlier this month.

I had joined the company as because Nexsan has the right leadership puts clients and employees above all else.

<unk> strategy that has the company addressing attractive market opportunities for <unk>.

Reinvigorated and growing commercial team differentiated.

<unk> solutions that add real value to our clients.

And we've.

We've made investments that position the company to win.

All of that adds up to driving accelerating and profitable revenue growth.

Up to double digits in the next few years.

It's an exciting time and I hope youll join us as we continue to execute on our strategic initiatives.

This concludes my comments, let's move to questions.

Operator.

Thank you.

At this time, if you'd like to ask a question. Please press the star one key on your telephone keypad keep in mind, you may remove yourself from the question queue at any time by pressing the pound key and.

In the interest of time, please limit yourself to two questions and one follow up question.

Again to ask a question today, Please press the star and <unk> on your Touchtone telephone keypad.

And we'll take our first question from Jeff Garro with Piper Sandler. Please go ahead.

Hi, good afternoon, congrats on the quarter and congrats on your first call here as CEO David Thanks.

Thanks for taking the questions.

Let me start with a set in the spring 'twenty one release.

And so how does that 40% adoption metrics stand versus expectations.

And given the description of the early adopter phase has that rollout cadence changed.

And then lastly, David just curious if theres any opportunities or changes on this rollout that you've identified since coming on board.

Thanks, Jeff.

So for spring 'twenty, one I think the 40% that are signed up.

To our expectation.

We're ramping up so in our early adopter done abroad are very broad representative groups. So lots of different specialty different sizes complexities. So we feel like it's really representative of what we'll see moving forward and so now we are scaling up and we're playing a more active role than we have in the past where we are.

Instead of saying, here's some new software.

Upgrade when you want are helping really guide our clients through the upgrade process.

Very repeatable.

Standardized so that we and they benefit when we have all of our clients on a single platform. So that for our engineering and our product organization you can assume a more homogeneous environment. So.

You will see us ramp up our spend on the.

Kind of services side.

Set up our center of excellence to really scale. This is the base I think that.

There's a lot of opportunity here for us.

<unk> kind of tracking where we are in that progress, we'll give updates, but not something we need to do necessarily quarterly it's more of an internal metric I think the one that we're excited about is that we're still on track for the $100 million.

Surround that we're selling as you as you see in our bookings growth of 25%.

Excellent that's all really helpful.

Maybe ill give my second question on the bookings results that you mentioned and maybe in one area in particular from recent releases. It seems like you are having strong momentum with <unk>. So I'm curious, what's been driving that success and how.

How much opportunity remains with <unk> or other providers that might also benefit from integrated medical and behavioral platforms.

Okay.

It's a good question so what's driving our success is the breadth of our offering and ability to meet those centers needs also obviously the additional funding by the federal government.

As helpful as.

During Covid <unk>.

Centers became extremely important too.

Are the consumers, we serve and our country. So that's been a tailwind for us.

Specialized in these centers for some time, we're very good at them. So a meeting of CEO for dinner Tonight.

From a H QC and really excited to see how we're doing there and how we can continue to expand and serve both of those those clients and the consumers that they serve better going forward.

Yes.

Great. Thank you.

Okay.

We will take our next question from Steve Halper with Cantor. Please go ahead. Your line is open.

Hi.

Question. So when you think about the new clients.

25% of the book.

<unk>.

What do you think of the.

Strong points relative to the competitive.

Environment, and why youre, winning that that level of new business.

Thanks, Steve So.

I think that.

We've focused somewhat on which specialties do we really have deep content really good outcomes, where we can drive.

For those specialties outsized results compared to our competitors and so as we mentioned in the prepared remarks. We've won from everyone. So think of any of our competitors no matter, how big or small we are winning market share in the market and.

And I think it's because our product is really good really strong our team supports clients in their relationships and we're focused on how can we drive outcomes together with them.

And.

That's getting out so I think being best in class helps we've worked on that over several years to improve the solution set and Youre seeing the result of those investments come through when we're winning.

Greater than 25% of our bookings as brand new clients to the firm.

<unk>.

Steve This is Jamie let me add onto that is that as you've heard us discuss previously a couple of years ago. We.

Established.

Are we separated our sales organization between sales.

The focus outside the base versus the sales organization that works with existing clients and I think that focus and all the way up through the leadership level has added to our success here.

Great and then on the share.

Repurchase.

I think it's.

Great way to deploy capital, but at the same time.

What do you think those sources of funds or to use that.

To affect that share repurchase I mean, so your company is debt free.

