NextGen Healthcare - Q2 2023

Transcript

Operator (participant)

Good day, everyone, and welcome to today's NextGen Healthcare Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one keys on your touch-tone phone. Please note that this call is being recorded and that I will be standing by should you need any assistance. It is now my pleasure to turn today's program over to James Hammerschmidt, Senior Vice President of Finance and IR. Sir, please begin.

James Hammerschmidt (SVP of Finance and Investor Relations)

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 reconciliation 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 call over to our President and CEO, David Sides.

David Sides (President and CEO)

Thank you, James. How time flies. It's hard to believe I recently passed the one-year anniversary as CEO at NextGen. It's also hard to believe that we are more than halfway through fiscal year 2023. Let me start by saying that we have improved confidence, and due to our consistent execution and client results, we are increasing our outlook for the remainder of the year. Our updated guidance implies that we will have made up for the lost revenue and earnings from the commercial dental divestiture we announced last call. In my prepared remarks today, I will touch on three areas supporting our positive outlook. Number one, our ability to execute. Number two, our clients. Number three, our approach to capital allocation. Let's start with execution. Bookings were solid for the quarter with five flagship deals over $1 million.

Net new client wins accounted for approximately 20% of total bookings as our differentiated value proposition aligns with the needs of integrated care organizations, federally qualified healthcare organizations, behavioral health, ophthalmology, and orthopedic practices. These clients are purchasing multiple solutions at once, and we continue to have success selling the surround into the base. As a reminder, our surround solutions include the patient experience platform, patient pay, virtual visits, mobile, population and financial analytics, managed cloud services, and revenue cycle management. We remain on track to achieve our target of $100 million in contracted annualized recurring revenue for surround solutions by the end of fiscal year 2024. Client adoption of patient payment and engagement solutions has materialized faster than originally planned.

Testament to the investments we're making to modernize our revenue cycle capabilities and provide an end-to-end solution for managing payments, coding, and clearing house services. We believe there is real upside here, which should lead to increased penetration into the base. As the first EMR to be 21st Century Cures Act certified, we've made investments in our upgrade center of excellence, tooling and automation, and best practices to support our clients as they migrate to the latest version. We are pleased to announce that as of today, we are nearing 400 NextGen Enterprise clients live on the latest Cures compliant version, well ahead of the submission deadline. We believe this provides a timely competitive advantage, especially as it relates to the smaller end of the market, which is why we're also very excited to announce that we've received confirmation of Cures Act certification for our NextGen Office solution.

Our base has the ability to be compliant more than a year before the deadline, giving them ample time to upgrade without undue pressure. We can now turn our attention fully to deliver on next-generation improvements for the provider experience while others are still working on certification. Our pipeline is strong with net new prospects, sizable cross-sell, and inside the base expansion opportunity. The underlying strength of our commercial team, current working set of opportunities, and solid client retention supports our confidence that growth will further accelerate in the fiscal second half, which carries into fiscal 2024, given the recurring nature of our business. Now moving on to our clients. We are strongly encouraged by the engagement we see in our base. They truly want us to win.

In September, we had an executive roadshow where the top leaders in our organization, including myself, spent a month on the road meeting with over 100 clients to understand their practice strategy, challenges, and opportunities for us to serve as their strategic advisor. This was also a great opportunity for us to both listen and share our own vision, strategy, and multi-year roadmap. These conversations reaffirmed that we are focused on solving the top issues faced by the market. In just under two weeks, nearly 2,000 client leaders will convene in Nashville to kick off our annual user group meeting. The event will be in person for the first time since 2019, and the enthusiasm is high. The theme of UGM 22, Better Healthcare Outcomes For All, embodies our company vision.

