Q3 2022 NextGen Healthcare Inc Earnings Call

January 25, 2022

Continue to standby will begin shortly.

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Conference. Please press Star zero.

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Welcome to the Nextgen healthcare fiscal 2022 third 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 Scalf, Vice President of Investor Relations.

Today's call is being recorded and now I will turn the call over to Matt Scott low.

Okay.

And before we start I'd like to remind everyone that the comments made on this call may include statements that are forward looking within the meaning of the federal securities laws, including without limitations statements related to anticipated industry trends, the company's plans future performance products 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 Companys public filings with the U S Securities Exchange Commission, including the discussion under the heading risk factors in the company's most recent annual report.

On the Form 10-K , and any 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 for our earnings results. The GAAP financial measures most direct.

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 web site.

This release also provides qualitative descriptions of how we have calculated non-GAAP financial measures contained in our guidance at this time I'd like to turn the call over to our president and CEO David sides.

Thank you, Matt and everyone on the call today.

Over the last few months, Jamie, Matt and I have been busy speaking with a number of investors that are new to the story and we appreciate your interest.

Since joining the company I've made raising the companys long term growth rate a top priority.

While next Gen is already delivering accelerating revenue growth.

Having generated 2% growth in fiscal 'twenty three.

<unk>, 3% growth in fiscal 'twenty, one and now approaching mid single digits in fiscal 'twenty two.

I'm challenging the team to achieve even higher levels.

And at the same time to keep an eye on the bottom line.

One way to keep focus on this balanced growth ambition is to incorporate the rule of 40 and our internal planning process.

For those not familiar the rule of 40 is prevalent in the SaaS software investing where he combined total revenue growth.

And adjusted EBITDA margin into a single percentage.

It's a way to compare value generated by SaaS models at different stages of maturity.

While we are not a pure SaaS company, we're moving in that direction as we continue to shift to a highly recurring revenue model and so we believe this is a useful metric to frame our longer term financial goals.

If you look back a few years using this rule.

We would see that Nextgen has made steady progress moving from 18% total in physical 19% to 20% total in fiscal 'twenty to 'twenty, 3% in fiscal 'twenty, one and now approaching mid <unk> in fiscal 'twenty two.

We anticipate continuing to grow this measure by 2% to three percentage points a year longer term.

In the near term revenue growth will be the main driver while earnings leverage should materialize thereafter and.

And I would also reiterate our comfort with an annual target revenue growth rate of 6% to 8% next year driven by the strength of our comprehensive offering and commercial capabilities.

This higher growth rate.

Is the end result of effective teamwork across departments and individuals from strategic planning the product management.

From marketing to R&D and onto our go to market execution.

A highly coordinated effort all to achieve next gens mission.

All we think about our ways to help independent physicians, either workload and manage the risk and complexity in their practices.

We constantly question the status quo, how can we help them automate repetitive tasks, how do we help them meet ever changing regulatory requirements and.

And ultimately how do we support them as they deliver great clinical care.

This focus thats nextgen apart.

To achieve our mission and elevate next gens growth profile. We have spent considerable time enhancing our comprehensive long term strategic plan.

This process is led by our Chief growth officer. So we develop more who came to nextgen very familiar with our technology product offerings and capabilities from his prior career as a consulting partner at Mckinsey.

This process also had significant input from core commercial teams as well as the executive team and reviewed at the board level.

As I mentioned on our last call I am excited about the new board members and the expanding breadth of experiences and insights they bring.

I believe our engage board will be a vital will be vital to shaping nextgen long term strategic plan and future direction.

We look forward to providing more visibility into our plans and longer term growth trajectory along with a deeper dive into key asset that can unlock future value at our upcoming investor event. This spring.

More details to follow.

Now shifting to certain trends in our fiscal third quarter performance.

Nextgen continues its positive momentum winning new business.

Fiscal third quarter, new client wins accounted for well over 25% of total bookings.

This strong performance reflects the company's focus on medical specialties.

Breadth of our solutions and the continued strong execution from our commercial team.

I am excited to say Nexgen closed a handful of seven figure deals again this quarter.

And we are beginning to see the positive influence of consolidation and the independent ambulatory space.

Yes, I said positive influence.

Let me explain.

While most investors are aware of the ebbs and flows of hospital driven consolidation trends over the past few decades.

The independent ambulatory space is now seeing provider groups.

That value they are independent.

Acquiring other practices with the support from well financed investors.

As these practices grow and the number of providers services offered and complexity.

Nextgen becomes the obvious choice to provide not just data, but clinical and financial insights.

Let me provide an example in the fiscal third quarter Nexgen had a nice win adding a large mission driven provider of clinically integrated eye care.

This organization has been growing rapidly and now has over 1000 providers.

Across ophthalmic and optometry clinics as well as surgery centers.

They operate in hundreds of locations across multiple states and are well financed to continue their expansionary goals.

Next gen be multiple competitors to win this important client.

Due to our longstanding presence and commitment to total vision care.

As well as the breadth and scalability of our solutions.

We will be implementing our core practice management and EMR offering along with certain surround offerings.

By hosting plus our mirth connect financial analytics and additional services.

It's an exciting opportunity and speaks to the true value of <unk> offering and how we win in the market.

While Jamie will provide the details on the quarter.

