NextGen Healthcare - Q4 2022

Transcript

Operator (participant)

Today's call is being recorded, and I will now turn the call over to Matthew Scalo.

Matthew Scalo (VP of Investor Relations)

Thank you, operator. Before we start, I'd like to remind everyone that the comments made on this call may include statements that are forward-looking within the meaning of the federal securities laws, including, without limitation, statements related to anticipated industry trends, the company's plans, future performance, products, perspectives, and strategies. Risks and uncertainties exist that may cause results to differ materially from those expressed in forward-looking statements, including, among others, those risks set forth in the company's public filings with the U.S. Securities and Exchange Commission, including the discussion under the heading Risk Factors in the company's most recent annual report on the Form 10-K, and any subsequent quarterly report on Form 10-Q. Any forward-looking statements speak only as of today. The company expressly disclaims any intent or obligation to update these forward-looking statements.

Our remarks on today's call include both our earnings results and guidance, which contain certain non-GAAP financial measures. For our earnings results, the GAAP financial measures most directly comparable to each non-GAAP financial measure used or discussed in a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our latest quarterly earnings release that was filed with the SEC and is posted to the investor relations section of our website. This release also provides qualitative descriptions of how we have calculated non-GAAP financial measures contained in our guidance. At this time, I'd like to turn the call over to our President and CEO, David Sides.

David Sides (President and CEO)

Thank you, Matt, and good afternoon, everyone. Earlier this month, we pre-announced our fiscal Q4 results and issued fiscal 2023 financial guidance and hosted our first investor event as a new management team. We covered a lot of ground during the investor event, providing a clear overview of our business across three domains, Enterprise, Office, and Insights. We highlighted NextGen's top goals, including our path to accelerating revenue growth and our target 10% rate by fiscal 2025. These two longer-term operating leverages and expanding adjusted EBITDA figure and the Rule of Forty performance metric, which combines revenue growth and adjusted EBITDA margin. For those of you who were not able to attend the investor event, I would strongly encourage you to listen to the replay on our website. Now let me turn to my favorite topic, growth.

For fiscal year 2022, NextGen generated 7% revenue growth, an acceleration over 3% growth in fiscal 2021 and 2% in fiscal 2020. This growth was driven broadly across product lines, but consistent with the investor event, I thought I would provide a few comments across each domain. Starting with enterprise, which we define as practices with 10 or more providers, is our largest practice area by revenue. We're growing faster than the industry average, driven by new client wins and further penetration of existing clients with our expanding breadth of solutions. Our success in this market area is built on long-standing and trusted client relationships, which is particularly attractive now with such uncertainty and transition at a number of industry participants.

The last point I'd like to make on our enterprise group is we remain on track with our three-year target of incremental $100 million in bookings from our surround solutions through fiscal year 2024. Now turning to our second domain, office, which focuses on the smaller independent ambulatory practice market. Think of a practice with fewer than 10 physicians, which we service with our multi-tenant SaaS offering. This area continues to grow well, reflecting the strength of our SaaS solution and our success providing managed services and revenue cycle management solutions during a period when many of our clients are struggling with labor shortages. We are confident the office domain can continue to grow double digits as we continue to execute and expand into slightly larger practices and adjacent medical specialties over time. In our third domain, what we call insights, offers significant untapped potential.

We spent considerable time outlining the opportunities in this exciting area at our investor event, so I won't repeat it here. However, NextGen is investing in a number of solutions and strategies across connectivity, analytics, and outcomes that will provide a solid foundation for strong growth in this business over the long term. We enter fiscal 2023 with solid momentum, and our fiscal 2023 revenue guidance of $628 million-$640 million reflects our confidence in continuing to execute on our growth. We are also introducing adjusted EBITDA into our fiscal 2023 financial guidance. I think it's important to call this out as we see this as another step the company is making to improve visibility, particularly as investors now track our progress on the Rule of Forty metric going forward.

My final comment is on the company's disciplined capital deployment strategy. NextGen has an attractive business model that generates positive free cash flow, has a healthy balance sheet, and access to significant capital. We continue to have a board-approved share buyback program in place, and we envision other business development activities, such as M&A, to contribute to our longer-term growth goals. With that, I'll ask our CFO, Jamie Arnold, to provide the details on fiscal Q4 and our outlook.