We intend to partner with our clients and help them improve patient engagement, reduce physician burnout, target higher-risk patients to close gaps in care, assume risk and value-based care models, exchange and utilize meaningful health data, and achieve better financial outcomes. We plan on showcasing results from our NextGen Community Health Collaborative, where a group of highly innovative clients have partnered with us to leverage NextGen's vast data pool, representing the largest footprint of community health center data assembled to date. We've launched Insights as a service on the back of our enterprise data cloud to streamline outcomes reporting and benchmarking of clinical quality and operational measures for members of the collaborative to inform best practices and truly drive results. Speaking of results, we'll also be discussing the Medicare shared savings results from a group of NextGen ACO clients who utilize our value-based care solutions.

These clients were able to generate $81 million in total Medicare savings and $41 million in shared savings, 33% increase compared to the prior year. We're just starting to unlock the power of NextGen Insights, and I'm excited to share more about our progress as we get closer to fiscal year 2024. Lastly, moving on to our capital deployment effort, we continue to manage capital in a disciplined and thoughtful manner. Last quarter, we announced the divestiture of our commercial dental business, which we considered a non-core part of our portfolio. This helped to strengthen our balance sheet and provided us with increased flexibility to pursue attractive acquisition opportunities. As of today, we have effectively transitioned the core dental operations to the new owner, and our team is now solely focused on our core strategy, serving the integrated needs of the ambulatory care market.

When we look at buy, build, partner, our approach is to focus on return on invested capital, where we not only look at traditional mergers and acquisitions, but also leverage strategic business development partners where we're able to generate an attractive return. Our corporate development pipeline is active as we continue to look opportunistically at M&A as a means of broadening our portfolio, expanding our share of wallet, gaining market share, unlocking new markets, assessing new capabilities, and driving efficiencies through vertical integration. Today, we announced an update and extension to our share repurchase program, allowing the company to continue returning capital to the shareholders. This is just one of many examples of how the refreshed board and management team are acting on the lessons learned from the proxy contest just one year ago. Now I'll turn to Jamie to provide details on the financials. Jamie?

Jamie Arnold (CFO and EVP)

Thank you, David. Now turning to the second quarter financial results. Bookings came in at $37.4 million, down 4% from the same period a year ago, but largely in line with our expectations for the first half of the year, given the difficult comparison to Q2 FY 2022. New client wins accounted for approximately 20% of bookings this quarter, and we continue to see strong demand for our solutions. Total revenue of $159 million in the quarter increased 7% year-over-year. Recurring revenue accounted for $143.5 million or 90% of total revenue and grew 6% year-over-year due to strong performance in transactional and data services and managed services, and especially patient pay and cloud-managed cloud services offerings.

I want to remind our listeners that the prior year financial results included a full quarter of commercial dental operations compared to one month this quarter. On a pro forma basis, our total revenue would have increased approximately 8%, and recurring revenue would have increased 7%. Non-recurring revenue of $15.9 million increased by 17% over the last year, where we saw strong growth from non-recurring services, which were up 43% year-over-year. We expect this revenue line will continue to show strong growth throughout the remainder of the year. Software and hardware revenues will continue to be lumpy on a quarter-by-quarter basis, but are expected to be flat to declining in aggregate.

Gross margin of 48.2% was down 310 basis points compared to the same quarter last year, but up 40 basis points compared to the prior quarter. This trend, which we discussed on last quarter's call, is due to a combination of several factors, including investments in our upgrade center of excellence and product mix shift. Margin improvement will continue to be a focus and spend related to upgrades should start to moderate in fiscal year 2024. Turning to operating expenses, SG&A of $44.9 million decreased by 30% compared to last year, when the company incurred significant expense related to the proxy contest and other legal matters.

Net R&D expense of $20.9 million, which represents 13% of total revenue, increased $2.3 million or 13% from a year ago as we continue to invest across our three domains. We had a GAAP tax provision of $5.7 million this quarter with a GAAP effective tax rate of 29.5%. Our non-GAAP tax rate remains at 20%. On a GAAP basis, Q2 fully diluted net income per share was $0.20 compared to a net loss of $0.10 per share in the fiscal second quarter of 2022. Note that Q2 fiscal 2023 benefited from the sale of commercial dental. On a non-GAAP basis, fully diluted earnings per share for the fiscal second quarter of 2023 was $0.25 compared to $0.29 in the year ago quarter.