Also wanted to address a few questions we've been fielding recently.

Regarding how a higher inflation and interest rate environment affects our business.

First nextgen has a solid balance sheet.

No debt and a resilient business model that generates significant free cash flow.

Second a portion of our client contracts have an automatic annual inflation hedge tied to the consumer price index.

So why so not only are we well protected in an inflationary environment, but we are positioned to thrive in it.

Turning to the current tight labor market.

We see some interesting potential outcomes for nexgen.

First many of our clients are experiencing labor shortage and higher staff turnover.

And we're seeing customers in the past probably would not have discussed outsourcing activities like revenue cycle management.

Now actively evaluating and engaging us for these services.

As an example in fiscal third quarter, we were able to cross sell RCM services to an existing client.

Multi specialty group operating out of.

Over 10 locations in Texas.

The ROI on this service was so compelling, especially in this environment.

I can see other clients, making the same decision.

But it is not just about the value of RCM here. It's a strong relationship Nextgen has built with this client over the years.

The trust that has been earned.

The mix of client turned to Nextgen first.

So we see this tight employment market as an incremental positive tailwind for select solutions.

As for next Gen itself.

Investments, we have made and our culture are paying dividends and being able to attract the talent we need.

Of course, it's challenging challenging to find top data scientists as we expand our data offerings, but we are optimistic given our vision and ability to attract talent.

And one of the advantages of our hybrid work model is that it allows us to hire broadly across the United States States in India.

Not only does the hybrid work models save on real estate footprint cost, but it better positions nextgen define top talent.

Lastly, we received a number of questions regarding my perspective on M&A and how it might affect the company's stance going forward.

What I'll say is nextgen has a singular focus on accelerating its growth profile.

I'm agnostic as to whether this growth is driven by internal and external means let.

Let me make clear.

We expect to drive 6% to 8% revenue growth through organic means.

Nexgen has considerable assets.

That with investment will likely drive significant future growth.

When it comes to external activities Nextgen has ample dry powder, we have a disciplined process multiple hurdles in which many targets just don't make the cut Chris.

Critical elements include strategic fit cultural fit growth above next gens level.

Clear line of sight to revenue and cost synergies and at a price that is not dilutive and then in the <unk>.

First 12 months.

We favorite bolt on transactions that add a technology or capability.

So we've decided not to build ourselves however.

However, we won't rule out larger transactions.

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

Thank you David.

Let's begin with a few operational highlights.

Bookings came in at $37 7 million in the quarter up slightly on a year over year basis and on track with our expectations.

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

As David noted Nextgen closed a handful of seven figure transactions in the quarter. These wins reflect both existing and new clients and span across a range of medical specialties.

From neurosurgery to ophthalmology to multi specialty.

In certain cases nexgen is partnering with clients that are moving away from managing multiple different legacy systems.

Consolidating on our fully integrated and scalable solution.

In other cases, we are working with clients to <unk>.

Nextgen surround solutions to enhance their productivity and customer experience.

These wins reflect our strong commercial capabilities and ability to execute as well as the market's growing appreciation of Nextgen <unk> core value proposition.

Now onto the fiscal third quarter financial results.

Nextgen generated total revenue of $149 7 million in the quarter, an increase of 6% year over year of this total recurring revenue accounted for $134 5 million or 90%.

Our largest revenue category software subscription services generated $41 2 million in the fiscal third quarter or 8% growth year over year clients continue to adopt our surround solutions to better engage their patients and to improve the patient and provider experience.

Managed services revenue of $28 9 million grew by 5% due to continued growth in our managed cloud services and continued strength in revenue cycle management as Q3 client encountered volumes continued to be strong even as the omicron variant grew late in the quarter.

Adi and data generated $26 2 million in revenue this fiscal third quarter up 5% over the year ago period as transaction volumes remained strong.

Software maintenance and support revenue of $38 2 million was up slightly over the year prior year period.

Nonrecurring revenue of $15.

$2 million increased 13% over the same quarter last year and reflects several large perpetual license transactions along with the strength of services bookings in prior periods.

Gross margins of 54% remained flat year over year, reflecting added staff to support the spring 'twenty, one rollout and increased hosting cost offset by higher license revenue and reduction in amortization of acquisition related software technology.

<unk>.

Turning to operating expenses SG&A of $47 2 million decreased by $1 7 million compared to a year ago. The decrease is due to tight controls in G&A and reduction in shareholder litigation expense.

All set by increasing investments in sales and demand generation personnel.

Net research and development of $19 4 million grew 7% over the year ago period and represents 13% 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.

GAAP tax rate was approximately 33% with a non-GAAP tax rate of 20%.

On a GAAP basis Q3 fully diluted net income per share was <unk> <unk> compared to net income of <unk> <unk> per share in the fiscal third quarter of 2021.

On a non-GAAP basis fully diluted earnings per share.

For the fiscal third quarter was <unk> 24, compared to 26 in the year ago quarter.

Turning to the balance sheet, we ended the fiscal third quarter with $49 4 million in cash and equivalents and no balance outstanding on our line of credit.

Our cash balance is down from the fiscal second quarter.

Due to the initiation of our share buyback plan.

As you May recall, we announced the board approval to purchase up to $60 million of our stock in October .

And in fiscal third quarter, we purchased $35 9 million worth of stock in the open market at a weighted average repurchase price.