Jamie Arnold (CFO)

Thank you, David. Before diving into the Q4 results, I would like to comment on our fiscal year 2022 accomplishments. Total revenue increased 7% compared to a year ago. Subscription services revenue of $162.6 million grew 10% as clients continued to adopt our surround solutions. Perpetual software licenses grew approximately 9%, primarily due to our success partnering with existing clients who want to standardize on and broaden the use of NextGen across their enterprise. On a GAAP basis, fully diluted earnings per share was $0.02 compared to $0.14 a year ago. Recall that in the first half of fiscal 2022, we had significant expenses associated with the proxy contest.

On a non-GAAP basis, fully diluted earnings per share was $0.98 compared to $0.98 in the prior year and ahead of our full-year guidance provided at the start of the year. These results are a strong reflection of execution on the commercial side and deliberate cost management efforts put into place at the onset of the pandemic, balanced against investments made to support long-term growth plans. Now turning to the Q4 financial results. Starting with bookings, which came in at $41.4 million in the Q4, an increase of 18% on a year-over-year basis. We saw strong demand for professional services and managed services, particularly patient pay.

New client wins accounted for close to 25% of bookings for the quarter based on outstanding bookings from inside the base, and we expect the return to excess of 25% throughout the new fiscal year. We closed several seven-figure transactions in the quarter from both existing and new clients, both of which are focused on adopting the full portfolio of offerings we provide all in. NextGen is partnering with clients that are moving away from managing multiple different legacy systems and upgrading to our fully integrated and scalable solution. This is the case with David's example of independent provider-led consolidation. In other instances, we are working with existing clients to add NextGen surround solutions to enhance their productivity and patient experience.

These wins reflect our strong commercial capabilities and ability to execute, as well as the market's growing appreciation of NextGen's core value proposition. We generated total revenue of $151.3 million in the quarter, an increase of 5% year-over-year. Of this total, recurring revenue grew 6% and accounted for $137.2 million or 91% of total revenue and was driven by solid performances in our subscription services, managed services, and EDI businesses. Software subscription services generated $42.1 million in the fiscal Q4, an increase of 10% year-over-year. Growth came from strong performance in NextGen Office and NextGen Enterprise surround offerings such as telehealth and mobile, which enable physicians to better engage their patients and improve the patient-provider experience.

Managed services revenue of $28.9 million grew by 7% due to continued strength in our managed cloud services as well as solid performance in revenue cycle management. Q4 client encounter volumes were ahead of our expectations. EDI and data generated $26.4 million in revenue this fiscal Q4, up almost 3% over the year ago period as transaction volumes remained strong. Software maintenance and support revenue of $39.9 million was up approximately 4% over the prior year period. This reflects strong client retention and some upside from large expansion clients continuing to pursue a perpetual license and maintenance model. Non-recurring of $14 million or a decrease of 5% over the same quarter last year, reflecting the lumpiness of contract timing we have mentioned in the past.

Turning to operating expenses, SG&A of $50 million increased by 2% compared to a year-ago period. Tight cost controls in G&A offset increasing investment in sales and marketing. For modeling purposes, please be aware of the timing of certain events like our national sales meeting or large client user group that did not happen in person in the year-ago period. This will create lumpiness in our fiscal Q4 and Q1. As David alluded to earlier, we had some nice wins from new and existing clients early in the quarter, which allowed us to pull forward spending on investments we see as having a high return on investment. These include robotic process automation and overall process improvement activities, as well as investments related to both our Office and insights domains.

A number of these projects kicked off in the fiscal Q4 and continue into the Q1 and then begin to roll off in the Q2. Net R&D expense of $19.4 million decreased $2 million from a year ago due to a higher capitalization rate, 28% in the current quarter, 21% in the previous year. Fiscal Q4 gross R&D spend represents 18% of total revenue, and net R&D spend represents 13% of total revenue. Our GAAP tax rate was approximately 85%, with non-GAAP tax rate of 20%. On a GAAP basis, Q4 fully diluted net income per share was $0.01 compared to a loss of $0.01 per share in the fiscal Q4 of 2021.

