NextGen Healthcare Q1 2024 Earnings Call Transcript

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July 24, 2023

There are 8 speakers on the call.

Operator

Welcome to the NextGen Healthcare Fiscal 20 24 First Quarter Results Conference Call. Hosting the call today from NextGen are David Sides, President and Chief Executive Officer and Jamie Arnold, Chief Financial Today's call is being recorded. All lines have been placed in a listen only mode. The floor will be open for questions following the presentation. At At this time, I'd like to turn the call over to James Hammerschmidt, Senior Vice President of Finance and Investor Relations of NextGen.

Operator

James, you may begin.

Speaker 1

Thank you, operator. Before we start, please note that we will be making forward looking statements during the presentation and Q and A part of the call. These statements are based on management's current expectations and assumptions and are subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings release and SEC filings. This call will also reference certain non GAAP financial measures.

Speaker 1

Information about non GAAP financial measures, including reconciliations to U. S. GAAP can be found in our earnings release, which is available on our Investor Relations website. At this time, I'd like to turn the call over to our President and CEO, David Sides.

Speaker 2

Thank you, James, and welcome everyone to our fiscal 2024 Q1 earnings call. I'm pleased to report solid top and bottom line results to start the new fiscal year. Building on the momentum created during fiscal 2023, Company executed across all fronts and is well positioned to deliver double digit revenue growth, create operating leverage and demonstrate effective This quarter was a testament to the strength of our business and the investments we've made to position the company for future growth. We're living our mission as the partner and trusted advisor to the practices we serve, which creates strong retention, The right to cross sell solutions and net new client wins. Our integrated platform is clearly differentiated in the market And meaningfully addresses client concerns related to financial sustainability, physician experience, interoperability and staffing constraints.

Speaker 2

The commercial team continues to execute well. Our value proposition when serving attractive markets such as behavioral health and integrated care It's clearly resonating given 28% of our overall bookings came from net new clients with flagship wins in the space. Foundation to Crossbell's success is ensuring our clients are leveraging the latest offerings we have. And I'm pleased to announce that the majority of our provider clients are on the latest And we have a clear line of sight to closing out the remainder. As we were the 1st and remain a leader in this transition, We believe that positions us well to further accelerate surround solution adoption and scale.

Speaker 2

Our existing clients continue to adopt our surround solutions, which helps them optimize their financial performance and clinical outcomes, resulting in a clear return on investment and Shifting from a license and maintenance based model to a subscription managed service or transaction based model, which best aligns with how we deliver value to our clients today. This transition continues to lessen our exposure to the lumpiness that comes with perpetual software licenses, which we've modeled A ramp down aligned with what we saw in the Q1. Now I'd like to cover the progress we're making as we invest in innovation. I mentioned in our last call that we're continuing to invest and create new organic solutions in several areas, such as data and analytics, interoperability and value based care, which is key to delivering on our growth agenda. We've made good progress over the quarter in advancing all these initiatives.

Speaker 2

We continue our investment in the Enterprise Data Cloud in partnership with AWS and Snowflake to deliver a broad set of data solutions to our Working with them, we've started to unlock the value of our clients' data along a few dimensions, including the ability to access and visualize clinical data for those using health quality measures. We found through our advanced Practice intelligence and benchmarking capabilities. The NextGen customers outperformed the national average in 27 of 32 CMS clinical quality measures. This is just one of many opportunities we have to leverage our core platform and help clients thrive as broader reimbursement models evolve. We completed several fields this last quarter with pharma and life sciences companies to support advanced clinical research Which expands beyond our current data partnerships.

Speaker 2

Working with our clients and partners, we're excited about the potential to open Aperture This includes new specialties with a focus on high value research studies. I'm also excited for the opportunity we see in interoperability, Specifically in supporting global clients who also have scaled needs, we are now GDPR compliant, which gives us the ability to market leading solutions like Through the provider's current system of use remains a differentiating capability for enabling providers to take on risk. That's I'm excited to announce that for the 2024 CMS enrollment period, we successfully enrolled approximately 200 providers in Medicare Sedge Savings ACOs, representing nearly 30,000 attributed lives. These providers are using NextGen's leading population health analytics solutions And wraparound services to improve care quality and generate significant savings. Now turning to scale and our journey to deliver operating leverage.