Would the board consider adding some leverage.

To affect that share repurchase.

Yes, Steve.

As we reported we have $75 million cash on hand.

We had a nice cash generation quarter, and we will continue.

We have had discussions with the board about it.

About leverage.

And.

As we kick off the program I don't envision us drawing.

On the line or but it is something that we've discussed with the board.

Great. Thanks.

Yes.

We will take care.

Alright, let me just I wanted to further even though Stephen and ask the question directly is that in.

As we were considering youre discussing with the board.

The share buyback, we did discuss how to balance the share buyback with with our growth and that was something I suspect Steve. It is embedded in your question that you were asking me, which is we feel like we.

We can handle the share buyback and continue our investment.

And growth.

And our next question comes from Anne Samuel with Jpmorgan. Please go ahead. Your line is open.

Hi, guys. Thanks for taking the question and David Congrats and welcome.

You spoke to opportunities for investment unlock value going forward and I know, it's early for you to talk about what areas those might be but I was wondering should we think about that as incremental investment or maybe repurposing of current expense dollars.

Thanks Ann.

I would think about it a couple of ways.

From a from a where we're thinking about investing obviously in R&D research and development new solutions, bringing new.

Products to market.

To capture additional market share. We also have opportunities to invest in services, whether its services to speed the rollout of spring 'twenty, one or traditional services like our revenue cycle management services are our managed cloud services.

We're seeing good uptick there from a sales perspective and think there's further that we can we can move in both of those to generate additional revenue.

And then commercial rights of our commercial team growing those teams for further growth. So those are kind of the three large buckets.

Thinking through and as Jamie mentioned, we're generating free cash flow. So we can.

The thoughtful on how we use that cash to further those investments.

And there could be.

From time to time inorganic growth through M&A.

M&A. So all three of those we'll think about build buy or partner, what's the best way to market and what's the best return as we think about those investments.

That's really helpful color. Thank you and maybe just one for Jamie.

Despite the really strong results in the quarter you guys only raised your guidance by a penny on the bottom line and I was just wondering how do we think about cadence in the back half of expenses and did anything shift out of Q2 into the back half.

Yes.

It's a good question and I think it ties into your first question because the investments that David was talking about really are continuation of some of what we did in Q2, but some of the investments.

Okay.

That we've talked about at the end of Q1, our extending through.

Q3, and Q4, so you should expect to see the cost continuing.

To increase the operating cost in Q3, and Q4 as well as there will be a small increment up and our cost of sales because we've added.

Services people to help with the upgrade to spring for spring 'twenty. One. So you will see and that is why we kind of ties to your question. There is incremental investment over what we were making in Q1 and Q2, which is why we didn't increase the EPS guidance anymore than we did.

Great. Thanks, guys.

And we will take our next question from Stephanie Davis with SVP Leerink. Please go ahead. Your line is open.

Hey, guys. Thank you for taking my question Congrats on a follow up Brian and David Congrats on Guang mentioned good move.

Thank you Stephanie.

You've already touched on this in the prepared remarks, but I did want to dig in a little bit more on your decision to move to Nexgen, just because there's been enormous amount of health Tech CESC availability not Chuck.

Really across the board.

So given your history in EHR White <unk>, the right time, and thereby opportunities go back to an EHR as opposed to some of the other maybe arguably sexier area additional health.

Thanks for the question Stephanie.

Always liked ambulatory.

And.

Mainly if you think about that moves out of the hospital to ambulatory surgery centers and if you think about our consumers' health journey, they're almost always working with their own physician.

We're spending very little time on the inpatient side and as you think about the ways we can empower.

Our doctors the clients, we serve to do telehealth to do remote patient monitoring. So that you can get these services from Europe, the doctor with with which you already have a relationship I think that is a trend that continues.

Going forward and accelerate.

As a way to both improve access to care and reduce health and equity and drive down the cost of care because we can.

Enable those those doctors kind of operate as doctors and.

Think about ways to improve their clinical outcomes financial outcomes and operational outcomes.

Nexgen has all of the assets that are necessary for that transformation is maybe putting some of them together in a slightly different way our thinking at the next the next click past that.

How do we take what we have and then take it to a new market. There is a lot of opportunity just in the mirth connectivity side alone, it's such a great.

Software system that there is so much we can do with that to help.

Help with interoperability joined up record so that people.

Have a complete health record and then.

Think through how do you.

To some level, maybe even care coordination across that platform. So that we defragment healthcare, we have all the tools and assets and technology you could want for that kind of problem and it's I think it's an exciting place to be.