A $16 53.

Or approximately two 2 million shares.

This program underscores our confidence in our balance sheet and strong cash flow generation.

We believe our positive business momentum.

It's ample capacity to return cash to shareholders, while continuing to execute on our growth strategy.

Dsos in the quarter were outstanding at 43 days, a decrease of one day from the previous quarter.

Free cash flow this quarter was $9 7 million, reflecting a carryover from the proxy contest a $9 million and repayment of employer tax deferral due to the pandemic.

Free cash flow generation should return to historic levels for the fourth quarter.

Now to our fiscal 2022 financial guidance.

As noted in the press release, we are raising our guidance for fiscal 'twenty two for revenue.

The updated guidance range.

$591 million and five and.

$595 million.

And non-GAAP EPS guidance is raised to 96.

And one dollar.

Our fiscal third quarters performance was strong and well balanced we continue to monitor the impact of the homegrown variant.

While potentially disruptive in the early months of fourth quarter. It appears to be on the wane 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 volumes are historically lower in the fiscal fourth quarter due to deductible resets.

Which will have an impact on our managed services and <unk> lines of business.

And those of you that have 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 trends typically smoothed out.

We continue to expect subscription services revenue to grow at approximately 10% for the full year.

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

We continue to make ongoing investments in sales and demand generation and R&D to invest or enhance our offerings.

These investments will accelerate throughout the remainder of this fiscal year and yet we are raising our non-GAAP EPS range.

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 longer term.

And now let me turn the call back to David for closing comments.

Thank you, Jamie and I did want to add to your comments regarding the company's share buyback activity.

This action reflects nextgen being more responsive to shareholder interest.

With a focus on driving a return on capital.

But I would also like to add the key members of the executive team also purchase shares in the open market over the last quarter as we are all big believers and aligned interest.

I'll wrap up today's call by reiterating the Companys focus on driving accelerating and profitable revenue growth.

Nexgen has significant untapped potential we have a refreshed board with an excellent breadth of experience in health care and technology, we have the right leadership, a clear strategy and attractive assets to go after a high growth market opportunities.

We will continue to make the right investments that position nextgen to win now and in the future.

And I was just informed that nextgen will be honored by Forbes as one of America's best employers.

So it is an exciting time here at the company and hope you'll join US as we continue to execute on our strategic initiatives.

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

To ask a question you will need to press star one on your telephone.

Draw your question press the pound key.

In the interest of time and to get to as many questions as time permits we ask that you limit yourself to one question and one follow up thank.

Thank you.

We'll take our first question from Jeff Garrow Piper Sandler.

Hi, and thanks for taking the question.

Nice to hear your cement the higher revenue growth profile for the next fiscal year I wanted to ask what the incremental revenue growth drivers are to get from where you are now to 6% to 8% and maybe more specific whats baked in there.

Patient volumes retention acceleration of recent demand trends or any new products or markets that you'll be entering.

We will go through all of those at Investor day, but at a high level. Let me just give you some.

Examples Jeff so the subscriptions growing at 10% of our largest revenue line item that we see continuing to grow.

We've talked about.

In past calls about some of the growth areas, where we're investing like interoperability.

<unk>.

Some of our services and our.

Our population health our value based care solutions, we expect all of those to accelerate as we started to make investments in those.

This quarter and last quarter, and we will continue that through this year.

Those should then add an additional growth on the retention.

Seen that.

B, where we expect it to be and Thats why we don't report it anymore. So you can assume that that's also at a good level going forward and not and not a headwind from that perspective.

And then new client wins, so these new client wins that we've had the last few quarters.

Adding the ability for us to sell our surround solutions into those clients.

If they didn't buy everything in the first round, which nobody does that.

It gives us additional sales opportunities for growth next year and so as we looked at.

Our preliminary plans for our budget.

We're comfortable with that 6% to 8% growth for next year.

Okay, all very helpful and one more follow up for me on the maybe the bookings and really just trying to understand the balance between the solid bookings number.

Really strong trends in bookings coming from new clients and the deal size.

It would be reflecting clients adopting more of your profile.

What I think might be the biggest software license quarter in two and a half years, which I would think would come more from existing clients.

Help us understand the kind of push and pull there as we think about the recurring revenue profile going forward.

So our preference is still to sell.

As much recurring revenue as we can but to your point it was a very large license software.

Deal this quarter.

That kind of pushed that forward.

We also talked about some of those larger clients that we had.

1000 physicians for a win is a big client for us.

There is still more room in that in that client.

<unk>.

We're still talking with them starting to get that implementation started actually having dinner with them next week.

And we'll see where that relationship goes but we're excited about those.

Those kinds of relationships and especially the ones that are consolidating or that are growing that we've talked about in our comments because.

There is.

Given opportunities to then move those things forward.

The deal in Texas, where we added our RCM services, we're investing in our Sam.

<unk>.

Not not as much of our client base on our RCM services as we think.

We think we're able to capture until you will see that as to your previous question is that a place for growth.

No.

It's really all of those.

For for new sales.

A good bookings quarter and as we think about.

Next year and going forward in the future, we're really working on okay. How do we.

How do we get systematic about pulling some of these larger deals to get some of the sales.

To continue the sales momentum we have but then accelerate it.

To get the growth rates.