Speaker 2

We see opportunity to further optimize our operating model, ensuring we have the right capabilities in place to deliver growth at scale for years to come. Focusing on cost Sales, we've made investments in the past to support the Cures upgrades effort and deliver growth in professional services. As we near the end of the upgrade cycle And falling to a predictable service cadence, we have plans in place to reduce our reliance on third party staff augmentation, optimize our own billable utilization and redeploy upgrade resources to new value creation initiatives. These actions will start to be apparent in the back half of our fiscal year as our cost of sales as a percentage of revenue supporting maintenance, professional services and managed services begins to moderate. Looking at operating expense, we've always been buff on how we invest in growth oriented functions like R and D, sales and marketing, While rationalizing our G and A expense, we've evolved our product development group to a more modern agile model, Which should improve delivery speed and quality, while also maximizing capacity without significantly growing the organization.

Speaker 2

We continue to leverage sales development representatives to improve our client acquisition costs with higher lead to sales conversions on a more favorable cost And

Speaker 3

when looking at

Speaker 2

the back office function, we've been investing in systems and automation to even further streamline how we support the business going forward. We also aim to improve the leverage we get from the vendors and strategic partners we work with. One I want to call out is our collaboration with Amazon Web Services As we successfully transitioned our colo operations for NextGen Office into a secure and extensible AWS environment back in May of this calendar year. We see potential to expand relationships like this beyond the product and into the commercial setting, taking advantage of their marketplace and Bringing offerings into new segments and geographies where these partners already have an established channel. I want to close by providing an update on the TSI acquisition.

Speaker 2

The integration is on track and our unified sales and marketing team had a great start to the year. We exceeded our 1st quarter sales targets And we're excited for the opportunity to begin in front of even more clients as we plan to host over 200 attendees at our Leaders in Rheumatology Conference, where we will deepen our relationships New and prospective clients and partners. What's exciting about the acquisition is it further strengthens our position in the health data arena. In collaboration with our NextGen Insights team, we're actively pursuing new and expanded agreements with Health Data Partners, which will drive future revenue growth at an attractive margin. And with that, I'd like to turn the call over to Jamie to provide an update on the financials.

Speaker 2

Jamie?

Speaker 3

Thank you, David. Now turning to the Q1 results. Total bookings came in at $38,900,000 roughly flat year over year. Recurring bookings increased 7% as our bookings mix shifted towards higher value recurring revenue streams, which aligns with the comments David made earlier on our business model transition. There were 4 transactions greater than $1,000,000 in the quarter.

Speaker 3

And as a reminder, bookings represent the annual contract value excluding renewals. Total revenue for the quarter was 178 $200,000 a 16.8% increase year over year on an as reported basis Recurring revenue of $163,400,000 grew 17% and accounted for 92% of total revenue. Subscription services revenue of $52,500,000 grew 23%. Transaction and data services revenue $37,600,000 grew 38 percent and managed services revenue of $34,800,000 grew 13%. The growth was fueled by a combination of revenue from the acquisition of TSI, plus the acceleration of organic solutions.

Speaker 3

Non recurring revenue for the quarter was $14,800,000 a 10% increase compared to the same quarter last year. Software revenue of $5,000,000 was down year over year and under the 6 quarter trend, but in line with the longer term trend and in line with our internal Professional services revenue of $9,900,000 grew 34% as we continue to work down the backlog Looking forward to the next quarter, we expect revenue to be flattish sequentially due to 1 fewer business days and one time benefit in services revenue. Gross margin of 44.8% was down approximately 300 basis As discussed on last quarter's earnings call, we have made significant investment in our upgrade center of excellence and Professional services as well as a shift in product mix. Margin improvement will continue to be a focus and spend related to the upgrade center of excellence And services transformation should start to moderate towards the end of fiscal 'twenty four. Turning to operating expenses, net R and D expense was $20,900,000 for the quarter.

Speaker 3

This is a 4% decrease compared to the same quarter last year, which included several one time pull forward investments. SG and A of $48,200,000 decreased by 2% compared to the same On a non GAAP basis, earnings per share was $0.24 compared to $0.16 in the same quarter last year. Our non GAAP tax rate for the quarter was 21%. Turning to the balance sheet, we ended the quarter with $226,000,000 in cash, cash equivalents and marketable securities and we had no balance outstanding on our line of credit. Free cash flow for the quarter was a negative $16,800,000 and was impacted by payments for TSI customer financing sales arrangements, Annual bonus and convertible debt interest payment.

Speaker 3

We expect free cash flow to be negative next quarter due to the DOJ settlement and then return to a more normalized cash flow conversion rate for the remainder of the year. We did not repurchase shares in the quarter and have $74,300,000 remaining on the current share repurchase authorization. Turning to our full year Fiscal 2024 financial guidance. As noted in the press release, we are raising the bottom end of our revenue range based on the solid start For the year, we now expect total revenue to be in the range of $714,000,000 to 722,000,000 Our adjusted EBITDA and non GAAP EPS guidance remains unchanged. And now let me turn the call back to David for closing comments.