On a non-GAAP basis, fully diluted earnings per share for the fiscal Q4 of 2022 was $0.19 compared to $0.21 in the year ago quarter. Now, turning to the balance sheet. We ended fiscal Q4 with $59.8 million in cash and equivalents and no balance outstanding on our line of credit. Our cash balance rose just over $10 million compared to the fiscal Q3 due to strong operating cash flow. We did not buy back any shares in the fiscal Q4. We believe our positive momentum provides ample capacity to return cash to shareholders while continuing to execute on our growth strategy. DSOs in the quarter were 46 days, a decrease of three days from the same period last year, but an increase of three days from the fiscal Q3.

Free cash flow from this quarter was $8.7 million, reflecting strong year-end operating activities partially offset by capitalized software costs. On to our fiscal 2023 financial guidance. As noted in the press release, we are confirming the guidance that we provided at our investor event two weeks ago. As David mentioned in his prepared remarks, we are adding an adjusted EBITDA metric into the guidance to improve visibility into our Rule of Forty commentary going forward. Let me review the main components of our fiscal year 2023 financial guidance. Fiscal 2023 revenue is to be in a range of between $628 million and $640 million, or 5.3%-7.3% year-over-year growth. Key drivers in our enterprise domain include subscription services, managed services, and revenue cycle management.

Within our office domain, we continue to see consistent growth in the core, which is offered as a multi-tenant SaaS, RCM upsell, and other managed services, which includes chronic condition management. In Insights, we believe various initiatives around connectivity discussed at our recent investor event are expected to start to impact our results in the second half of fiscal 2023. The timing of Insights growth in fiscal 2023 is important. For modeling purposes, we would expect the second half of fiscal 2023 to reflect higher year-over-year growth than the first half due to incremental momentum in Insights and easier comparisons with the year ago period. To aid in your models, we are forecasting growth in the first half of 2023 to be in the range of 4%-6%.

Gross margins for fiscal year 2023 are expected to compress slightly as product mix shifts leans more towards lower margin services, and we absorb a full year of investment in areas such as centers of excellence, R&D, and sales infrastructure. Our cost of sales expense growth will level off in the back half of the year and then be in a position for attractive leverage in fiscal year 2024 and beyond. We continue to make ongoing investments in sales and demand generation and R&D to enhance our offerings. These investments will accelerate through fiscal year 2023 before leveling off in fiscal year 2024. Our adjusted EBITDA guidance is for $111 million-$116 million, which compares to $114.5 million or 19.2% of total revenue in fiscal 2022.

We confirm our fiscal 2023 non-GAAP EPS guidance of $0.95-$1.01. Now factoring in our earlier comments on mid-single-digit revenue growth in the first half of fiscal 2023, combined with slight compression of gross margin and increased R&D spend in the fiscal Q1, we arrive at non-GAAP EPS ranges for the first fiscal quarter in the mid-teens. We expect this EPS level to improve progressively throughout the fiscal year. In closing, I am pleased with the overall momentum and diversified growth we generated in the quarter. We will continue to focus on profitable growth as we consider capital deployment, both internally and externally to drive long-term shareholder value. Now let me turn the call back to David for closing comments.

David Sides (President and CEO)

Thanks, Jamie. Certainly has been a busy May for us here at NextGen, but based on the overwhelmingly positive feedback from our investor event, I'd say it's well worth it. I'll wrap up today's call by reiterating the company's focus on driving, accelerating, and profitable growth. We have the right leadership, a clear strategy, and attractive assets to go after high-growth market opportunities. We will continue to make the right investments that position NextGen to win now and in the future. With respect to fiscal 2023, we would expect these investments to have a bigger impact in the early part of the year. Lastly, I wanted to congratulate Jamie Arnold for receiving a Lifetime Achievement Award by the Orange County Business Journal.

Great to see Jamie being recognized for attributes we see every day. Your commitment to NextGen's mission and contribution to the company's overall success over the last six years is undeniable. Thank you, Jamie. We've got a lot more work for you, so don't even think about playing that back nine for a few more years yet. This concludes my comments. Let's move to questions. Operator?

Operator (participant)

To ask a question, you will need to press star one on your telephone keypad. To withdraw your question, please press the pound key. In the interest of time and to get to as many questions as time permits, we ask that you please limit yourself to one question and one follow-up. We'll pause for just a moment to allow questions to queue. We will take our first question from Jeff Garro with Piper Sandler. Your line is open.