Taken in one level deeper just talking about improving outcomes and prevent cost and the returns in the broader market is it safe to say there could be some interesting risk on products that help folks on the ambulatory side right.

<unk> five.

No I think it's where we are we have a value based care offering that's really good.

We looked at recently.

How we done and CMS data and we've driven tens of millions of shared savings for our ACO clients.

And then.

On the even better side, probably for how most people perceive risk zero percent downside, so 100, 100% elimination of downside.

And a lot of upside so.

Thinking about that that tool and that capability, how do we take that into the average physician practice and help doctors who.

Or maybe in a small five or 10 person practice be able to have the analytics to understand their risk profile and then take that risk on and then what services would we wrap around that to make that easier for them to do for.

For example, they can't stand up a call center to do these type of things how can we help them with marketing.

Consumers then.

How do they use telehealth to make it efficient so I think theres just a lot.

There and Youll see us start to more aggressively market. These solutions and then integrate them together to bring a better holistic solution to market.

Awesome to hear that can find about telecom. Thank you guys.

Thank you.

And as a reminder, if you'd like to ask a question. Please press the star and one key on your telephone keypad.

We will take our next question from Donald Hooker with Keybanc. Please go ahead. Your line is open.

Great Good evening.

So the bookings were obviously very strong you had one large deal in there this is California multi specialty practice.

Was curious if that deal that there was another deal that really was sort of a big contributor to bookings this quarter.

And I'm.

I'm trying to think through what sort of the cadence of bookings that we should expect going forward.

And just kind of like the right level for quarterly bookings for you guys.

Hi, Dana this is Jamie in there where actually the one <unk>.

Discussed in my comments was one of several.

Large transactions.

So.

It was not uniquely alone as a single large transaction.

And I would say that.

Good.

Basically if you look at the last couple of quarters.

The bookings rate is.

Varies between say 35, and there's 39 is so I sort of put it at I don't want to get into the position of giving guidance on bookings.

But I think if you think of it in that range is kind of that 35% to 39 is where we think we should be.

And sometimes when as we commented in my prepared remarks.

Sometimes the license deals that come in there they tend to be a little larger and they have a tendency to skew the results upwards.

Gotcha, Okay, and then and I apologize if I missed this but I think Jamie you might have mentioned there was a onetime benefit in the support and maintenance fee line.

Yes did I hear that.

Yes.

The.

There are actually a couple of clients that.

That.

We had catch up adjustments on maintenance invoicing.

And that skewed the number higher.

Then we would have expected otherwise had a just some catch ups on on the number of licenses that were.

Being utilized so those got caught up in the quarter.

But it did skew the number up for the quarter and it was by several hundred thousand dollars enough to change the trend that we've been seeing and that's why I highlighted it.

Okay Super Yeah, that's how I was trying to get at.

Thank you thank.

Thank you.

Yep.

And once again, if you'd like to ask a question today. Please press the star and one key on your telephone keypad.

And we can pause for a moment to allow any further questions to queue.

And there are no further questions on the line at this time I will return the program to your presenters for any closing remarks.

This is David thanks, everyone for joining us today.

Cited about our results about the raise in both revenue and EPS guidance.

And to announce our share repurchase program. Thanks for.

As always your interest in Nextgen health care, and we'll talk to you again at JP Morgan and next quarter.

That concludes our call.

Okay.

You may now disconnect.

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Welcome to the Nextgen healthcare fiscal 2022 second quarter financial results Conference call.

Hosting the call today from Nextgen is David sides, President and Chief Executive Officer, Jamie Arnold Executive Vice President and Chief Financial Officer, and Matt Scalable Vice President of Investor Relations. Today's call is being recorded and now I will turn the call over to Matt Skylife.

Products perspectives and strategies.

And uncertainties exist that may cause results to differ materially from those expressed in forward looking statements, including among others. Those risks set forth in the Companys public filings with the U S Securities Exchange Commission, including the discussion under the heading risk factors in the company's most recent.

The annual report on Form 10-K, and any other subsequent quarterly report on Form 10-Q any forward looking statements speak 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.

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 release that was filed with.

The SEC and is posted to the Investor Relations section of our website. This release also provides.

Qualitative descriptions 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 our new President and CEO David sides.

Thank you Matt.

And thank you to everyone participating on the call today.

In the month or so since I joined the Nextgen I've spoken with many of you, but for those who I haven't already talked with I want to share how excited I am to join a company with great products loyal customers.

<unk> focused on client success.

All of which is manifested in our strong results. We produced in our first in our fiscal second quarter.

Jim.