Speaker 3

Thank you, Jamie. NextGen continues to execute with

Speaker 2

a focus on driving growth for both us and our clients We're making the investments required to deliver long term profitability and scale. Our overall positive outlook reflects the tailwinds we created by solely Focusing on ambulatory care, our resilient business model and our focus on driving shareholder value. I want to close by thanking the 2,700 mission driven team members And thousands of clients have had the opportunity to work with on a regular basis. They are the champions behind our success and the foundation to making our equation for sustained growth and operating leverage work. And with that, I'll turn the call back to the operator to open up for questions.

Speaker 2

Operator?

Operator

Thank Our first question will come from Jeff Garro with Stephens.

Speaker 4

Yes, good afternoon. Thanks for taking the questions. And I appreciate the comments on bookings and given that recurring Bookings metric, that's quite helpful. I want to ask further on the demand environment. Any color that you would give on the current level of sales activity in the quarter?

Speaker 4

How your win rate is tracking and where the pipeline sits currently?

Speaker 3

Thanks, Jeff. So it was a good quarter from a sales perspective, from a SaaS, especially from a SaaS perspective. You probably saw that we went down some in perpetual, which is expected. We expect the long term to kind of go down or The environment is still good. So our pipeline looks good for this quarter, Looks good for the year.

Speaker 3

Looks good for continued growth, a little up and down. But otherwise, From a buyer's perspective, we're feeling pretty good.

Speaker 4

Got it. That helps. Ginn, you had some helpful comments around the timing, but maybe you could help parse out how much of the recent headwind to gross margins is attributable To revenue mix, specifically, you have some strength in that transactional and data services line where presumably you have some partners in some of the areas. And then how much can be attributed to that implementation work to get clients upgraded on that, Cures version ahead of that looming regulatory deadline?

Speaker 3

Jeff, I would say it's I'm trying to it's probably split about evenly, the headwinds between the two factors you talked about. Clearly, we're very happy with the increase in the transactional and data services, but it does come with a lower margin. So it becomes a very sticky solution and helps round out The solutions our customers are acquiring and we did see continued increased Spend in the upgrade center of excellence and a little bit of increased spend on the services line. So the combination Of those 2 are probably about half of the gross margin headwind.

Speaker 4

Great. Thanks. I'll hop back in the queue.

Speaker 3

Thank you.

Operator

Thank you. Our next question will come from Jack Wallace with Guggenheim Securities.

Speaker 5

Hey, good evening. Thanks for taking my questions. I've got a couple of follow ups on the bookings in the quarter. Have you seen any impact in the office space since the data leak? And then also With the upgrades going on, has that had any impact just from a timing standpoint of some of the surround Upgrades and add ons, just kind of any other color there would be great.

Speaker 5

Thank you.

Speaker 3

Yes. Thanks. So from the office, we did see some softness in the base. So ironically, outside the base, we're getting new clients, no change, but in the base saw some softness. That started to already recover.

Speaker 3

We're expecting that to be back to our normal steady state in this current quarter. And on this round, Not seeing really an impact, so the surround is still doing well for us. We should see a lot of the Final clients get live on the Cures edition this quarter by October, which should set us up, we think, well in that a lot of Synergies could come through that. For example, when someone who calls support, we know what version they're on. When the salesperson calls a client, I know what version they're on.

Speaker 3

So, it sets up some things for us that we think are helpful from that perspective. As well as just adding on to the last question a little bit, in the second half of this year, you'll Start to ramp down that upgrade center of excellence and you'll see improvements on the gross margin as those really good people are redeployed to other parts of Business hopefully into more billable roles going forward. But that will gradually go down and We're excited to keep all that great talent that we've built up here going forward.

Speaker 5

Great. That's helpful. And then, can you just comment How the M and A pipeline has changed since last quarter and just your thoughts around your private market valuations?

Speaker 3

I think the private market valuations are continuing to improve at least from a buyer perspective, from our perspective, Especially if the Fed continues to raise rates. I think one of the things that people haven't factored in maybe to the rates that we've thought about a lot are the cost of healthcare coming through later this year in insurance premiums, I think they're going to be high and it will set a higher floor. So We'll see how that feeds in through next year, but at the same time, we'd be a beneficiary of that and that our providers Do better from some of that higher payments coming through. So it's an interesting market and I'd say all that just to say This may not be the last rate increase if healthcare spend if the increases come through at 8% or 10%. And those increases are helping bring private market valuations closer to public.