Up in the next periods.

We will take our next question from Stephanie Davis of Silicon Valley Bank Leerink.

Hi, guys. Thank you for taking my question and I apologize for the Hoarseness I've got from Covid going on right now.

No.

It's no fun.

I guess my Big question is last quarter, you attributed the conservative so our guidance does the timing pull forward. This.

This quarter, you are putting up another broad based.

Okay.

And through that we can see that the new products and throughout those guys had gotten more meaningfully surprised to the upside.

Or is there anything else in timing that we should be considering or just conservatism.

No Stephanie I think we've talked about before and Jeff asked the question about the perpetual license and.

We've often said that.

Perpetual licenses at the larger deals are harder to predict in terms of timing.

When you close a large deal.

And the one that David just talked about the timing of it sort of made this quarter look probably a little better than we thought when we came into the quarter.

And so in.

As you know license revenue.

It gives a little spike on the license number and also on your gross margin and operating margin. So.

I think we saw a little extra strength in the license this quarter that we don't anticipate going.

In Q4, and then on the other side, we had a really strong.

Volume from managed services and the EI and as you know from prior years as we go into our fiscal Q4, the first quarter of the new calendar year.

Deductibles reset and we typically see a little fall off there. So all of that is factored into our forward guidance for the balance of this year.

Well, let me try asking in a different way.

A large transaction closed last quarter.

And another big benefit from license sales this quarter and one of your competitors pre announced last night with Michael Yes, Chunky license that Ron.

Is there anything in the market.

On the carrier side.

That's causing more embrace at these bars license sale.

There could be some.

From government entities that are buying.

If they've gotten a lot of money through some of the recent appropriations that we have seen some clients say they want to buy a perpetual because there.

License, because they're not sure where the money comes from in future periods, we would prefer.

To solve that over multiple periods as a subscription as kind of our SaaS offering but.

There has maybe been a little bit of that because of the government stimulus money that's out there for some of those some of those clients.

Alright, that's super helpful. I'll hop back in the queue. Okay.

We will take our next question from Sean Dodge of RBC capital markets.

Yes, thanks and.

Good afternoon.

Maybe taking a flipside of Jeff's earlier question around next year's revenue growth target.

If you look at bookings in this quarter were strong growth in bookings leading up to now has averaged.

I think it's been in the mid Twenty's over the last five quarters preview.

Previous to this and when we look at like the high levels of recurring revenue in your model I'm curious as to why we're not seeing this convert into faster revenue growth is it.

Is it just simply some of these.

We're implementing they can take time and these wins are just now beginning to layer in the revenue and that's happening or is there something else mechanically I'm missing here and the conversion of backlog to revenue.

I think thats, mainly yet so there is a three to six month lag as we implement it.

And then they layer and so the layers do stack up overtime so to your point.

If we can continue to increase bookings are keeping in this level.

This does stack up and that's why we're confident in.

Accelerating our revenue growth in the.

What we're showing for 'twenty, two and what we intend for 'twenty three.

Okay, Okay, great and then.

I guess, maybe on the spring 'twenty, one releasing great.

David last quarter, you had shared some metrics around the number of clients that had signed up to upgrade I think you said, 40% of your target client at that point in time.

Where are you on that now and how are those that have already opted in.

How are they progressing.

Okay.

We're closing in on just about 50%.

Of those.

Our contracted we're slotting people in now.

We've been working on the methodology to become more predictable for setting up a 10 week upgrade methodology.

So we're we're becoming very methodical on how we go through this this process.

It's progressing as we originally described it as a.

It will take approximately two years to go through the entire customer base.

The fact that we've got.

Close to 50%.

<unk> to take the upgrade.

So it's up a little from the previous quarter.

We're committed to the three year goal that we've previously described in terms of surround bookings.

But broadly on target.

Okay.

Alright, Thanks again.

Yes.

Thanks.

And once again that is star one if you would like to ask a question.

We will take our next question from George Hill of Deutsche Bank.

Oh, Hi, Maximo.

Maximo on for George Thanks for taking the question.

So you talked about the strong cross sell opportunities of RCM services to existing clients.

Could you maybe give us a ring.

Roy in key value proposition that help next year when the contract squeeze and then what.

What's the level of penetration are probably the white space available for you too.

Cross sell RCM services to existing clients.

Thanks for the question so the <unk>.

The value prop for the RCM services really around.

Especially now and this is a flavor market.

We can automate and run an RCM service to a higher level than our clients, who may be struggling to find replacement or find people with the expertise to run the system with.

With the technology. So for example, a better collections will help with revenue.

On the expense side, we are usually less expensive due to the high levels of automation that we have inherent in our offering so that labor savings.

As attractive.

Also in this.

And this.

Current economy, a good driver for us.

As we are.

And market because people are struggling to attract talent.

So thats good for us.

And as far as what percentages of our of our base. It's about 6% of our base also takes our RCM services.

So that gives us a lot of room to really.

Those services there is a lot of cross sell that we can be.

So we could realize there and that's where we're focused is one of the main growth areas.

Great. Thanks, maybe a follow up could you give us an update on the level of returns you're seeing here in the quarter versus your expectation.

Yes.

Yes, it's essentially at our expectations or better than that we don't report on churn anymore now that its gotten to be less and less.

And our target and.