This result is modestly ahead of our first quarter commentary and consensus. Turning to the balance sheet, we ended the fiscal second quarter with $70.7 million in cash and equivalents and no balance outstanding on our line of credit. Free cash flow for the quarter was $28.1 million. We purchased 428,000 shares this quarter for $7.4 million at an average cost of $17.21 per share. Since the authorization of our share repurchase program in the fiscal third quarter of 2022, we have purchased a total of 2.7 million shares for $45.8 million at an average cost of $16.66 per share. As mentioned in our earnings release, we have updated the share repurchase program by extending the term and increasing the authorized amount by $100 million.

Therefore, the company will be allowed to purchase an additional $114 million of its shares outstanding through March of 2025. I want to call your attention to an update in the ongoing regulatory investigation. As noted in our disclosure in the 10-Q we filed today, the United States Attorney's Office recently informed us of the existence of a sealed qui tam lawsuit concerning the issues we have been discussing with their office. We have not seen a copy of the lawsuit because it remains under seal. Because the investigation is ongoing, we cannot discuss it beyond what we have described in our disclosure. Now to our updated fiscal 2023 financial guidance. As noted in the press release, we are increasing our prior guidance for the above-plan revenue growth performance.

We now expect fiscal 2023 total revenue to be in the range of $630 million-$640 million, which represents a year-over-year growth of 6.5% at the midpoint. Moving to adjusted EBITDA, we are increasing our guidance range to between $110 million and $115 million. Our fiscal non-GAAP EPS is now in a range between $0.93 and $0.99. In closing, I am pleased with the continued momentum and diversified growth we generated in the quarter. We will continue to focus on growth as we consider internal and external capital deployment to drive long-term shareholder value. Now, let me turn the call back to David for closing comments.

David Sides (President and CEO)

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. In summary, I'm pleased with this quarter's results, and I'm incredibly proud of the commitment and care shown by the NextGen family, both to each other and to our clients. This concludes my comments, and let's move on to questions. Operator?

Operator (participant)

Thank you, sir. At this time, if you would like to ask a question, please press the star and one keys on your touch-tone phone. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. Our first question will come from Stephanie Davis with SVB Securities. Your line is open.

Stephanie Davis (Senior Managing Director)

Hey, guys. Thank you for taking my question. Congrats on a strong quarter. First big question that surprised me, I'd love to hear a little bit more about the large data exchange strength, given that that's been a sleepier area of the world for a while.

David Sides (President and CEO)

Thanks, Stephanie. The data strength could be a number of factors that are in that line. There's EDI where we're seeing volumes pick up like we've talked about in prior calls above pre-pandemic levels. Our data business and our payments business, which is kind of part of EDI. That line item is one reason we broke it out is we think it'll grow well in the next couple of years. This is the first quarter of that we've broken that out, and we expect that to grow well as we move forward.

Stephanie Davis (Senior Managing Director)

Is that a particular end market that you're focused on where you're gaining a lot of share, or is it the function of maybe outcompeting some of the more legacy platforms given what EDI has been for so many years?

David Sides (President and CEO)

I would say it's more of we've combined these assets together in a way that makes it easy for our clients to uptake these assets, to apply these assets, and by bringing them together, we were able to sell them, you know, relatively quickly, and they turn to revenue more quickly as well as we kind of package multiple things together and get a larger sale at once.

Operator (participant)

Thank you. Our next question will come from Jack Wallace with Guggenheim. Your line is open.

Jack Wallace (Director of Equity Research)

Yeah, thanks for taking my question and congrats on another strong quarter. Just to follow up on Stephanie's question, there was a relationship, the consolidation of the patient pay portion relationship. Was there any benefit from just a more coherent go-to-market with that service, instead of having three internal solutions, now you've got one, follow-up.