Speaker 3

So, we like those new prices. It also takes out some of the competition for the assets We like from private equity because they're financing it with debt and we're financing it with cash. So, we have cash on the balance sheet to do what we want and are Still seeing good opportunities out there and have a good team that's working on M and A focused on it. So, like the pipeline that we see right now.

Speaker 5

That's helpful. Thank you.

Operator

Thank you. Our next question will come from Sean Dodge with RBC Capital Markets.

Speaker 2

Yes. Thanks. Good afternoon. Maybe just going back to the gross margins one more time. David, you said This should begin to moderate later in the year spend on the upgrade center wind down.

Speaker 2

When we think about how much and how quick Gross margin improved. I guess you see it pass back to the low 50s like we saw in years past or was that just helped a lot by license Sales and that would be Jamie's point I think around revenue mix just makes that a little bit tougher to achieve.

Speaker 3

Yes. Sean, this is Jamie. I would say that the payout to $50,000,000 is a little longer. We do expect to see, as David said, we expect to see the margin start to increase in the back half of this year, But the path to $50,000,000 is going to take a bit longer and particularly will be enhanced when I think about the Insights, The revenue that will be generated in Insights will be higher margin revenue and will help to lift the overall corporate margin. I think the NextGen Enterprise is probably going to settle in in this kind of at its current Gross margin, it will tick up a little bit over time, but not dramatically.

Speaker 3

I think the bigger improvement comes As Incyte's revenue starts to pick up and we identified that a year ago, it's starting to produce Meaningful contribution in 2025 and 2026.

Speaker 2

Okay, great. That's very helpful. And then On the bookings, is there any more color you can share on the 39,000,000 you signed in the quarter, was that in line with plan? Were there any kind of pushes or pulls, anything that slipped or was pulled slipped or was pulled ahead from adjacent quarters. And then maybe give us a sense of the kind of cadence you need There in order to achieve the guidance for the year, is 39 a quarter good enough or do you need something a little bit higher than that going forward?

Speaker 3

We need something higher than that going forward. Certainly for especially when you think 25, I mean, we kind of talked about that before when in the Q1. The Q1 does feed in into Q3 and Q4. Once we get to the Q3, you're really talking about the following year. It's the beauty of our recurring business model is 91%.

Speaker 2

Like we have really good visibility. So people are like,

Speaker 3

how do you know that you have confidence around your kind of revenue forecast? It's because It's so recurring in nature, but we need better than 39 in Q2. The current forecast looks better than that, so we're not nervous about that. But you're starting when you get into Q3, really setting up for 25. So, this quarter was good.

Speaker 3

Next quarter should be better. We feel good still about the year And the latter half of this year's bookings will really be about how do we continue the growth at double digits in 25.

Operator

Thank you. Our next question comes from Jalendra Singh with Truist Securities.

Speaker 6

Thank you and thanks for taking my questions. I actually want to double click on the data you shared around 100 providers and 30,000 attributed lives for 2024 CMS enrollment in MSSP and ACO products. A few questions there. First, how many of these 200 providers were your existing clients versus clients who are working with you just on value based care or these MSSP solutions? And second, maybe can you dig a little bit deeper on the key differentiation you guys have in your solutions compared to several other vendors out there doing like

Speaker 3

Thanks, Zelandra. So, they're all existing clients. So, everyone we've targeted so far has been existing. And what we're bringing is we're bringing them the tech and the technology and insights integrated into the workflow So that they can actually achieve those savings without having to do a lot of work, right? And what I mean by that is, So all of our population health applications and analytics, we bring that kind of face up in the application As they're going through a clinical encounter with a patient, we're telling them you need to check the following things to get the outcomes that We'll generate the better shared savings.

Speaker 3

So, that's what differentiates us. We're not some places Taking lots of tech and then putting it together, we're able to bring all of our tech to it and bring with that some of the Clinical change support. And importantly, too, I'd point out that we have a proven model here. So, when you've seen us put out press releases with some of our

Speaker 6

It's kind of related to that. I think there was a proposal a couple of weeks back from CMS around some changes to the program. And I know it might be a little early, but just curious if you had any early conversation with any provider clients because It seems like CMS expects more participation and more lives to be attributed because of those changes. It's curious like have you heard anything in the last couple of weeks or so?

Speaker 3

We haven't heard anything in the last couple of weeks. We still have time to sign up more providers. So we're optimistic that this won't be the final number that we end up at. But we haven't heard it come through the marketplace yet from those changes.

Speaker 6

Okay. And one last one. On the free cash flow trend, I think you talked about that. So just any guidance you can provide For the year, like any number just to make sure we are in the ballpark?