We would report if it went higher I guess, so what we've said in the past since we don't reported by not saying anything we're saying it's within our expected range.

Okay.

Yes.

And once again that is star one on your Touchtone phone one moment, while we queue.

And there are no further questions at this time.

I'll turn the call back over to David sides for closing remarks.

Thank you all for joining today, we really appreciate your interest in Nextgen and appreciate your questions.

We will look for an investor day.

Event to come sometime in early May perhaps even as early as may 3rd at the.

NASDAQ offices were listed.

Of course, let's know as we get closer to that time, but again, thanks, everyone for joining the call and we look forward to talking with you again soon.

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

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Welcome to the Nextgen healthcare fiscal 2022 third 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.

Matt Scott low.

Vice President of Investor Relations.

Today's call is being recorded and now I will turn the call over to Matt Scott low.

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

<unk> 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 risk factors in the company's most recent and.

We will report on the Form 10-K and any other subsequent quarterly report on Form 10-Q .

Our web site.

Thank you, Matt and everyone on the call today.

Over the last few months, Jamie, Matt and I have been busy speaking with a number of investors that are new to the story and we appreciate your interest.

Since joining the company I've made raising the companys long term growth rate a top priority.

While nexgen is already delivering accelerating revenue growth.

Having generated 2% growth in fiscal 'twenty three.

<unk>, 3% growth in fiscal 'twenty, one and now approaching mid single digits in fiscal 'twenty two.

And I'm challenging the team to achieve even higher levels.

And at the same time to keep an eye on the bottom line.

One way to keep focus on this balanced growth ambition is to incorporate the rule of 40 and our internal planning process.

For those not familiar the rule of 40 is prevalent in SaaS software investing where he combined total revenue growth.

And adjusted EBITDA margin into a single percentage.

It's a way to compare value generated by SaaS models at different stages of maturity.

If you look back a few years using this rule.

We would see that Nextgen has made steady progress moving from 18% total in fiscal 19% to 20% total in fiscal 'twenty to 'twenty, 3% in fiscal 'twenty, one and now approaching mid Twenty's in fiscal 'twenty two.

We anticipate continuing to grow this measure by 2% to three percentage points a year longer term.

In the near term revenue growth will be the main driver while earnings leverage should materialize thereafter and.

And I would also reiterate our comfort with an annual target revenue growth rate of 6% to 8% next year driven by the strength of our comprehensive offering and commercial capabilities.

This higher growth rate.

Is the end result of effective teamwork across departments and individuals from strategic planning the product management.

From marketing to R&D and onto our go to market execution.

A highly coordinated effort all to achieve next gens mission.

All we think about our ways to help independent physicians ease their workload and manage the risk and complexity in their practices.

We constantly question the status quo, how can we help them automate repetitive tasks, how do we help them meet ever changing regulatory requirements and.

And ultimately how do we support them as they deliver great clinical care.

This focus thats nextgen apart.

To achieve our mission and elevate next gens growth profile. We have spent considerable time enhancing our comprehensive long term strategic plan.

This process is led by our Chief growth officer. So we develop more who came to nextgen very familiar with our technology product offerings and capabilities from its prior careers consulting partner at Mckinsey.

This process also had significant input from core commercial teams as well as the executive team and reviewed at the board level.

As I mentioned on our last call I am excited about the new board members and the expanding breadth of experiences and insights they bring.

I believe our engage board will be a vital will be vital to shaping nextgen long term strategic plan and future direction.

More details to follow.

Now shifting to certain trends in our fiscal third quarter performance.

Nextgen continues its positive momentum winning new business.

Fiscal third quarter, new client wins accounted for well over 25% of total bookings.

This strong performance reflects the company's focus on medical specialties.

Breadth of our solutions and the continued strong execution from our commercial team.

I am excited to say Nexgen closed a handful of seven figure deals again this quarter.

And we are beginning to see the positive influence of consolidation and the independent ambulatory space.

Yes, I said positive influence.

Let me explain.

While most investors are aware of the ebbs and flows of hospital driven consolidation trends over the past few decades.

The independent ambulatory space is now seeing provider groups.

That value their independence.

Acquiring other practices with the support from well financed investors.

As these practices grow and the number of providers services offered and complexity.

Nextgen becomes the obvious choice to provide not just data, but clinical and financial insights.

Let me provide an example in the fiscal third quarter Nexgen had a nice win adding a large mission driven provider of clinically integrated eye care.

This organization has been growing rapidly and now has over 1000 providers.

Across ophthalmology, and optometry clinics as well as surgery centers.

Operating in hundreds of locations across multiple states and are well financed to continue their expansionary goals.

Next gen be multiple competitors to win this important client.

Due to our long standing presence and commitment to total vision care.

As well as the breadth and scalability of our solutions.

We will be implementing our core practice management and EMR offering along with certain surround offerings.

By coasting, plus our mirth connect financial analytics and additional services.

It's an exciting opportunity and speaks to the true value of <unk> offering and how we win in the market.

While Jamie will provide the details on the quarter.

Also wanted to address a few questions we've been fielding recently.

Regarding how a higher inflation and interest rate environment affects our business.

First nextgen has a solid balance sheet.

No debt and a resilient business model that generates significant free cash flow.

Second a portion of our client contracts have an automatic annual inflation hedge tied to the consumer price index.