Let me start by sharing why I joined Nextgen.

Spent many years in executive roles in this exciting industry.

I've watched next gens progress with interest from a distance and I found the company's rapid rise in product quality and reputation.

As reflected in improving class research scores.

Quite impressive.

It is difficult to turn around customer perception.

Once I am engaged in the CEO search process.

This rapid turnaround was driven largely by insightful long term investments made by the current leadership team.

And that next Gen addresses attractive markets with a well defined strategy and an enhanced ability to execute through both its commercial capabilities and expanding portfolio of solutions.

And finally with a constant focus on enabling and improving the interaction between the health care provider and consumers.

He has a solid foundation to support accelerating growth.

All of this makes me quite bullish about our opportunity.

Now let me tell you what I have been doing since joining the company.

I've met with every member of the board and the leadership team as well as many of our team members at all levels of the organization.

I've spent time with a wide range of clients and I participated in many of our discussions with investors is the company preparing for its annual shareholder meeting on October 13th.

From these encounters I wanted to share a few observations.

First the.

The next Gen team from the board to the frontline is first class.

And I am, especially excited about the new members of our board and the expanding breadth of experiences and insights they bring to an already diverse and experienced board.

Human capital retail health care and clinical expertise.

I believe our engaged board will be vital to shaping next gens future direction.

We have a great culture throughout the organization and I look forward to promoting the same high level of dedication and focus in everything we do.

Second our clients are unique in so many ways.

Where they are in terms of size specialty or mission, but what they haven't commented that they are putting their trust in next year.

And we know we have to earn their trust every day.

For my ongoing client discussions.

Can't emphasize how strongly these providers want nextgen healthcare to succeed which includes winning in the market.

In the quarter just ended we continued to win business against all competitors big and small.

In fact over the last six years. This was a record bookings quarter and includes a handful of transactions valued over $1 million each.

Our clients also shared that their healthcare providers continue to seek ways to produce better outcomes for their patients.

And our clients share their insights into where this industry is headed.

Which in turn helped shape, our long term strategy in future offerings.

Our dedication to the ambulatory healthcare provider and their patients is unwavering and we will continue to strive to help physicians be physicians again.

And finally, our shareholders.

Ongoing investor engagement is important that nexgen, we are acting on their feedback.

At our recent annual shareholder meeting Investor sent a vote of confidence in the board this leadership team and our growth strategy.

Elders approved the plan to reincorporate Nextgen healthcare in Delaware and important step for the company's future, particularly considering how much the company has paid out and litigation costs in fiscal second quarter alone.

On corporate governance, and aligning pay for performance. The board is taking action to eliminate certain roles like the chairman Emeritus board seat and the associated fees.

As well as eliminating meeting fees.

For fiscal year 'twenty, two executive equity Grant the comp Committee approved performance shares vesting tied solely to increase shareholder value.

We also clearly heard the needed to deliver shareholder value.

I know I speak for the entire leadership team when I say, we take our responsibilities as stewards of shareholder capital seriously.

And we continually strive to generate long term shareholder value.

We also heard the request to return excess capital to shareholders.

We want to do so in a tax efficient way. So the board approved a share repurchase program.

Jamie will provide more details in his section coming up.

And with the goal of applying shareholder value and appreciating shareholder value in mind.

I'm already applying my experience and a fresh set of eyes to the entire company.

As I review, the Companys product offerings and pipeline I see considerable assets.

That with focused investment in execution and unlock the full potential of Nextgen healthcare.

We will continue to drive adoption of solutions addressing the provider and the consumer what we call the surround solutions to drive significant growth from this high value offerings for the foreseeable future.

I also see potential opportunities to further unlock value.

We're effectively pointing certain of our assets toward attractive high growth markets, which potentially offer significant return on investment.

While it's a bit too early to provide details today the growth potential is exciting.

Look forward to discussing these opportunities at a more appropriate time.

Before I turn the call over to Jamie I want to provide an update on spring 'twenty one.

At the Investor Day in March the company spent considerable time reviewing the benefits of the enterprise spring 'twenty one upgrade.

I understand the excitement and value around this program.

Upgrading both the enterprise system and a new patient experience platform together is a first for the company and our clients.

Let's next Gen is approaching this program in a new way, adding significant resources and working closer with our clients than ever before.

Our early adopter phase has provided an opportunity to discover and overcome obstacles that typically arise in a real world setting before rolling out to the entire install base.

Working closely with our early adopters.

It sounds as had been identified and resolved we've established an upgraded center of excellence, which provides our clients with both resources and best practices in order to accelerate the upgrade process and ensure an excellent experience for spring 'twenty, one and all future upgrades.