David Sides (President and CEO)

Yes. Yes. That's a great question. Sorry, if I didn't answer that well, Stephanie. Thanks for the follow-up, Jack. We've combined these together, so we can get a larger share of wallet and have a integrated solution. To your point, instead of selling three point solutions, we're coming forward and said, "We'll take care of all these functions for you." They're integrated, so it's easy to implement for us. We've spent time, both from a marketing perspective, putting these together, getting our pricing and packaging right, which is one reason we're seeing good uptake.

From an engineering perspective, we've made it easy to send a single interface through to get these benefits instead of, you know, implementing all three of them separately, which would be slower, that value realization for the client, and it's slower for us to get the revenue to come online. We've simplified both, and you're seeing the results of that as we go to market in this line item.

Jack Wallace (Director of Equity Research)

Got you. That's helpful. I want to ask a little about the data insights business and what it would mean for NextGen to get QHIN status in terms of is this gonna be a game expansion event that's going to be an acceleration of go-to-market? What is the, I guess, impact of getting access to incremental source of data in terms of your powering analytics and helping your customers, you know, with their risk-based?

David Sides (President and CEO)

It's a great question. It's part of our insights business. One of the things that we think is really powerful from a client perspective is to bring them faster speed to value. We would help control the endpoints, you know, from NextGen to NextGen and to other, you know, things like pharmacies or other things that are on the network. You know, I was talking to a client last week at a federally qualified health center, and they were, you know, working through when the new pharmacy, you know, opens in their town, they have to then, you know, do work, and it takes them a month or two to get that set up. The Walgreens has been open for a month, so their consumers are unhappy that they're waiting to get that data through.

What we're able to do then with the QHIN is say, "Oh, you want that pharmacy report? I got it." The next practice it opens, "Oh, where do you need to interoperate?" We can do that. We're facilitating that data, and we also then think there's an opportunity with all that data to then do other tools on top of it, like you mentioned, for value-based care. Cause now we know not just the data that's flowing through our client system, but where are the referral patterns? Where is data moving to which pharmacy? How can we make things more efficient?

We think over time, this is more forward-looking, but over time, there'll be opportunities for us, cause of the extensibility of that platform, to add on applications, on top of that QHIN network that'll bring value, to our clients and to others in the healthcare ecosystem.

Operator (participant)

Thank you. Our next question will come from Sean Dodge with RBC Capital Markets. Your line is open.

Sean Dodge (Healthcare Technology Analyst)

Yep. Thanks. Good afternoon. Maybe on the guidance, if you could just bridge for us. You raised the revenue by $8 million at the midpoint. EBITDA target is up by about $1 million, again, midpoint. Does that drop through or kind of the lack of drop through from the higher revenue to EBITDA, is that being affected by Jamie, the mix shift you referenced, or is it just as simple as there's more reinvesting or maybe a little bit more cost inflation than you had initially expected?

Jamie Arnold (CFO and EVP)

It's a combination of the mix shift as well as there is some investment in terms of bringing these revenue streams online.

Sean Dodge (Healthcare Technology Analyst)

Okay.

David Sides (President and CEO)

Our EBITDA margin, it might have been 1.6% compared to 1%, so it wasn't too far off.

Sean Dodge (Healthcare Technology Analyst)

Sure. Okay. Fair point. Maybe just broadly on end market activity. We've heard from other vendors selling into providers that because of pressures or distractions related to the macroeconomy, buying decisions are being delayed, sales cycles are elongating. David, based on your comments, it doesn't sound like that's what you all are seeing. Maybe if you could comment on any change in sales pipeline, pace of buying decisions through your sense. Thanks.

David Sides (President and CEO)

Thanks. I think of that more happening on the hospital side of the healthcare IT system, where I think they're really challenged on the staffing shortages, especially of nurses and the inflationary wage pressure, you know, on labor because of those shortages. When we talk to hospitals, which we don't do very often, but when we do, it does seem like they are pulling back on their capital spend because their OpEx has increased so much. Now contrast that with the average physician office, where there hasn't really been any change in CapEx. They're still in the same office. In fact, they're seeing volumes increase.