So why so not only are we well protected in an inflationary environment, but we are positioned to thrive in it.

Turning to the current tight labor market.

We see some interesting potential outcomes for nexgen.

First many of our clients are experiencing labor shortage and higher staff turnover.

And we're seeing customers than in the past probably would not have discussed outsourcing activities like revenue cycle management.

Now actively evaluating and engaging us for these services.

As an example in fiscal third quarter, we were able to cross sell RCM services to an existing client.

Multi specialty group operating out of.

Over 10 locations in Texas.

The ROI on this service was so compelling, especially in this environment.

I can see other clients, making the same decision.

But it is not just about the value of RCM here. It's a strong relationship Nextgen has built with this client over the years.

The trust that has been earned.

The mix of client turned to Nextgen first.

So we see this tight employment market as an incremental positive tailwind for select solutions.

As for next Gen itself. The investments, we have made and our culture are paying dividends and being able to attract the talent we need.

Of course, it's challenging challenging define top data scientists as we expand our data offerings, but we are optimistic given our vision and ability to attract talent.

And one of the advantages of our hybrid work model is that it allows us to hire broadly across the United States States in India.

Not only does the hybrid work models save on real estate footprint cost, but it better positions nextgen defined top talent.

Lastly, we received a number of questions regarding my perspective on M&A and how it might affect the company's stance going forward.

What I'll say is nextgen has a singular focus on accelerating its growth profile.

I'm agnostic as to whether this growth is driven by internal external means let.

Let me make clear.

We expect to drive 6% to 8% revenue growth through organic means.

<unk> has considerable assets.

With investment will likely drive significant future growth.

When it comes to external activities Nextgen has ample dry powder, we have a disciplined process multiple hurdles in which many targets just don't make the cut Chris.

Critical elements include strategic fit cultural fit growth above next gens level.

Clear line of sight to revenue and cost synergies and at a price that is not dilutive.

12 months.

We favorite bolt on transactions that add a technology or capability.

So we've decided not to build ourselves however.

However, we won't rule out larger transactions.

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

Thank you David.

Let's begin with a few operational highlights.

Bookings came in at $37 7 million in the quarter up slightly on a year over year basis and on track with our expectations.

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

As David noted Nextgen closed a handful of seven figure transactions in the quarter. These wins reflect both existing and new clients and span across a range of medical specialties from.

From neurosurgery to ophthalmology to multi specialty.

In certain cases nexgen is partnering with clients that are moving away from managing multiple different legacy systems.

Consolidated on our fully integrated and scalable solution.

In other cases, we are working with clients to add nextgen surround solutions to enhance their productivity and customer experience.

These wins reflect our strong commercial capabilities and ability to execute as well as the market's growing appreciation of nextgen core value proposition.

Now onto the fiscal third quarter financial results next.

Nextgen generated total revenue of $149 7 million in the quarter, an increase of 6% year over year of this total recurring revenue accounted for $134 5 million or 90%.

Our largest revenue category software subscription services generated $41 2 million in the fiscal third quarter or 8% growth year over year clients continued to adopt our surround solutions to better engage their patients and improve the patient and provider experience.

Adi and data generated $26 2 million in revenue this fiscal third quarter up 5% over the year ago period as transaction volumes remained strong.

Software maintenance and support revenue of $38 2 million was up slightly over the year prior year period.

Nonrecurring revenue of $15.

$2 million increased 13% over the same quarter last year and reflects several large perpetual license transactions along with the strength of services bookings in prior periods.

Gross margins of 54% remained flat year over year, reflecting added staff to support the spring 'twenty, one rollout and the increased hosting costs offset by higher license revenue and reduction in amortization of acquisition related software technology.

<unk>.

To operating expenses SG&A of $47 2 million decreased by $1 7 million compared to a year ago.

The decrease is due to tight controls in G&A and reduction in shareholder litigation expense.

Offsetting by increasing investments in sales and demand generation personnel.

Net research and development of $19 4 million grew 7% over the year ago period and represents 13% 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.

GAAP tax rate was approximately 33% with a non-GAAP tax rate of 20%.

On a GAAP basis Q3 fully diluted net income per share was <unk> <unk> compared to net income of <unk> <unk> per share in the fiscal third quarter of 2021.

On a non-GAAP basis fully diluted earnings per share.

For the fiscal third quarter was <unk> 24, compared to 26 in the year ago quarter.

Turning to the balance sheet, we ended the fiscal third quarter with $49 4 million in cash and equivalents and no balance outstanding on our line of credit.

Our cash balance is down from the fiscal second quarter.

Due to the initiation of our share buyback plan.

As you May recall, we announced the board approval to purchase up to $60 million of our stock in October .

And in fiscal third quarter, we purchased $35 9 million worth of stock in the open market at a weighted average repurchase price of $16 53.

We're approximately two 2 million shares.

This program underscores our confidence in our balance sheet and strong cash flow generation.

We believe our positive business momentum praveen.

<unk> has ample capacity to return cash to shareholders, while continuing to execute on our growth strategy.

Dsos in the quarter were outstanding at 43 days, a decrease of one day from the previous quarter.

Free cash flow this quarter was $9 7 million, reflecting a carryover from the proxy contest a $9 billion and repayment of employer tax deferral due to the pandemic.