Approximately 40%.

Of our target clients have signed up to implement spring 'twenty, one indicating that our clients are anxious to move on to our patient experience platform, what we call PSP.

As you May recall, <unk> will help the clients simplify and streamline the process of adding incremental surround products as needed.

We believe that interest in our <unk> platform is a strong signal of the future cross sell opportunities.

And we are confident in achieving our target of $100 million of incremental contracted annual recurring revenue.

From our surround solutions by the end of fiscal year 'twenty four.

Streamed 21 is a multi year program and we and we plan to provide future progress updates, but at a less regular cadence and quarterly.

Instead, I would point, our investors to our quarterly revenue lines, such as the positive trends in our high margin recurring revenue and subscription revenue growth.

And with that I will ask our CFO, Jamie Arnold to provide the important details.

Thank you David it's great to welcome you aboard.

Let's begin with a few operational highlights bookings came in at $39 1 million in the quarter up 25% on a year over year basis, and 14% quarter over quarter.

We believe this momentum speaks to the advantages of our solutions and certain medical specialties and the attractiveness of the breadth of our solutions.

And for another quarter in a row, new client wins accounted for over 25% of bookings.

Additionally, I'm pleased to report we closed a handful of seven figure deals.

In the quarter spanning both existing and new clients. One example is a California based multi specialty group.

With over 1200 providers, serving over 120000 patients across many centers.

They recognized how our comprehensive offering supports.

They're very medical specialties as well as their need for integrated virtual visit capabilities.

We look forward to supporting this client and their mission going forward.

Now onto the fiscal second quarter financial results, starting with total revenue the company generated $149 3 million, an increase of 7% year over year.

Of this total recurring revenue accounted for $135 6 million or <unk>, 91% of the total it was driven by strong performances across all lines.

Software subscription services at $41 1 million in the fiscal second quarter is now clearly our largest revenue category delivering growth at 12% year over year.

This stronger than expected growth reflects that our clients continue to adopt our surround solutions like telehealth and mobile to better engage their patients and improve the patient and provider experience.

Managed services revenue of $29 5 million grew 13% due to continued growth in our managed cloud services and continued strength in revenue cycle management.

Q2 client encountered volumes were stronger than we initially expected as the impact from the Delta variant wane throughout the quarter.

EDI and data generated $26 million in revenue this fiscal second quarter up 6% over the year ago period as transaction volumes continue to improve.

Software maintenance and support revenue of $39 million was slightly up over the prior year period due largely to a onetime benefit recognized in the quarter.

Gross margin of 51, 3% represents an increase year over year and quarter over quarter of 110, and 50 basis points respectively.

This improvement reflects a reduction in amortization of acquisition related software technology.

A revenue mix shift offs.

Offset partially as we add staff to support the spring 'twenty one rollout.

Now turning to operating expenses.

SG&A of $63 9 million increased by $21 9 million compared to a year ago due to increased cost associated with the shareholder dispute and related cost.

Net R&D of $18 5 million grew 5% over the year ago period.

And represents 12% of total revenue net R&D spend reflects increased gross spend due to project timing and slightly lower capitalization, which increases net R&D expense.

Our GAAP tax rate was approximately 17, 5% with a non-GAAP tax rate of 20%.

On a GAAP basis Q2 fully diluted net loss per share was <unk> 10.

Compared to net income of <unk> 16 per share in the fiscal second quarter of 2021.

On a non-GAAP basis fully diluted earnings per share for the fiscal second quarter of 'twenty. Two was 29 compared to <unk> 30 in the year ago quarter.

Turning to the balance sheet, we ended fiscal second quarter was $75 3 million in cash and equivalents and no balance outstanding on our line of credit.

<unk> in the quarter were 44 days a decrease of two days from the previous quarter.

Free cash flow this quarter was $13 3 million impressive considering that we paid $11 4 million associated with the Hussein lawsuit.

We expect a lingering impact from the proxy contest in fiscal third quarter.

And partial repayment of pandemic related employer tax deferral free cash flow generation should return to historical levels for the fourth quarter of fiscal year 'twenty two.

In addition to this afternoon's earnings release, we also announced board approval to purchase up to $60 million of our stock.

This new program represents a strategic use of the companys cash, while retaining sufficient flexibility to fund ongoing and future investments in the business we.

We maintain a disciplined approach to capital allocation, where we believe we can drive the greatest value for our shareholders.

Now to our fiscal 2022 financial guidance as.

