NextGen Healthcare, Inc. (NASDAQ:NXGN) Q1 2024 Earnings Call Transcript

NextGen Healthcare, Inc. (NASDAQ:NXGN) Q1 2024 Earnings Call Transcript July 24, 2023

NextGen Healthcare, Inc. beats earnings expectations. Reported EPS is $0.24, expectations were $0.22.

Operator: Welcome to the NextGen Healthcare Fiscal 2024 First Quarter Results Conference Call. Hosting the call today from NextGen are David Sides, President and Chief Executive Officer; and Jamie Arnold, Chief Financial Officer. Today’s call is being recorded. All lines have been placed in listen-only mode. The floor will be open for questions following the presentation. [Operator Instructions] At this time, I’d like to turn the call over to James Hammerschmidt, Senior Vice President of Finance and Investor Relations of NextGen. James, you may begin.

James Hammerschmidt: Thank you, operator. Before we start, please note that we will be making forward-looking statements during the presentation and Q&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. Information about non-GAAP financial measures, including reconciliations to US GAAP can also 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.

David Sides: Thank you, James. And welcome everyone to our fiscal 2024 first quarter 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 capital management. 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.

The commercial team continues to execute well. Our value proposition when serving attractive markets such as behavioral health and the integrated care is clearly resonating. Given 28% of our overall bookings came from net new clients with flagship wins in the space. Foundation to cross-sell 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 Cures-certified version of our product, and we have a clear line of sight to closing out the remainder. As we were the first and remain a leader in this transition, we believe that positions us well to further accelerate Surround Solution adoption and scale. 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 high growth across our diverse recurring revenue streams.

We saw strong momentum in patient volumes, which led to higher demand in the quarter than originally planned in our transaction and data revenue line, specifically our Patient Pay offering. This is a great example where we’ve created an integrated experience for our clients, leveraging our top ranked practice management system in partnership with a leading pair in the payment space. And finally, we saw acceleration in our business model transition, 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 client 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 first quarter.

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. We continued our investment in the Enterprise Data Cloud in partnership with AWS and Snowflake to deliver a broad set of data solutions to our customers. 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’ve found through our advanced practice intelligence and benchmarking capabilities that 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] (ph) this last quarter with pharma and life sciences companies to support advanced clinical research studies, which expands beyond our current data partnerships. Working with our clients and partners, we’re excited about the potential to open the aperture to include new specialties with a focus on high value research studies. I’m also excited for the opportunity we’ve seen in our operability, 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 Mirth Connect for use in over 40 countries.

And finally, touching on value based care, we have been partnering with clients seeking to achieve superior quality and financial outcomes when participating in ACOs and other alternative payment models. We believe the ability to deliver insights at the point of care through the provider’s current system of use remains a differentiating capability for enabling providers to take on risk. That’s why I’m excited to announce that for the 2024 CMS enrollment period we successfully enrolled approximately 200 providers in [Medicare Shared Savings] (ph) 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. 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 of sales, we’ve made investments in the past to support the Cures upgrade effort and delivered growth in professional services. As we near the end of the upgrade cycle [indiscernible] predictable service cadence, we have plans in place to reduce our reliance on third party staff augmentation, optimize our own billable utilization, and redeploy upgraded 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 thoughtful on how we invest in growth oriented functions like R&D, sales and marketing, while rationalizing our G&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. We continue to leverage sales development representatives to improve our client acquisition cost with higher lead to sales conversions on a more favorable cost base. And when looking at 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.

Source: Unsplash

One I want to call out is our collaboration with Amazon Web Services, as we’ve successfully transitioned our co-lo operations for NextGen office into a secure and extensible AWS environment back in May of this calendar year. We see potential to expand partnerships like this beyond the product and do the commercial setting, taking advantage of their market place 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. The integration is on track and our unified sales and marketing team had a great start to the year. We exceeded our first quarter sales targets and we’re excited for the opportunity to get 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 with 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. Jamie?

James Arnold: Thank you, David. Now turning to the first quarter results. Total bookings came in at $38.9 million, 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 four transactions greater than $1 million in the quarter. And as a reminder, bookings represent the annual contract value excluding renewals. Total revenue for the quarter was $178.2 million, a 16 point percent increase year-over-year on an as reported basis and a 13% increase year-over-year on a pro forma basis. That is excluding the historical contribution of TSI pre and post-acquisition and the commercial dental assets we divested in July 2022.

Recurring revenue of $163.4 million grew 17% and accounted for 92% of total revenue. Subscription services revenue of $52.5 million grew 23%. Transaction and Data Services revenue of $37.6 million grew 38% and managed services revenue of $34.8 million grew 13%. The growth was fueled by a combination of revenue from the acquisition of TSI, plus the acceleration of organic solutions. Nonrecurring revenue for the quarter was $14.8 million, a 10% increase compared to the same quarter last year. Software revenue of $5 million was down year-over-year and under the six quarter trend, but in line with the longer term trend and in line with our internal plan. Professional services revenue of $9.9 million grew 34% as we continue to work down the backlog to bring new customers live, and there was also a benefit from closing fixed fee contracts, which resulted in a onetime uplift.

Looking forward to the next quarter, we expect revenue to be flattish sequentially, due to one fewer business days and onetime benefit in services revenue. Gross margin of 44.8% was down approximately 300 basis points compared to the same quarter last year. 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 2024. Turning to operating expenses, net R&D expense was $20.9 million for the quarter. This is a 4% decrease compared to the same quarter last year, which included several onetime pull forward investments.

SG&A of $48.2 million decreased by 2% compared to the same quarter last year. On a GAAP basis, earnings per share was $0.09 compared to $0.02 in the same quarter last year. 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 million 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 $16.8 million and was impacted by payments for TSI customer financing sales arrangements, annual bonus and convertible debt interest payment. 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 $74.3 million 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 to the year. We now expect total revenue to be in the range of $714 million to $722 million. Our adjusted EBITDA and non GAAP EPS guidance remains unchanged. And now let me turn the call back to David for closing comments.

David Sides: Thank you, Jamie. NextGen continues to execute with a focus on driving growth for both us and our clients who are 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 of 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. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question will come from Jeff Garro with Stephens.

Jeff Garro: Yeah. Good afternoon. Thanks for taking the questions. And I appreciate the comments on bookings and given that recurring book 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? How your win rate is tracking and where the pipeline sits currently?

David Sides: 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 trend down as we really are pushing SaaS to all new clients. The environment is still good. So our pipeline looks good for this quarter, looks good for the year, looks good for continued growth, little up and down. But otherwise, from a buyer’s perspective, we’re feeling pretty good.

Jeff Garro: Got it. That helps. Then I wanted to ask on the profitability side of things. Any further comments on gross margins? 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? Thanks.

James Arnold: Jeff, I would say it is — 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. But it becomes a very sticky solution and helps round out the solutions our customers are requiring 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 two are probably about half of the gross margin headwind.

Jeff Garro: Great. Thanks. I’ll hop back in the queue.

James Arnold: Thank you.

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

Jack Wallace: Hey, good evening. Thanks for taking my questions. You’ve got a couple of follow ups on the bookings in the quarter. Was there any impact — have you seen any impact in the office space since the data leak? And then also with the upgrades going on, does that add 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. Thank you.

David Sides: Yeah. 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. So we’re expecting that to be back to our normal steady state in this current quarter. And on the Surround, 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 addition this quarter by October, which should set us up we think well and that a lot of synergies could come through that. For example, when somebody calls support we know the version they’re on. When the salesperson calls the client, they know what version they’re on.