Free cash flow generation should return to historic levels for the fourth quarter.

Now to our fiscal 2022 financial guidance.

As noted in the press release, we are raising our guidance for fiscal 'twenty two.

For revenue to be up.

David guidance range.

Is $591 million and 595 million and.

And non-GAAP EPS guidance is raised to 96.

One dollar.

Our fiscal third quarters performance was strong and well balanced we continue to monitor the impact of the <unk> variant.

While potentially disruptive in the early months of fourth quarter. It appears to be on the wane 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 inpatient volumes are historically lower in the fiscal fourth quarter due to deductible resets.

Which will have an impact on our managed services and <unk> lines of business.

We continue to expect subscription services revenue to grow at approximately 10% for the full year.

We continue to make ongoing investments in sales and demand generation and R&D to invest or enhance our offerings.

These investments will accelerate throughout the remainder of this fiscal year and yet we are raising our non-GAAP EPS range.

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.

Total revenue growth longer term.

And now let me turn the call back to David for closing comments.

Thank you, Jamie and I did want to add to your comments regarding the companys share buyback activity.

This action reflects nextgen being more responsive to shareholder interest.

With a focus on driving a return on capital.

But I would also like to add that key members of the executive team also purchase shares in the open market over the last quarter as we are all big believers and aligned interest.

I'll wrap up today's call by reiterating the Companys focus on driving accelerating and profitable revenue growth.

Nexgen has significant untapped potential we have a refreshed board with an excellent breadth of experience in health care and technology, we have the right leadership.

<unk> strategy and attractive assets to go after a high growth market opportunities.

We will continue to make the right investments that position nextgen to win now and in the future.

And I was just informed that nextgen will be honored by Forbes as one of America's best employers. So.

So it is an exciting time here at the company and hope you will join US as we continue to execute on our strategic initiatives.

This concludes my comments.

Let's move to questions operator.

To ask a question you will need to press star one on your telephone.

So let's draw your question press the pound key.

In the interest of time and to get to as many questions as time permits we ask that you limit yourself to one question and one follow up.

Thank you.

We will take our first question from Jeff Garro Piper Sandler.

Hi, and thanks for taking the question.

Baked in there.

Patient volumes retention acceleration of recent demand trends or any new products or markets that you'll be entering.

We will go through all of those at Investor day, but at a high level. Let me just give you some.

Examples Jeff so the subscriptions growing at 10% of our largest revenue line item that we see continuing to grow.

You've talked about.

In past calls about some of the growth areas, where we're investing like interoperability data.

Some of our services and our population health our value based care solutions, we expect all of those to accelerate as we started to make investments in those.

This quarter and last quarter, and we will continue that through this year.

Those should then add an additional growth on the retention.

<unk> seen that.

B, where we expect it to be and that's why we don't report it anymore. So you can assume that that's also at a good level going forward and not and not a headwind from that perspective.

And then new client wins. So these new client wins that we've had the last few quarters really adding the ability for us to sell our surround solutions into those clients. If they didn't buy everything in the first round, which nobody does.

<unk>.

It gives us additional sales opportunities for growth next year and so as we looked at.

Our preliminary plans for our budget.

We're comfortable with that 6% to 8% growth for next year.

Hi, all.

Very helpful.

One more follow up for me on the maybe the bookings and really just trying to understand the balance between the solid bookings number.

Really strong trends in bookings coming from new clients and the deal size.

Seem to be reflecting clients adopting more of your profile again.

I think might be the biggest software license quarter in two and a half years, which I would think would come more from existing clients. So if you just help us understand the kind of push and pull there as we think about the recurring revenue profile going forward.

So our preference is still to sell.

As much recurring revenue as we can but to your point it was a very large licensed software.

Deals this quarter that kind of push that forward.

We also talked about some of those larger clients that we had.

1000 physicians for a win is a big client for us.

There is still more room in that in that client.

We're still talking with them starting to get that implementation started actually having dinner with them next week.

And we'll see where that relationship goes but we're excited about.

Those kinds of relationships and especially the ones that are consolidating or that are growing that we talked about in our comments because.

There is.

Good opportunities and then move those things forward, we mentioned the deal in Texas, where we added our RCM services, we're investing in our Sam.

<unk>.

Not not as much of our client base on our RCM services as we think.

As we think we are able to capture and so you'll see that as to your previous question another place for growth.

So.

It's really all of those.

Add up for for new sales.

Good bookings quarter and as we think about.

Next year and going forward in the future, we're really working on okay. How do we.

How do we get systematic about pulling some of these larger deals to get some of the sales to.

To continue the sales momentum we have but then accelerate it.

To get the growth rates.

Up in the next periods.

We'll take our next question from Stephanie Davis of Silicon Valley Bank Leerink.

Hi, guys. Thank you for taking my question and I apologize for the Hoarseness I've got from Covid going on right now.

No.

It's no fun, but I.

I guess my Big question is last quarter, you attributed the conservative so our guidance does the timing pull forward. This.

This quarter, you are putting up another broad based.

Okay.

And through that we can see that the new products throughout those guys had gotten more meaningfully surprised to the upside.

Or is there anything else in timing that we should be considering or just conservatism.

No Stephanie I think we've talked about before and Jeff asked the question about the perpetual license and.

We've often said that.