As noted in the press release, we are raising our fiscal 'twenty two revenue guidance to a range of.

The $584 million and $590 million.

The fiscal second quarters performance was clearly strong and well balanced and the impact of the Delta variance was less impactful than feared however.

However, as we discussed last quarter, there are approximately five fewer business days in the back half of the fiscal year compared to the front half.

And patient visit volumes are historically lower in the fiscal fourth quarter due to deductible resets, which you will have an impact on our managed services and Adi.

And those of you that if followed the story for some time know that the potential timing of a few large software transactions can impact any single quarters performance, but over time the trend typically smoothes out.

With strong fiscal second quarter performance, we now expect subscription services revenue to grow approximately 10% for the full fiscal year.

As noted in prior calls.

Making ongoing investments in sales and demand generation to continue our commercial momentum and making investments in R&D to enhance our offerings.

These investments will accelerate throughout the remainder of this fiscal year and yet we are raising our non-GAAP guidance to a range of 90% to 96 per share.

In closing I am pleased with the overall momentum and diversified growth we generated in the quarter.

Next Gen is making the right investments to drive total revenue growth long term and now let me turn the call back to David for closing comments.

Thanks, Jamie and again, an excellent performance this quarter driven by the entire organization.

I wanted to reiterate how pleased I am to join Nexgen. During this exciting period, we have terrific long standing relationships with our clients and continue to win new clients every quarter.

With our current solutions I see significant untapped potential in our addressable markets and with a focus on commercial execution, Nextgen will drive accelerating and profitable revenue growth.

I look forward to leading the execution of our long term strategic growth plan and accelerating the companys momentum.

Let me close by summarizing My first next Gen shareholder letter issued earlier this month.

I joined the company because Nextgen has the right leadership that puts clients and employees above all else.

That strategy that has the company addressing attractive market opportunities for <unk>.

Invigorated and growing commercial team differentiated.

<unk> solutions that add real value to our clients.

And we've.

We've made investments that position the company to win.

All of that adds up to driving accelerating and profitable revenue growth.

Up to double digits in the next few years.

It's an exciting time and I hope youll join us as we continue to execute on our strategic initiatives.

This concludes my comments, let's move to questions.

Operator.

Thank you.

In the interest of time, please limit yourself to two questions and one follow up question.

Again to ask a question today, Please press the star and <unk> on your Touchtone telephone keypad.

And we'll take our first question from Jeff Garro with Piper Sandler. Please go ahead.

Hi, good afternoon, congrats on the quarter and congrats on your first call here as CEO David Thanks.

Thanks for taking the question so I mean.

Let me start with a set in the spring 'twenty one release.

And so how does that 40% adoption metrics stand versus expectations.

And given the description of the early adopter phase as that rollout cadence changed.

And then lastly, David just curious if theres any opportunities or changes on this rollout that you've identified since coming on board.

Thanks, Jeff.

So for spring 'twenty, one I think the 40% that are signed up.

As to our expectation.

We're ramping up so.

And our early adopter done abroad are very broad representative groups. So lots of different specialty different sizes complexities. So we feel like it's really representative of what we'll see moving forward and so now we are scaling up and we're playing a more active role than we have in the past where instead of saying here's a.

Some new software upgrade when you're what are helping really guide our clients through the upgrade process.

And make it very repeatable.

Kind of standardized so that we and they benefit when we have all of our clients on a single platform.

For our engineering and our product organization, you can assume a more homogeneous environment. So.

Youll see us ramp up our spend on the <unk>.

Kind of services side as we set up our center of excellence to really scale this to the base.

<unk>.

There's a lot of opportunity here for us I think kind of tracking where we are in that progress, we'll give updates, but not something we need to do necessarily quarterly it's more of an internal metric I think the one that we're excited about is that we're still on track for the $100 million of surround that we're selling as you as you see in our bookings growth.

25%.

Excellent that's all really helpful.

Maybe I'll give my second question on the bookings results that you mentioned and maybe in one area in particular from recent releases it seems like Youre, having strong momentum with <unk>. So I'm curious, what's been driving that success and how much opportunity remains with <unk> or other providers that might also benefit from integral.

Medical and behavioral platforms.

Yes.

It's a good question so that what's driving our success is the breadth of our offering and ability to meet those centers needs also obviously the additional funding by the federal government is helpful.

During Covid these centers became extremely important too.

Are the consumers, we serve and our country. So that's been a tailwind for US we have specialized in these centers for some time, we're very good at them. So a meeting of CEO for dinner Tonight.

From a H QC and really excited to see how we're doing there and how we can continue to expand and serve both of those those clients and the consumers that they serve better going forward.