For us, those staffing shortages can be a tailwind for our managed services business, which you see has grown nicely this quarter as well, where they may want us to host the application for them in the cloud, or they're looking at revenue cycle outsourcing services. We're seeing a different dynamic, but to comment on the pipeline, we're seeing a strong growing pipeline, and you know, still feel really good about the growth this year.

Operator (participant)

Thank you. Our next question will come from George Hill with Deutsche Bank. Your line is open.

George Hill (Managing Director and Senior Equity Research Analyst)

Good evening, guys, and thanks for taking the question. David, my question is probably the opposite side of Sean's question, though it may also be focused a little bit more upmarket. We're hearing a lot of discussion around EMR vendors trying to take price in the current environment. I guess just as you think about kind of whether it's new clients or renewals, I guess, can you talk about what you're seeing in the pricing environment, whether you guys have the opportunity to take price, whether you're seeing competitors take price? I have a quick follow-up, if you don't mind.

David Sides (President and CEO)

Yeah. That's a good question in this environment. We raised prices earlier this year. We raise them on an annual basis, and we might even talk about it on the call, but CPI at the time, it's hard to believe, but CPI back in January was only 4.1% for the prior year. Now, I don't think any of us expect that's where it's gonna be in January of next year when we get to that next pricing milestone. Our contracts allow us to price through that capability. We are seeing in the market some competitors raise prices by, you know, fairly healthy amounts. We see that as an opportunity for us to gain market share at a price that still works for us.

One of the reasons is some of the investments we're making are trying to lower our operating expenses so that we have room for that. I think that could be an opportunity. We will probably raise prices where we're contractually allowed to, just like we did this year. You know, from the overall environment, I think there's not a lot of resistance to price increases so far that we've seen. It's been fairly elastic.

George Hill (Managing Director and Senior Equity Research Analyst)

Okay. That's helpful. Just the quick follow-up is on the expansion of the share repurchase opportunity or share repurchase authorization. It's great that you guys are buying back stock here. I guess I would just love to hear your comments on what you're seeing in the M&A environment and kind of asset prices given where the market is right now and whether you guys feel like you're seeing interesting opportunities in the M&A market, or should we take the expansion of the authorization? Is that kind of signaling out there?

David Sides (President and CEO)

I wouldn't combine the two just due to the cash flow generation capability that's in the business. We had a good cash generation quarter last quarter. To your question, we are seeing asset prices become more realistic. I think that's partially because at the high end of the high yield debt, it's difficult to get that instrument placed in this upward interest rate environment for private equity and others. We have less kind of natural competitors in the market. We're bullish on the ability to go do acquisition.

At the same time, last year was when we had authorized its original share repurchase, so it naturally came up, and we looked at our forward cash needs and said, "You know, let's just authorize this for a little bit longer than the last time." That kind of roughly equated to the same amount. I think you'll see, you know, similar kind of spend will be opportunistic, but our preferred use of capital is for acquisition.

Operator (participant)

Thank you. Our next question will come from Jessica Tassan with Piper Sandler. Your line is open.

Jessica Tassan (Director and Senior Research Analyst)

Hi. Thank you so much for taking the questions. I think we were interested to know on the enterprise side, you were obviously the first to achieve the Cures Act certification in March of 2022. In the first six or so months of that certification, how did your head start kind of convert to net new share? I think you said 20% of bookings were net new customers, but just how much of that was related to the enterprise EHR?

David Sides (President and CEO)

Yeah. Thanks, Jessica. Welcome to the call, as well. Appreciate the question and you joining. From the perspective of where we are in that cycle, we're through a lot of our base, almost, you know, a third of the base is now on that version. In net new, it's not showing up yet as much as we'd like. What I mean by that is I think people are hoping that the government's either gonna delay the penalties from next December or that, you know, their current provider will, you know, come through at the end and be compliant. What we've talked to clients about is that even if they became compliant in three or four months, to get through all the upgrades of their base is gonna be difficult.

