Exhibit 99.1
QUALITY SYSTEMS INC.
Moderator: Louis Silverman
05-27-04/12:00 pm CT
Confirmation #7753338
Page 1
QUALITY SYSTEMS INC.
Moderator: Louis Silverman
May 27, 2004
12:00 pm CT
Operator: Good afternoon, my name is Angela. And, I will be your
conference facilitator. At this time, I would like to
welcome everyone to the Quality Systems Fourth Quarter and
Fiscal Year 2004 Earnings Conference Call.
All lines have been placed on mute to prevent any
background noise. After the speaker's remarks, there will
be a question and answer period. If you would like to ask
a question during this time, simply press *1 on your
telephone keypad.
If you would like to withdraw your question, press *2 on
your telephone keypad. Thank you. I would like to turn the
conference over to Lou Silverman, President and CEO of
Quality Systems. Please go ahead, sir.
Louis Silverman: Thank you, Angela and welcome everyone to Quality Systems
Fiscal 2004 Fourth Quarter and Year End Conference Call.
Joining me on today's call, as per usual, are Paul Holt,
our CFO; Greg Flynn, the Executive VP and General Manager
of our QSI Division; and Pat Cline, President of our
NextGen Healthcare Information Systems Division.
QUALITY SYSTEMS INC.
Moderator: Louis Silverman
05-27-04/12:00 pm CT
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Please note the comments made on this call may include
statements that are forward looking within the meaning of
the securities laws including without limitation
statements related to anticipated industry trends, the
company's plans, products and strategies, and projected
operating results.
Actual results may differ materially from our expectations
and projections, and, you should refer to our SEC filings
including our Forms 10K and 10Q for discussions of the
risk factors, management's discussion and analysis, and
other information that could impact our actual
performance.
We undertake no obligation to update such projections or
forward looking statements in the future. Please also note
that the company's past performance is not necessarily
indicative of future performance.
For the quarter, the company set new revenue and earnings
records. In the March quarter, revenue totaled $18.8
million up 25% over the prior year. Fully diluted earnings
per share at 47 cents exceeded prior year by 74%.
The quarter's top line results were driven by record
revenue performance at NextGen with $14.7 million in
revenue attained by the division for the quarter
represents a 38% year over year increase.
QSI division had quarterly revenue of slightly more than
$4 million which represented an 8% year over year decline
in top line performance for the division. Company
profitability was driven by strong performance at both the
NextGen division and the QSI division.
Gross margin percentage for the company at 62.5% for the
quarter came in high and outside our historical band.
Operating income at NextGen came in a record $4.8 million
nearly double the prior year's figure.
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Moderator: Louis Silverman
05-27-04/12:00 pm CT
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At the QSI division, operating income of $1.2 million was
15% higher than the prior year quarter despite the year
over year decrease in divisional revenue.
While not used internally as any kind of management
metric, I would point out that quarterly operating margins
were strong at both divisions - north of 32% for the
NextGen division and a little north of 29% for the QSI
division.
EDI revenue for the quarter came in at just under $2.2
million, up 16% over prior year. EDI growth was at 70% for
the NextGen division. And, we had a 6% year over year
decline at the QSI division.
I'll once again remind listeners that EDI revenue is
reported as part of divisional revenue totals each
quarter. As a convenience, Paul Holt will break out
divisional EDI totals among other things as part of his
prepared remarks later in the call.
Corporate expenses for the quarter came in at $948,000
which was 13% ahead of prior year level. Increases in
corporate expenditures, particularly in the areas of
professional services and insurance coverages and to a
lesser extent staffing expenses continue to be the norm.
Looking at fiscal 2004 as a whole, total company revenue
increased approximately 30% to $70.9 million. Fully
diluted earnings per share increased 45% from $1.10 in
fiscal 2003 to $1.60 in fiscal 2004.
Fiscal 2004 revenue for NextGen increased 46% to $54.4
million while the division grew to the point where it
accounted for 77% of total fiscal year company revenue.