Yes.

Great. Thank you.

Adequately.

We will take our next question from Steve Halper with Cantor. Please go ahead. Your line is open.

Hi.

Two questions. So when you think about the new clients.

5% of the bookings.

What do you think of the.

Strong points relative to the competitive.

Environment, and why youre, winning that that level of new business.

Thanks, Steve So.

I think that the.

We've focused somewhat on which specialties do we really have deep content really good outcomes, where we can drive.

For those specialties outsized results compared to our competitors and so as we've mentioned in the prepared remarks. We've won from everyone. So think of any of our competitors no matter, how big or small we are winning market share in the market.

And I think it's because our product is really good really strong our team supports clients in their relationships and we're focused on how can we drive outcomes together with them.

And.

That's getting out so I think being best in class helps.

Worked on that over several years to improve the solution set and Youre seeing the result of those investments come through when we're winning.

Greater than 25% of our bookings as brand new clients to the firm.

Steve This is Jamie let me add on to that is that as you've heard us discuss previously a couple of years ago.

Established.

Are we separated our sales organization between sales.

Big focus outside the base versus the sales organization that works with existing clients.

Think that focus.

All the way up through the leadership level has added to our success here.

Great and then on the share.

Repurchase.

I think it's.

Great way to deploy capital, but at the same time.

What do you think those sources of funds or to use that.

To affect that share repurchase I mean, so your company is debt free.

Would the board consider adding some leverage.

To affect that share repurchase.

Yes, Steve.

As we reported we have $75 million cash on hand.

We had a nice cash generation quarter, and we will continue.

We have had discussions with the board about.

About leverage and.

As we kick off the program I don't envision us drawing.

On the line or but it is something that we've discussed with the board.

Great. Thanks.

We will take care of quest.

Im sorry, let me just I wanted to further even though Stephen and ask the question directly is that in.

And as we were considering youre discussing with the board.

The share buyback, we did discuss how to balance the share buyback with with our growth.

And that was something I suspect Steve It is embedded in your question that you were asking me, which is we feel like the.

We can handle the share buyback and continue our investment.

In growth.

Our next question comes from Anne Samuel with Jpmorgan. Please go ahead. Your line is open.

Hi, guys. Thanks for taking the question and David Congrats and welcome.

Thanks Ann.

I would think about it a couple of ways.

From a from a where we're thinking about investing obviously in R&D research and development new solutions, bringing new.

Products to market.

To capture additional market share.

We will have opportunities to invest in services, whether its services to speed the rollout of spring 'twenty, one or traditional services like our revenue cycle management services are our managed cloud services, we're seeing good uptick there from a sales perspective and think there's further that we can we can move in both of those to generate additional.

Revenue.

And then commercial rights of our commercial team growing those teams for further growth. So those are kind of three large buckets.

Throw in as Jimmy mentioned, we are generating free cash flow. So we can.

Be thoughtful on how we use that cash to further those investments.

And there could be.

From time to time inorganic growth through M&A.

M&A. So all three of those we'll think about build buy or partner, what's the best way to market and what's the best return.

That's really helpful color. Thank you and maybe just one for Jamie.

Despite the really strong results in the quarter you guys only raised your guidance by a penny on the bottom line I was just wondering how do we think about cadence in the back half of expenses and does there anything shift out of <unk> into the back half.

And as it is.

Good question and I think it ties into your first question because the investments that David was talking about really are continuation of some of what we did in Q2, but some of the investments.

Okay.

That we've talked about at the end of Q1.

Our extending through.

Q3, and Q4, so you should expect to see the cost continuing.

To increase the operating cost in Q3, and Q4 as well as there will be a small increment up and our cost of sales because we've added.

Services people to help with the upgrade to spring spring 'twenty. One so you will see and that is why we kind of ties to your question. There is incremental investment over what we were making in Q1 and Q2, which is why we didn't increase the EPS guidance anymore than we did.

Great. Thanks, guys.

And we will take our next question from Stephanie Davis with SVP Leerink. Please go ahead. Your line is open.

Hey, guys. Thank you for taking my question Congrats on a follow up Brian and David Congrats on Brian mentioned did move.

Thank you Stephanie.

You've already touched on this in the prepared remarks, but I did want to dig in a little bit more on your decision to move to Nexgen, just because there has been enormous amount of health Tech CESC availability not Chuck.

Really across the board.

Given your history in EHR.

Thank you.

Time, and thereby opportunities go back to an EHR as opposed to some of the other maybe arguably sexier area as additional health.

