NextGen Healthcare, Inc. (NASDAQ:NXGN) Q4 2023 Earnings Call Transcript

NextGen Healthcare, Inc. (NASDAQ:NXGN) Q4 2023 Earnings Call Transcript May 16, 2023

NextGen Healthcare, Inc. misses on earnings expectations. Reported EPS is $0.1 EPS, expectations were $0.29.

Operator: Welcome to the NextGen Healthcare Fiscal 2023 Fourth 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. [Operator Instructions]. At this time, I would 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 the 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 U.S. 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 thank you to all who have joined the call today. I will start today’s call by covering some of the more notable accomplishments in our fiscal fourth quarter, then review our performance for the fiscal year and finally provide an outlook on why we are excited for fiscal year 2024 before turning the call over to Jamie to take you through the financial commentary. We will then close the call and open it up for questions. Starting with fourth quarter accomplishments, the team continues to execute well, which resulted in solid performance to end the fiscal year. Bookings grew both year-over-year and sequentially, which means another new quarterly bookings record. We continue to see strong demand inside the base for our Surround solutions and interoperability capabilities.

Our ability to serve integrated care organizations, who need a single platform that combines both medical and behavioral health, continues to differentiate us in the market, leading to more flagship wins. Revenue came in better than expected for the quarter, resulting in 18% year-over-year growth for the company. While subscription showed significant growth as expected with the acquisition of TSI, we also are pleased that revenue cycle management saw an increase in collections, and our transactional and data services were ahead of plan. Furthermore, perpetual license sales came in above our prior 6-quarter trend and our expectations. We had the opportunity to spend time with both current and prospective clients at ViVE and HIMSS the last 2 months.

We approach these industry trade shows to validate our areas of focus and investment. Clients are looking for EHR-powered workflows that enable care beyond traditional practice settings, mobile tools that allow doctors to treat patients wherever they may be and increased focus on equitable patient access and provider well-being. From an interoperability perspective, fire and integrations with social determinants of health content and social services continue to be a repeating thing. These are all key areas that we are investing in, which will position us nicely in the market. We also see opportunities in health care IT to partner with leading tech players to accelerate innovation and unlock new business models. At ViVE, we hosted a joint event with Snowflake and AWS, which had over 200 attendees.

One example of these partnerships was the launch of Mirth Cloud Connect, a trial-based solution that provides interoperability as a managed service, leveraging our market-leading Mirth Connect interoperability engine and our partnership with AWS. The new offering is designed to help solve clinical data exchange challenges faced by large physician networks and health technology vendors. From an operations standpoint, we continue to invest in building a scalable infrastructure to facilitate growth. The team is focused on process improvement, identifying areas where we can leverage technology systems and automation to improve our own operating model. One recent example was the decision to consolidate multiple HR, payroll and recruiting systems to a single integrated global platform.

Now I’d like to take a moment to provide a brief update on a security-related matter that occurred during the quarter. At the end of March, we were alerted to suspicious activity involving our NextGen Office system. As a reminder, this is our small physician office system and is 1/10 the size of our NextGen Enterprise system, which has the bulk of our client base. We executed our internal response procedures, engaged the support of leading outside cyber experts and notified law enforcement. Following our forensic investigation, we determined that an unknown third party gained unauthorized access to a limited set of personal information stored on the NextGen Office system. Based on our investigation, this did not include patient health or medical information.

At the end of April, we notified impacted NGO providers and their patients as well as state regulatory authorities. As you know from our discussion on our last earnings call, we also experienced an incident in January. We continue to work with independent experts to ascertain whether personal information has been impacted. And to the extent the detailed analysis reveals that personal information has been impacted, we will notify individuals accordingly. Security in all its forms is and will continue to be a top priority for NextGen Healthcare. While we have determined that the recent incident was a result of stolen client credentials from sources and incidents unrelated to NextGen, we are taking action to further strengthen our security with the help of our independent experts.