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Moderator: Louis Silverman
05-27-04/12:00 pm CT
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In addition to its financial performance, NextGen enjoyed
impressive performance in other areas as well as recent
press releases attest. Pat Cline will go into more details
on these items in his segment of the call.
For the QSI division, fiscal 2004 revenue declined by 5%
from $17.4 million to $16.5 million. However, operating
income increased by 5% from $4.7 to $4.9 million. The
continued expense diligence employed by the QSI team
remains impressive.
For fiscal 2004, corporate expenses increased from $2.9
million to $4 million. Professional service fees were
significant contributors to this increase. Cash and cash
equivalents increased to a record $51.4 million at year
end.
DSO's dropped to 99 days at year end. Collections activity
remained strong during the quarter and the year. Full time
employee head count at quarter end was 319 which taken
with revenues for the quarter generated annualized revenue
per full time employee of $236,000 not quite a record but
certainly at the higher end of our historical band.
There were no stock repurchases during the quarter or the
fiscal year. Note that the company's stock repurchase
authorization expired in September of 2003 actually
September 24 of 2003, the date of the 2003 annual
shareholders meeting.
During the course of fiscal 2004 and continuing on through
to date, the topic of executive compensation including
programs involving equity based compensation has been the
subject of study by the company's Compensation Committee.
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Moderator: Louis Silverman
05-27-04/12:00 pm CT
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The Compensation Committee continues to work on this
important issue. On another board topic, the company's
board of directors has approved the use of 10B5-1 trading
plans by appropriate parties as part of newly approved,
updated insider trading guidelines.
During the March quarter, the company participated in the
Roth Capital Conference and the B (Riley) Conference. The
company also met with investment professionals in San
Francisco, Los Angeles, and Minneapolis during the
quarter.
In closing my prepared comments for this morning's call,
I'd like to point out that the performance of the company
for the March quarter completes a year's performance that
has exceeded our internal expectations, at times by a
significant margin.
I want to express my thanks to the individuals joining me
on this call and our entire team for their performance
during the March quarter and year as a whole. I also want
to again clearly point out the current and/or perspective
analysts and investors that while we are extremely pleased
with the quarter's performance, there are absolutely no
guarantees that the company or either of its divisions
will exceed or even sustain a level of performance turned
in during this quarter in future periods.
It is possible that the quarter's performance will
encourage investors or analysts to set new short, medium,
or long term expectations for the company. In response to
this possibility, please continue to note that we do not
give out financial guidance to the investment community,
and, we do not comment on the guidance advanced by members
of the financial community. I'll now turn the call over to
Paul Holt, CFO for additional financial details on the
quarter.
QUALITY SYSTEMS INC.
Moderator: Louis Silverman
05-27-04/12:00 pm CT
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Paul Holt: Thank you, Lou. This quarter reflected continued strong
performance in both systems sales and maintenance and
other revenue. Consolidated systems sales came in at
approximately $10.2 million this quarter, that's an
increase of 23% over the prior year.
Maintenance and other revenue came in at $8.6 million,
that's an increase of 27% compared to the prior year
quarter. Our growth in systems sales this quarter was
based primarily on sales to both new and existing NextGen
users.
This quarter we had particular success in selling software
licenses to NextGen's existing base of customers. Systems
sales in the NextGen division grew 29% on a year over year
basis to $9.6 million this quarter. That compares to $7.4
million a year ago.
Our increase in maintenance and other revenue this quarter
was driven primarily by the continued growth in the
NextGen base of installed users which drove maintenance
and EDI revenue in that division to record levels.
Maintenance and other revenue in the NextGen division grew
58% year over year to $5.1 million compared to $3.3
million a year ago. Our gross profit margins this quarter,
as Lou mentioned, came in above our historical range of
62.5%.
This quarter had a significantly lower amount of hardware
and third party software content embedded in our system
sales. Our SG&A expense as a percentage of revenue was
lower this quarter at 27% compared to 28.3% a year ago.