We feel good about our position, and in fact, we have discussions with potential clients around rather than upgrade with your current, we'll switch you in the same timeline, and you'll have certainty. Because with hundreds of clients on the Cures Act certified version, you know, you have less risk than if you're, you know, in the first 50 clients to take the upgrade from someone else. I think we should see tailwinds from that. If the government delays it may, you know, spread it out over a time period. Otherwise, we're really happy with our positioning, then frees up our R&D resources to work on, you know, more exciting things like provider experience or patient experience or new adjacent products.

Jessica Tassan (Director and Senior Research Analyst)

Got it. Thank you. That makes a lot of sense. Just my quick follow-up would be, where are you guys today in terms of the portfolio review, and any sort of guidance on when that might be complete? Thanks for having me back on the call.

David Sides (President and CEO)

Yep, for sure. We're through reviewing the portfolio. There'll be, we talked about this last time, no further divestitures that we see at this time. From a SaaS perspective, we're on track. Jimmy mentioned it in his piece, but the portfolio is doing well. We've sold about $47 million of the $100 million so far. We're about halfway to our goal, and we're about halfway there timeline-wise. We feel good about that piece, too. We think we have the right assets, and they're resonating in the market and selling well.

Operator (participant)

Thank you. Our next question will come from Jailendra Singh with Truist. Your line is open.

Jailendra Singh (Managing Director)

Thank you, and thanks for taking my questions. A quick follow-up on Sean's question earlier around the macro environment. Just to confirm, are you implying that we should not be reading much into this, new client bookings likely declining from 25% last quarter to 20% this quarter? Staying on the same topic around wage inflation and tight labor market, as you think about your own employee base, how has been your employee retention efforts in this environment? Are you reflecting any wage inflation impact in your outlook?

David Sides (President and CEO)

Thanks, Jailendra, and, welcome to the call as well. Appreciate the question. Yes, to your first question, if I answer in one word, we're not seeing any slowdown in sales or growth, even though we're just a little off from the 25% where we like to be. This was the most large over $1 million sales we had five of them this quarter than we've ever had. That's really good. The downside of having really large deals is they're lumpy. You'll see that, you know, some of those deals are in this next quarter, but we feel good about the full year number and our progress there. With regard to our own employees, that's in our number already.

We've baked in, you know, that increase earlier this year when we started the fiscal year. We're looking at next year and the following year and, you know, thinking about worst case scenario, if you're having to do 8% increases each of the next two years, what kinds of adjustments do we need to make in the business to be sure we hit our, both our growth and profitability goals? We think those are achievable. We are seeing some of that wage inflation. I'd maybe point out as well that we do have a good portion of our workforce outside of the U.S. and India, where, inflation, you know, at the overall is a little bit reasonable or tamped down. We have the opportunity to still cost shift if we need to.

We have levers to be sure that we are being as productive as possible with our salaries.

Jailendra Singh (Managing Director)

Okay, that's helpful. Just a quick follow-up. My follow-up question around the EBITDA in the quarter. Clearly, margins came in much better than expectations, some nice sequential step up as well. Anything in particular to call out in terms of any pace of investments or trends in any other expenses in the quarter compared to your expectations? It seems like R&D expenses were down sequentially, so any color there would be helpful.

Jamie Arnold (CFO and EVP)

I mean, there was a little bit on the margin with last quarter where you get a little bit of toggling of expenses for things like benefits. I mentioned this last time. It was down relative to last quarter, but we're talking a fairly negligible amount. I'm trying to think if there's anything else.

David Sides (President and CEO)

We had a little more software perhaps this quarter.

Jamie Arnold (CFO and EVP)

Yeah, a little more software revenue this quarter, but there is nothing that jumps out to me, Jailendra. I'm trying to think. It's.