I will close my comments on the quarter by discussing our progress on the integration of TSI, the first acquisition the company has done in several years. It’s on track and going well. We’re making the investments we said we’d make, which includes ramping up dedicated sales resourcing and demand generation, migrating from a colocation facility to AWS in the cloud and continuing the base upgrade to the latest Cures-certified version. We remain encouraged by the opportunity it represents not just with NextGen Enterprise but also with NextGen Insights and the data potential. Now to reflect on the full year. We’ve made significant progress on the long-term goals we outlined last May, which include building a path to deliver double-digit revenue growth, investing to great operating leverage and demonstrating disciplined capital management.

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Here are some key accomplishments I’d like to highlight. Bookings came in, in line with our plan, growing 9% year-over-year with net new client wins, contributing about 25% of total bookings while continuing to cross-sell our Surround solutions. Revenue for the year grew 9.5%, which was a combination of turning bookings into revenue and maintaining strong client retention, which has been further accelerated by the TSI acquisition. We were one of the first to achieve Cures Act certification and invested in the Upgrades Center of Excellence to give our clients predictably — predictability and best practices throughout their upgrade process. We became a remote-first organization, reducing our facility and carbon footprint, also improving the employee experience, which was recognized by Forbes on Newsweek America for the second year in a row.

We divested our commercial dental assets, which further focused the company on our core mission, and we raised capital through a convertible, which provides us access to dry powder at a favorable cost. It feels like a full year lining us up to achieve our long-term financial goals. Looking forward to next year and the strategic drivers that will lead to sustainable growth. Fiscal year ’24 will be about commercial execution and continuing to invest in innovation, which will carry momentum into fiscal year ’25 and beyond. I’d like to talk about some of the areas we are investing in to deliver sustained organic growth. We will continue to scale our investment in the enterprise data cloud in partnership with AWS and Snowflake to deliver a broad set of data solutions to our customers.

We will work with our clients to unlock the value of their own data and make it seamless to integrate with third-party data and test new monetization models. This will ultimately become a flywheel for innovation, improving our speed to market and ability to impact client outcomes. I’m also excited for the opportunity we see in interoperability, both the migration to a fully managed interoperability as a service in the cloud as well as the ability to support international clients who also have scaled needs. We will be focused on enhancing our value-based care analytics capabilities and clinical operations support to help providers 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 providers’ current systems of use like the EHR will be a differentiating capability for enabling providers to take on risk. And finally, we will continue to focus on removing friction out of the physician experience with investments in mobility and voice enablement. I’m confident that with our strong position in the market, our highly engaged and committed client base and these new organic growth initiatives, we can sustain mid- to high single-digit revenue growth, which provides a solid foundation to layer on inorganic effort to reach our 10% plus revenue growth target. Touching on M&A. Our corporate development team is busy building and maintaining an active pipeline of opportunities.

We see opportunity to further accelerate growth, especially related to NextGen Insights where the right acquisition could gain access to new capabilities and solutions we can sell back into our well-established commercial channel. And of course, we will continue to be prudent when considering strategic and financial fit during the M&A process. 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. Before diving into the fourth quarter results, I would like to comment on our fiscal year 2023 accomplishments. As David mentioned, total revenue of $653.2 million increased 9.5% compared to last year and was ahead of our full year guidance updated in January. Subscription services revenue of $184 million grew 13.2%. Managed services revenue grew — of $129.1 million, grew 15.9%. And transaction and data services revenue of $127.2 million grew 15.6%. Software revenue of $27.9 million declined 11.6%. On a GAAP basis, fully diluted net loss per share was $0.04 compared to a net earnings per share of $0.02 a year ago. On a non-GAAP basis, fully diluted earnings per share of $0.98 compared to $0.98 in the prior year.

These results reflect strong execution on the commercial side and deliberate cost management efforts balanced against the investments made to support long-term growth plans. Now turning to the fourth quarter results. Total bookings came in at $45 million. This represents a 9% increase from the fourth quarter of last year and slightly above the prior quarter. There were 4 $1 million deals in the quarter. As a reminder, bookings represent the annual contract value, excluding renewals. Total revenue for the quarter was $178.6 million, an 18% increase year-over-year. Recurring revenue accounted for $161.9 million or 91% of total revenue. Recurring revenue grew 18% year-over-year. Subscription services revenue of $52 million grew 23.7%. Managed services revenue of $34.5 million grew 24.2%.