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Moderator: Louis Silverman
05-27-04/12:00 pm CT
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Total SG&A expense increased to $5.1 million in the fourth
quarter compared to $4.3 million a year ago. The largest
contributor to the increase in SG&A expense was increased
selling related expenses in the NextGen division.
Our R&D expense grew 20% compared to the prior year at
$1.6 million compared to $1.4 million a year ago. Most of
this increase in R&D expense was related to increased
investment in the NextGen division product line.
The company's effective income tax rate was significantly
higher compared to the prior year quarter at 39.4%
compared to 35.1% a year ago. Our effective tax rate this
quarter was comparatively higher primarily due to a
proportionately lower amount of R&D tax credits reflected
in this quarter's tax provision.
Moving over to divisional performance, based on the strong
increase in systems sales and maintenance and other
revenue discussed earlier, the NextGen division reported
its highest ever quarterly revenue of $14,748,000.
That represents a 38% increase over the year ago quarter
of $10,681,000. NextGen EDI revenue totaled $905,000
compared to $531,000 a year ago. NextGen's operating
income of $4,794,000 hit another record representing a 97%
improvement over the year ago quarter of $2,443,000.
The QSI division reported net revenue of $4,039,000 and
operating income of $1,179,000. QSI division EDI revenue
was $1,270,000 that compared to $1,350,000 a year ago.
Higher gross profit margins helped the QSI division to
grow operating profits compared to the year ago quarter.
Moving on to the balance sheet, I'm going to highlight the
three areas that I typically talk about.
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Moderator: Louis Silverman
05-27-04/12:00 pm CT
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First off, I'm very pleased to report our DSO's have moved
down by 9 days this quarter to 99 days compared to 108 in
the prior quarter. For those of you who are tracking this,
our DSOs by division are 90 days for the QSI division and
101 for the NextGen division.
Primarily reflecting the growth in the customer base at
NextGen, our total deferred revenue grew to $17.3 million
as of the end of March. That compared to $16.3 million at
the start of the quarter.
Compared to the prior year, we've grown our deferred
revenue balance by $5.6 million. Reflecting the strong
performance in our cash collection efforts, we have grown
our cash to approximately $51.4 million. That equates to
$8.13 per share. That compares to $45.3 million or $7.23
per share as of the end of last quarter.
I'm going to give you our non-cash expenses which I
typically do each quarter. Total amortization expense:
$399,000; that's $60,000 for QSI, $339,000 for NextGen.
Depreciation expense: $190,000; that's $44,000 for QSI and
$146,000 for NextGen.
Our investing activities for the quarter were as follows:
Capitalized software: $684,000; that's $38,000 for QSI and
$646,000 for NextGen. Fixed assets: $288,000 in total;
that's $5,000 for QSI and $283,000 for NextGen.
I'd like to thank you all again for your interest in our
company and being on this call. I'm going to turn things
over to Greg Flynn, who will provide an update on the QSI
division.
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Moderator: Louis Silverman
05-27-04/12:00 pm CT
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Greg Flynn: Thank you, Paul and good day to you all. The QSI division
numbers have already been reviewed, so, I won't revisit
that analysis. I would point out, again, though the strong
operating income at the division, the growth year over
year in our EDI unit, particularly the sales and
successful implementations of EDI to our NextGen division
clients and our ongoing expense diligence.
I'm proud of the contributions to our overall corporate
success made by the QSI division. I would like to thank
each of the division staff for their efforts this year,
from those that I work with day to day, shoulder to
shoulder to those that work in the background.
Thank you again and thank you to our dedicated and loyal
clients. And, thank you, of course, to our shareholders
who have made the choice to invest in our business. For
the year end review, I would like to highlight some of our
product achievements at the QSI division.
It was a year of forward movement and technological
advancement. As I have said, and again this was true in
the quarter just past, we have had continued adoption of
our data miner report writer, our alternate user
interface, which we call EUI, and our dental EMR, which we
call CPS.