David Sides (President and CEO)

That's it. Straight down the middle for the most part.

Operator (participant)

Thank you. Once again, that is star one to ask a question. Next, we have a question from Jack Wallace with Guggenheim. Your line is open.

Jack Wallace (Director of Equity Research)

Thanks for the follow-up. Last quarter, there was some discussion about the implementation maybe hiring. Where are we with regards to the implementation? I think there was also contract labor as part of the line that was burned off this quarter. Was this a fully clean quarter in terms of no contract labor, or maybe a sequential step down from a contribution quarter over quarter?

David Sides (President and CEO)

Yeah, thanks for the question, Jack. Contract labor will, you know, still be in the numbers. That one will continue and then move around just as we get projects completed. Over time, it'll reduce as we get through some of these one-time projects like, you know, moving something to the cloud entirely, or our own implementations of internal software to make ourselves more productive that we've talked about before. As far as the professional services, we're feeling good about that hiring. We have stepped that up. We've taken some concepts like, hiring 20 people at a time and doing a mass onboarding into that group, and that's been really productive to have these kind of velocity classes.

We'll continue that as a way to get those skill sets ramped up quickly and then allocate them into the professional services org. Our backlog continues to grow. We've got a backlog to work through that's highly visible. We've gone through it, and it's all real. That's really encouraging. You'll continue to see, you know, a reasonable growth in the professional services business on a non-recurring basis as we work through projects.

Jack Wallace (Director of Equity Research)

Gotcha. That's helpful. Thank you.

Operator (participant)

Thank you. Our next question will come from Anne Samuel with J.P. Morgan. Your line is open.

Anne Samuel (Executive Director)

Hi, guys. Thanks for the question. Mine's a follow-up on Jessica's question about interoperability. I was wondering if maybe you could talk a little bit about what does drop dead look like next December if other competitors aren't certified, and how are you messaging competitively around that?

David Sides (President and CEO)

Yeah, thanks, Annie. It looks like it's gonna be penalty, right? You'll start to pay penalties as a provider if you're not certified. The other, you know, potential problem is you could have people, you know, consumers or, you know, others say, "You're not giving me my data. You're blocking my data, my interoperability." You know, that's. We'll see how that tests out. Certainly the government intends to enforce penalties. You know, we're ready, so our clients will be ready. We believe in this interoperability. We think it actually defragments healthcare and is one way to reduce the price of healthcare.

Our view is that the government will, you know, continue to move forward with this because the law was written in 2015, so they gave providers and people such as our your software providers and the physicians 8 years to comply. It's. The government has already issued things from CMS saying, you know, "After seven years, we expect you to be able to demonstrate this." I think that's fairly reasonable. We'll see how it plays out, but I think competitively it'll play out if others aren't able to get them there that people will switch at some point if their supplier can't afford to make the investment in meeting regulatory hurdles.

Anne Samuel (Executive Director)

That's really helpful, Colin. I guess maybe just a follow-up to that. You know, you had said previously that you were kinda the first to get, you know, Cures Act certified. Have you seen anyone, you know, else move to do that, or are you still, you know, the only one?

David Sides (President and CEO)

There's another. You can look on the CHPL, on the government CHPL website. There is one other that's out there now, but so far it's just us. They have a lot of market share, more on the hospital side. You know, really, everyone should be, right? I'm kinda surprised that people are so slow to adopt the standard, but we'll see. It's a competitive advantage for us, and we'll use it as we can.

Operator (participant)

Thank you. That does conclude our question and answer session, and I would now like to pass it back to David for any additional or closing remarks.

David Sides (President and CEO)

Thank you again for your interest in NextGen Healthcare. Really appreciate the questions, and we had a really good quarter. We'll talk to you again next quarter. Thanks.

Operator (participant)

Thank you, ladies and gentlemen. This does conclude today's teleconference, and we appreciate your participation. You may disconnect at any time.