Thanks for the question Stephanie.

I always liked ambulatory.

And.

It mainly if you think about the moves out of the hospital to ambulatory surgery centers and if you think about our consumers' health journey, they're almost always working with their own physician.

Spending very little time on the inpatient side and as you think about the <unk>.

Ways, we can empower.

Our doctors to clients, we serve to do telehealth to do remote patient monitoring. So that you can get these services from Europe, the doctor with with which you already have a relationship I think that is a trend that continues going forward and accelerates.

As a way to both improve access to care and reduce health and equity and drive down the cost of care because we can.

Enable those those doctors kind of operate as.

Doctors and think about ways to improve their clinical outcomes financial outcomes and operational outcomes and Nextgen has all of the assets that are necessary for that transformation is maybe putting some of them together in a slightly different way our thinking at the next the next click past that.

How do we take what we have and then take it to a new market. There is a lot of opportunity.

And the mirth connectivity side alone, it's such a great.

Software system that there is so much we can do with that to help.

Help with interoperability join up record so that people have.

I have a complete health record and then.

Think through how do you.

Taken in one level deeper just talking about improving outcomes and prevent cost and the returns from the broader market is it safe to say there could be some.

Interest in risk on products that help folks on the ambulatory side alright that piece that's two five.

No I think it's where we are we have a value based care offering that's really good.

We looked at recently.

How we've done in CMS data and we've driven tens of millions of shared savings for our ACO clients.

And then.

On the even better side, probably for how most people perceive risk zero percent downside, so 100, 100% elimination of downside.

And a lot of upside so.

Thinking about that that tool and that capability, how do we take that into the average physician practice and help doctors who.

Or maybe small fiber 10 person practice be able to have the analytics to understand their risk profile and then take that risk on and then what services would we wrap around that to make that easier for them to do.

For example, they can't stand up a call center to do these type of things how can we help them with marketing.

Consumers then.

How do they use telehealth to make it efficient so I think theres just a lot.

There and Youll see us start to more aggressively market. These solutions and then integrate them together to bring a better holistic solution to market.

Welcome to here that can find about telecom. Thank you guys.

Thank you.

And as a reminder, if you'd like to ask a question. Please press the star and one key on your telephone keypad will.

We will take our next question from Donald Tucker with Keybanc. Please go ahead. Your line is open.

Great Good evening.

So the bookings were obviously very strong you had one large deal in there it is California multi specialty practice.

Was curious if that deal that there was another deal that really was sort of a big contributor to bookings this quarter.

And.

I'm trying to think through what sort of the cadence of bookings that we should expect going forward.

Is this kind of like the right level for quarterly bookings for you guys.

I don't know, Jamie and they were actually the one.

<unk> discussed in my comments was one of several.

Large transactions.

So.

It was not uniquely alone as a single large transaction.

And I would say that.

<unk>.

That basically if you look at the last couple of quarters.

The bookings rate is.

Varies between say 35, and there's 39 is so I sort of put it at I don't want to get into the position of giving guidance on bookings.

But I think if you think of it in that range is kind of that 35% to 39 is where we think we should be.

And sometimes when as we commented in my prepared remarks.

Sometimes the license deals that come in there they tend to be a little larger and they have a tendency to skew the results upwards.

Gotcha, Okay, and then and I apologize if I missed this but I think Jamie you might have mentioned there was a onetime benefit in the support and maintenance fee line.

Yes did I hear you that curve.

And can you maybe elaborate on that if I missed that.

Yes.

<unk>.

They are actually a couple of clients that.

That.

We had catch up adjustments on maintenance invoicing.

And that skewed the number higher than we would have expected otherwise had a just some catch ups on on the number of licenses that were.

Being utilized so those got caught up in the quarter.

But it did skew the number up for the quarter and it was by several hundred thousand dollars enough to change the trend that we've been seeing and that's why I highlighted it.

Okay Super Yeah, that's what I was trying to get at.

Thank you thank.

Thank you.

Yep.

And once again, if you'd like to ask a question today. Please press the star and one key on your telephone keypad.

And we can pause for a moment to allow any further questions to queue.

And there are no further questions on the line at this time I will return the program to your presenters for any closing remarks.

This is David thanks, everyone for joining us today.

We're excited about our results up about the raise in both revenue and EPS guidance.

And to announce our share repurchase program. Thanks for.

As always your interest in Nextgen health care, and we'll talk to you again at Jpmorgan in next quarter.

That concludes our call.

Okay.

You may now disconnect.

Q2 2022 NextGen Healthcare Inc Earnings Call

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