Jeff Garro (Former Equity Research Analyst)

Yeah, good afternoon. Congrats on the quarter, and thank you for taking the questions. I wanna start off by asking about bookings. Now, you end the last fiscal year growing bookings 18%, well ahead of your revenue growth target. You know, and I think longer term, we would expect bookings growth to converge with revenue growth targets. Based on what you see in the pipeline, is the bias for FY 2023 bookings more towards recent momentum extending or that tougher comparables are a headwind to above target bookings growth?

David Sides (President and CEO)

To answer your question, Jeff, I think we expect double-digit bookings growth in 2023 as well. Maybe not quite as much as last year, just given it's above next year, so maybe in the mid-teens. It should still be growth above last year.

Jamie Arnold (CFO)

You know, sorry, let me correct. Our target for next year will be for growth. It's gonna be close to, you know. We're projecting somewhere in the 8%-12% range there for bookings. We're not giving guidance on bookings. We are expecting it to continue to grow next year.

Jeff Garro (Former Equity Research Analyst)

Oh, fair enough. Sounds like the momentum is continuing near term, so good to hear there. Then maybe to dig a little bit deeper into the FY 2023 outlook, I want to ask what the areas of potential variability are in the revenue guidance. I guess, you know, maybe more specifically, what are the assumptions around client retention, implementation pacing, and client patient volumes?

David Sides (President and CEO)

We're taking kind of a consistent approach to last year's retention into 2023. Some of the things that could lead to variability are if we can hire to fill services positions to generate revenue from our services side more quickly. We're focused on, we've got quite a backlog of services that we can train people more quickly, onboard people quickly and get to those services. To answer your question on retention, we're assuming same level as last year, and some of the variability could be around, you know, either the usual lumpiness of license software sales, if that happens for existing clients, and services, if we can fill those roles and hire more quickly to actually deliver those services. Jamie?

Jamie Arnold (CFO)

I mean, the area that has the most potential variability would be the software line. And that's an area that we focus on because it not only affects the revenue, but it's because it has such high gross margin, you know, it would affect. We are, you know, to be clear, you asked the question, I think, Jeff Garro, about volume, and I would say we're assuming that there won't be any change either to the negative related to the volume. We seem to have largely recovered from COVID. We've been running for better than four quarters now, and they're back to, you know, pretty much pre-COVID levels. Our assumption is that that's gonna continue and that we won't see a dramatic change because of, you know, something like COVID again.

Jeff Garro (Former Equity Research Analyst)

Makes sense. Thanks again for taking the questions.

Jamie Arnold (CFO)

Yep.

Operator (participant)

We will take our next question from Stephanie Davis with SVB Securities. Your line is open.

Stephanie Davis (Former Managing Director and Senior Research Analyst)

Hey, guys. Thank you for taking one of my many, many questions. I was hoping you could give us a little bit more color on just what you're seeing demand-wise on the ambulatory market, just given some of the hospital players coming under cost pressure in this past quarter. Any sort of quick health check and color on how the IT wallet for ambulatory is trending would be super helpful.

David Sides (President and CEO)

We still see good pickup on the ambulatory side. You know, as we mentioned a little bit on the prepared comments, there's a lot of disruption in the industry from some of the other players that, at least in the short term, we think, in the short-medium term is good for us. The market overall is moving, and we've moved into some you know slight adjacencies, so not just physician office or federally qualified health centers, but we're starting to move a little bit into urgent care. We've seen clients look at urgent care offerings with us, sometimes combined with primary care, where they're taking risk. We're also seeing some behavioral health opportunities after our you know initial investments there that could be promising as well.

You know, we like the ambulatory market and some of the moves that we've made to expand the specialties that we support. Not that urgent care is a specialty, but it's a venue. Behavioral health is an additional specialty. It's starting to see some traction in our pipeline.

Jamie Arnold (CFO)

And, and some of the, uh-

Stephanie Davis (Former Managing Director and Senior Research Analyst)

Dovetailing. Oh, continue.

Jamie Arnold (CFO)

I was gonna say, Stephanie, that the other thing is that some of the practices that have been consolidating, you know, there are consolidators in the ambulatory space. We have seen continued interest from them, particularly based on the strength of our practice management system. That we see as a positive as we go into the new year.

Stephanie Davis (Former Managing Director and Senior Research Analyst)

Dovetailing on that answer that you guys gave, we also have seen some other blow-ups in the space, the greater than quarter on increased competition of some of the new-age disruptors that's gotten a lot of private market funding. Now, I haven't heard a lot about that from you guys, but there are still some private market players competing with you. I'd be curious what you're seeing in the market and kind of how you're still competing well.