Speaker 3

No. We tried to share that for next quarter, we're expecting it to be negative because of the cash payment. It's almost $33,000,000 went out with on the Cash payment related to the DOJ issue. And so obviously that will be Negative. I believe afterwards, we will expect cash conversions in the back half of the year.

Speaker 3

And I think of it as Probably 50% of EBITDA will give you a pretty good target area. But for the year, still generating free cash flow on the entire year, but limited free cash flow for the entire year.

Speaker 6

All right, guys. Thanks a lot.

Operator

Thank you. Our next question comes from Jessica Cassatt with Piper Sandler.

Speaker 7

Hi, thank you guys for taking the question. So I have a few more bookings related ones. Hopefully, you Bear with me. So, are the majority of the 72% of bookings from existing customers coming from customers who are upgrading to Spring 2021? And if so, just is the completion of that upgrade cycle going to moderate the volume of existing customer booking?

Speaker 7

Or are you seeing kind of same store sales in the months years subsequent to the upgrade?

Speaker 3

So the I mean the 72% are from the base and now the majority of the base is on the Cures addition. So I guess it stands to reason

Speaker 2

that that's

Speaker 3

where but it's not because of the Cures Act addition kind of absence or presence that's Driving the bookings, probably. It's just do they need these things. From an implementation perspective, it's certainly getting easier that Almost everyone is on the Cures Edition. So when implementation goes to Jack, it's whatever it is, you can put it on this. Where I think probably 2 years ago without that, There are some newer surround solutions that require that.

Speaker 3

That's pretty much all there now. So there's no there's less work to do to implement at this point because people are all on most clients are on the same release at this point.

Speaker 7

Got it. So just the bookings from existing customers, those are kind of coming through irrespective of the status of the upgrade And should continue to?

Speaker 3

Yes, I think so.

Speaker 7

Got it. And then just in the ambulatory market kind of broadly, Do you have any sense of what practices are now 2015 cures update compliant? And what does that mean for just net new bookings prospect? Basically, does a recent update or compliance with the 2015 Cures update mean that a competitive client would be Harder to convert or is that kind of a neutral factor or irrelevant to competitive conversion?

Speaker 3

I think it's for somebody, if they're not on it, I think it's a positive for us in that if you're not on it, We could get you live by the deadline still.

Speaker 2

So we'd be happy to take any

Speaker 3

of those clients through the conversion process to get them live in time. So that is still good for us. And I think that's mainly a problem on the lower ends. Most of our larger practice competitors are But if they're already on in addition, we could still get them to come to NextGen or not. But the ones that aren't, I think there's still Probably some movement to happen there in the market.

Speaker 7

Got it. And so then would you expect kind of The mix of bookings or just the pace of bookings from net new customers to moderate or that should remain Strong despite the market generally having upgraded to be compliant?

Speaker 3

Yes, I think it stays strong like you've seen it. We've been very consistent around 25%, we did a little bit better this quarter, 28%. But it's consistent. And the nice part about those clients is they're bringing a lot of So another way of saying that is they're buying everything and it makes them sticky. So the part that we like about that is we see the more like no thanks, the more solutions we get installed, the stickier they become.

Speaker 3

And New clients that are coming to us are buying everything at once, so they're sticky from the start, which if you think about our base, they may have started somewhere 10 years ago. We've been moving them along over time. It's nice that our sales process is mature enough to sell everything at once and create a very sticky client right from the start.

Speaker 7

Got it. That's really helpful. And my final one would just be, are the providers that you all have signed so far for MSSP, are those providers who are already

Speaker 3

Yes. It's a good question.

Speaker 2

So, thanks, Jess. Most of

Speaker 3

them are New to the MSSP process, but we did have some conversions from competitors that aren't our normal competitors, right? So it's not like we converted them from Epic or Athena or whoever, we converted them from the kind of that different class of competitor that It's still yet to prove out the profitability of our business model. And the way we're looking at it, we're trying to create a profitable business model right from the So it's one of the differentiated way we're going to market is that we're not Spending is going to be profitable from the start, let me just say that. We're not spending tons of money to make an unprofitable business model. We would rather move it to size and scale for our providers and we think there's a lot of movement here, but we're moving over time profitable from the start.

Speaker 7

Thanks again.

Operator

Thank you. And there are no additional questions at this time. Like to now turn the conference over to Mr. David Sides for any closing remarks.

Speaker 3

Thank you all for joining And the conference call. We're really looking forward to talking to you again in the fall, on October for earnings call and potentially for an Investor Day in November. So appreciate everyone's interest and we'll talk

Speaker 2

to you soon. Thanks.

Operator

Thank you, ladies and gentlemen. This concludes today's presentation. You may now

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