Also, we added a number of new features and significant
enhancements to our products during the year. Items which
come to mind are: the electronic signature feature with
CPS (this works with PC tablets for doctors and also
allows patients to sign documents electronically as well);
our QSI scan products which scans insurance cards, drivers
licenses, explanations of benefits, known as EOB's, and
other data to be utilized through our QSI practice
management system; and our very new word mail merge, which
is
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Moderator: Louis Silverman
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used to produce correspondence by our clients through our
QSI systems for their patients.
We also have broken a barrier by enabling clients to run
more than 1,000 concurrent users on a single CPU. Lastly,
and I think, that this is actually pretty cool, we have
just finished a patient status feature in our dental
system.
Clients will now be able to track the status of patients
in their office whether they are in the waiting room, exam
room, etc., through color coding in our appointment
scheduling subsystems.
I'd like to thank the QSI Development Team, our
Implementation Team, and our Support Team for their
contributions to these products. I believe we continue to
bring fresh products to our mature markets.
As always, let me comment on our sales staffing and
pipeline. Our sales staffing remains unchanged from last
quarter. And, our pipeline has grown from $3.7 million
last quarter to $3.9 million this quarter due to the
addition of new sales prospects.
We define our pipeline as sales situations where QSI is
one of the final three vendors, and, we believe that the
sale will occur within a 180 day period.
I'd like to thank all of you for joining us on this call.
And, I'll now turn the call over to Pat Cline, President
of our NextGen division. Great quarter and year, Pat.
Pat Cline: Thanks Greg, hi everyone. NextGen had another outstanding
quarter and another terrific year. During the quarter we
executed approximately 54 agreements of which 37 were with
new customers.
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Moderator: Louis Silverman
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Our sales force now numbers 29 people including the
addition of 3 new inside salespeople focused on bringing
NextGen products to smaller practices. The company's
experimenting with a lower cost sales approach for the
small practice market.
The market for our systems, both large and small, remains
strong. And, though we've closed a lot of business, our
sales pipeline is still currently at or a little bit over
$35 million.
I would characterize the spring trade show season as a
success based both on the number of leads and the quality
of those leads. Since our last call, NextGen's won a
number of additional industry awards including a first
place finish in EMR and a first place finish in practice
management in the Microsoft's Healthcare Users Group
awards at the HIMSS conference and, two first place and
one second place finish at the recent TEPR Conference.
And, we also just received top overall honors in the AC
group's annual review of EMR applications.
We also just announced a relationship with CAPMED, a
subsidiary of Bio-Imaging Technologies. In this
relationship, NextGen will be able to bring a co-branded
version of their personal health record application to the
patient base of our customers. The personal health care
record application or PHR as we call it, allows customers
to maintain their own medical records securely on their
home PC's and also on an electronic key chain device or
CD, and exchange their personal health data with their
health care providers.
NextGen's preparing for the general release of NextGen 5.0
which is a new version we've been working on for about 18
months I guess. And, this new
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Moderator: Louis Silverman
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version is both NextGen EMR and NextGen EPM, the
electronic medical record and the practice management
system with an integrated database.
As usual in closing, I'd like to thank the employees of
NextGen for their outstanding contribution to our success.
Operator, I think, we're ready for questions.
Operator: At this time, I would like to remind everyone, if you
would like to ask a question, press *1 on your telephone
pad. We'll pause for just a moment to compile the Q&A
roster. Your first question comes from Mike Crawford with
B Riley.
Mike Crawford: Pat, I was looking through the AC group study. And, you
know, you can never bank on people's promises in this
space, but some of your, I guess, upstart competitors like
SynoMed and eClinical Works.
They have told AC group that they're going to have
functionality that's more closely matching what NextGen
has by the end of the year, prompting The AC group to give
them a five star rating like you have.
And, a couple of these companies have lower price per
seat. So, do you (a) think that they're going to have
functionality closer to what you have? And (b) do you
think that there might be any pricing changes going
forward?
Pat Cline: It's hard for me to comment as to whether or not I think
they'll catch up. But, the companies that you've mentioned
by and large are new, what you've called upstart
competition.