David Sides (President and CEO)

Yeah. We're not, I guess we're not seeing, you know, that level of competition necessarily, or any new entrants so far. It's really, you know, then any of those consolidators, for us so far, have been a tailwind in that we're picking things up. We even have an example from last quarter where we were talking to a group that then got acquired, and they took NextGen into the acquisition. We went up the other way, which was really good for us. The acquirer had multiple systems. When they acquired a client of ours, they brought in kind of this really strong, you know, NextGen as a way to move that part forward.

The value prop for us of you know being able to do a better job with billing and financials is really resonating with some of those buyers, which is why when they acquired a company that used NextGen, they actually took it into the acquired company. That was a great win for us that was unexpected and meaningful. The goal is that trend continues as we start to demonstrate value and really put the you know outcomes that we've achieved for clients and aligning with them to go forward with them.

Stephanie Davis (Former Managing Director and Senior Research Analyst)

Super helpful. Good to be a consolidator in this market. I'll hop back in the queue.

Operator (participant)

We'll take our next question from Jack Wallace with Guggenheim. Your line is open.

Jack Wallace (Equity Research Analyst)

Hey, thanks for taking the questions. Wanna talk about bookings and, you know, the pipeline a bit. You know, David, you mentioned that there's a number of all-in deals this quarter. When you're looking at the pipeline, are we seeing more momentum for the all-in deals? I got a couple follow-ups on that.

David Sides (President and CEO)

I'd say the pipeline looks robust. You know, came out of our largest sales quarter in recent history last quarter. That continues. Usually, it's the Q3 that's gonna be a little bit lighter for us, so we expect good results this quarter, as well and go through the year. I don't know what other color you'd like on the pipeline, Jack, but I can, you know, kind of give you some more specifics.

Jack Wallace (Equity Research Analyst)

Yeah. When you're saying all in, what's interesting to me there is that that includes the insights business and specifically with the insights suite of services there, you know, how much of that was a, you know, the shiny service, the, you know, the real benefits of going all in, and I'm assuming this is a competitive replacement, you know, how much of, you know, those capabilities, you know, was the deal maker?

David Sides (President and CEO)

So far, not much. I'd love to tell you that it's moved those deals, but most of those deals have been moving, you know, our sales cycle of, you know, six to nine months. Most of those deals have been moving without the analytics. I think it'll start to be. The goal is it's an accelerant as we get more demos to clients that we're starting new or at the end stage now. But, you know, the nice thing from a consolidation perspective overall in the ambulatory is people are looking for a reduction in the number of suppliers that they have. When we come to them with one offering that's hosted with our revenue cycle management, all the virtual visits, and analytics together, we're winning, especially net new clients.

We're trying to take up as much of the space as possible in the first win. That's been a great tailwind to us. I think the analytics should be additive. We've developed some of that analytics with a couple of our really progressive clients, have already moved it into another couple clients. We're seeing good movement there. You'll see the insights needle really moving growth toward the end of 2023.

We may add in, you know, some number here early, but I agree with you that it is actually helping to get everything in the first time, especially for new clients, when we're winning there, that's a differentiator for them because then they don't have to go and, you know, buy, you know, some third party like Tableau or something else and try to put that on top of it, right? We're bringing the whole solution at once. I think it makes it simpler for these practices to be able to do everything they need to right from the start.

Jack Wallace (Equity Research Analyst)

Gotcha. That's helpful. Just to confirm, when the insights, the bookings convert to revenue, which of the revenue segments does that hit?

David Sides (President and CEO)

Insights should mainly hit subscriptions for the most part.

Jamie Arnold (CFO)

There'll be subscriptions, and there will be a services component to that. You'll get both subscription revenue as well as some service revenue associated with it, depending on what the client needs from us.

Jack Wallace (Equity Research Analyst)

Gotcha. That's helpful. Thank you.

Operator (participant)

There are no further questions at this time. I'll turn the call back over to David Sides for closing remarks.

David Sides (President and CEO)

Thank you again for your interest in NextGen Healthcare. We look forward to speaking with you again at the end of July. That concludes today's call. Take care, everyone. You can now disconnect.

Operator (participant)

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