Perpetual license the larger deals are harder to predict in terms of timing.

When you close a large deal.

And the one that David just talked about the timing of it sort of made this quarter look probably a little better than we thought when we came into the quarter.

And so in.

As you know license revenue.

It gives a little spike on the license number and also on your gross margin and operating margin. So.

I think we saw a little extra string in the license this quarter that we don't anticipate going.

In Q4, and then on the other side, we had a really strong.

Volume from managed services and the EI and as you know from prior years as we go into our fiscal Q4, the first quarter of the new calendar year.

Deductibles reset and we typically see a little fall off there. So all of that is factored into our forward guidance for the balance of this year.

Well, let me try asking in a different way.

A large transaction closed last quarter.

And another big benefit from license sales this quarter and one of your competitors pre announced last night with likely chunky license that Ron.

Is there anything in the market.

On the EHR side, that's causing more of the embrace of these bars license sale.

There could be some.

From government entities that are buying.

If they've gotten a lot of money through some of the recent appropriations, but we have seen some clients say they want to buy a perpetual because their life.

Our license because they're not sure where the money comes from in future periods, we prefer.

To solve that over multiple periods as a subscription as kind of our SaaS offering but.

There has maybe been a little bit of that.

Because of the government stimulus money that's out there for some of those some of those clients.

Alright, that's super helpful. I'll hop back in the queue. Okay.

We will take our next question from Sean Dodge of RBC capital markets.

Yes. Thanks.

Good afternoon.

Maybe you've taken a flipside of.

Jeff's earlier question around next year's revenue growth target.

If you look at bookings in this quarter were strong growth in bookings leading up to now has averaged.

I think it's been in the mid Twenty's over the last five quarters.

Previous to this.

Look at like the high levels of recurring revenue in your model I'm curious as to why we're not seeing this convert into faster revenue growth is it.

Is it just simply some of these are.

Implementing they can take time and these wins are just now beginning to layer in the revenue and that's happening or is there something else mechanically I'm missing here and the conversion of backlog.

Revenue.

I think thats, mainly yet so there's.

Three to six month lag as we implement.

And then they layer and so the layers do stack up overtime so to your point.

If we can continue to increase bookings are keeping in this level.

This does stack up and that's why we're confident in.

Accelerating our revenue growth.

What we're showing for 'twenty, two and what we intend for 'twenty three.

Okay, Okay, great and then.

I guess, maybe on the spring 'twenty one releasing.

David last quarter, you had shared some metrics around the number of clients that had signed up to upgrade it.

40% of your target client at that point.

Where are you on that now and how are those that have already opted in.

How are they progressing.

Okay.

We're closing in on just about 50%.

Of those that are contracted we're slotting people and now we.

We've been working on the methodology to become more predictable for setting up a 10 week upgrade methodology.

So we're we're becoming very methodical on how we go through this this process.

It's progressing as we originally described it as a.

It will take approximately two years to go through the entire customer base.

The fact that we've got.

Most to 50% have signed sfw's to take the upgrade.

So it's up a little from the previous quarter and were committed to the three year goal that we've previously described in terms of surround bookings.

But broadly on target.

Okay.

Alright, Thanks again.

Yes.

Thanks.

And once again that is star one if you would like to ask a question we.

We will take our next question from George Hill of Deutsche Bank.

Oh, Hi, Maximo.

Maximo on for George Thanks for taking the question.

So you talked about the strong cross sell opportunities of RCM services to existing clients.

Could you maybe give us.

Your line is the ROI in key value proposition that help next year when the contract squeeze and then what.

What's the level of penetration of our probably the white space available for you too.

Cross sell RCM services to existing clients.

Thanks for the question so the <unk>.

The value prop for the RCM services really around.

Especially now in this flavor market.

We can automate and run an RCM service to a higher level.

May be struggling to find replacement or find people with expertise to run the system with.

With the technology. So for example, a better collections will help with revenue.

On the expense side, we are usually less expensive due to the high levels of automation that we have inherent in our offering so that labor savings.

As attractive.

Also in this.

And this.

Current economy, a good driver for us.

As we are.

And market because people are struggling to attract talent.

So thats good for us.

And as far as what percentages are.

Of our base, it's about 6% of our base also takes our RCM services.

So that gives us a lot of room to really.

Grow those services, there's a lot of cross sell that we can be.

So we could realize there and that's where we're focused is one of the main growth areas.

Great. Thanks, maybe a follow up could you give us an update on the level of returns you're seeing here in the quarter versus your expectation.

Yes, it's essentially at our expectations or better than that we don't report on churn anymore now that its gotten to be less and less.

And our target and we would report if it wasn't higher I guess, so what we've said in the past is since we don't reported by not saying anything we're saying it's within our expected range.

Okay.

Yeah.

And once again that is star one on your Touchtone phone one moment, while we queue.

And there are no further questions at this time.

I'll turn the call back over to David sides for closing remarks.

Thank you all for joining today, we really appreciate your interest in Nextgen and appreciate your questions.

We will look for an investor day.

Event to come sometime in early May perhaps even as early as may 3rd.

<unk>.

NASDAQ offices were listed.

Well of course, let you know as we get closer to that time, but again, thanks, everyone for joining the call and we look forward to talking with you again soon.

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

Q3 2022 NextGen Healthcare Inc Earnings Call

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