And transaction and data services revenue of 36.6% grew 32.9%. The growth was fueled by a combination of revenue from acquisition of TSI plus acceleration of organic solutions. Nonrecurring revenue for the quarter was $16.6 million, an 18% increase compared to the same quarter last year and a 26% increase from last quarter. Software revenue at $8.5 million came in higher than the prior 6-quarter trend and exceeded our internal forecast largely due to a transaction where an existing client expanded licenses to consolidate acquired practices on our solution. Gross margin of 47.3% was down approximately 250 basis points compared to the same quarter last year, but modestly better than last quarter. As discussed on last quarter’s earnings calls, we have made significant investment in our Upgrades Center of Excellence and professional services as well as a shaft in product mix.

Margin improvement will continue to be a focus, and spend related to Upgrades Center of Excellence should start to moderate towards the end of fiscal year ’24. Turning to operating expenses. Net R&D expense was $20 million for the quarter. This is 1.6% decrease compared to the same quarter last year, which included several onetime pull-forward investments. SG&A of $83.3 million increased by 67% compared to the same quarter last year, largely because of a $35 million accrual for settlement of the DOJ matter. As noted in the earnings press release, we have an agreement in principle with the DOJ subject to final approval by them resolving all claims against the company related to our previously disclosed investigation and key TAM lawsuit. We accrued approximately $32 million in anticipated settlement expense and $3 million in legal fees and costs related to the mediation and settlement.

We do not anticipate a corporate integrity agreement as a result of this settlement. We expect to finalize the agreement soon and look forward to putting this behind us. Our non-GAAP tax rate for the year was 20%, and we plan our non-GAAP tax rate for fiscal year ’24 will be 21%. On a GAAP basis, Q4 diluted net loss per share was $0.38, which includes the DOJ settlement accrual, compared to a net income of $0.01 per share for the same period a year ago. On a non-GAAP basis, fully diluted earnings per share for the fiscal fourth quarter of 2023 was $0.31 compared to $0.19 in the year ago quarter. Turning to the balance sheet. We ended the fiscal fourth quarter with $238.3 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 $600,000. We did not repurchase shares in Q4, which means for the full fiscal year, we repurchased 2.7 million shares of common stock for a total of $49.9 million. And as of March 31, 2023, we have $74.3 million remaining in our share repurchase authorization. We plan to opportunistically assess share repurchases as a means of offsetting shareholder dilution from employee stock compensation with deploying capital to support M&A as the top priority for capital allocation. Turning to our fiscal 2024 financial guidance. As noted in the press release, we expect fiscal ’24 total revenue to be in the range of $712 million to $722 million, which represents a year-over-year growth of 9.8% at the midpoint.

Moving to our profitability targets. We expect adjusted EBITDA to be in the range of $125 million to $131 million and a non-GAAP EPS range of $1.04 to $1.11. In closing, I believe the company is well positioned to meet our long-term objectives based on our strong bookings performance, operational execution and disciplined deployment of capital for smart acquisitions like TSI. 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, and 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. Our ability to deliver sustained revenue growth and create a scalable infrastructure comes from our people and culture and our ability to deliver value to the clients we serve. As always, I’m incredibly proud of the commitment and care shown by the NextGen family and their ability to drive results, both to each other and to our clients. This concludes my comments. Let’s move to questions. Operator?

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Q&A Session

Operator: [Operator Instructions]. And our first question will come from Stephanie Davis with SVB Securities.

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

Operator: Our next question will come from Jeff Garro with Stephens.

Operator: Our next question will come from Jailendra Singh with Truist Securities.

Operator: Our next question will come from Vishal Patel with Piper Sandler.

Operator: Our next question will come from George Hill with Deutsche Bank.

Operator: [Operator Instructions]. And at this time, there are no further questions in the queue. So I would like to turn the call back over to management for any additional or closing remarks.

David Sides: Thank you all for attending the call and your continued interest in NextGen Healthcare. Have a great quarter and a great year. We look forward to more to come in fiscal year ’24. This concludes our call.

Operator: Thank you, ladies and gentlemen. This concludes today’s call, and we appreciate your participation. You may disconnect at any time.