They have a lot of catching up to do. And, while it may be
that a year from now they'll have a lot of the
functionality that we now have, we have 60 or
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Moderator: Louis Silverman
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70 people in our development area, which is larger
typically than most of those competitors.
But, our people are not sitting on their hands, so I would
say that it's possible that a year from now, they'll have
what we have today. And, it's probable that a year from
now we'll have far more.
Relative to the pricing part of your question, that's
tough to say. We are, as I mentioned, experimenting with
new lower cost sales approaches. Some of that may get
passed on to the customer.
And, also, as we've talked about briefly, I think, the
market is about 80% small practices. And, while we have
and many other companies in our market have focused to
this point on the larger practices - and, we'll continue
to focus on larger practices. We're also starting to
expand our focus to the smaller practices. And, the
pricing models may change more at the low end.
Mike Crawford: Okay, great. And, then also, Pat, of the 54 agreements and
37 new, what's the break out between EMR and EPM?
Pat Cline: As has been the case, over half of the new sales included
both products. I think 21 were combination deals. Of the
remaining, similar to last quarter, EPM edged out EMR. I
don't have an exact number, but something like 10 to 6 or
9 to 7, something like that.
Mike Crawford: Okay, thanks. And, then Paul regarding some of the
financials, so your DSO's dipped down. Is that because
you're doing anything differently now? Or, why do you
think that changed? And, what do you expect going forward?
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Paul Holt: No Mike, we didn't do anything differently. That's just
execution, just good, strong execution in our cash and
collections area. But, nothing's changed other than that.
Mike Crawford: Okay, and then with the R&D tax credits, is that something
you expect to extend in the next year? Or, was that an
anomaly?
Paul Holt: Well, I think, I might have mentioned one or two
calls ago that the R&D tax credits are somewhat fixed. And
so, if you grow your earnings or you grow your pretax
income, you may have a proportionately smaller impact from
taking those credits. And, so we had some of that
happening this quarter.
Mike Crawford: Okay, and then, maybe Lou can - when is the
board next meeting? And, do you think they're going to do
anything about, you know, the good problem you have of
this rising cash balance.
Louis Silverman: I can tell you with confidence that the board's
next face to face meeting is scheduled for July 27. I
wouldn't put myself in a place where I would predict the
agenda or the outcome of any agenda item.
Mike Crawford: Okay, thank you.
Louis Silverman: Thanks Mike.
Operator: Your next question comes from the line of Sean Wieland
with W.R. Hambrecht.
Sean Wieland: Hi guys. My first question is on the gross margin line
which is way better than I expected which is great news.
Why is hardware expense as a percent of
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total revenue coming down or third party software expense
coming down? I mean, is that a trend you think should
continue?
Louis Silverman: Sean, this is Lou. And, if anybody else on the call wants
to pick up, they're more than welcome to. I think, it's
difficult to characterize the hardware component in any
given quarter as a trend.
It's based on the mix of sales in a given quarter. And, we
basically tally it up when the quarter is done and see
where it came out. It's not anything that is particularly
controllable by us. And, we don't really seek control of
it.
If there happens to be, in a forward quarter, a
significant increase in hardware, that would reflect in
the numbers as well. So, there's no grand corporate
strategy so to speak that is impacting the hardware
number. It just simply an outcome of the mix of deals and
the components of those deals in a given quarter.
Sean Wieland: Is there a trend by customers to purchase their own
hardware not through NextGen?
Pat Cline: This is Pat. I think, over a long period of time we've
seen that trend, certainly, nothing quarter to quarter.
You may see, as Lou mentioned, large fluctuations in
hardware content on a quarterly and even perhaps on an
annual basis.
But, over a longer period of time, I think, as customers
become a little bit more sophisticated relative to IT, and
as hardware prices come down, and as hardware suppliers
provide more value added, it becomes a little easier for
customers to buy their own.
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To add a little bit more texture, we incentivize our sales
people to sell software and essentially we try to align
our sales people's compensation programs with the
company's best interests.
And, as you know, that the margins on software are far
better. So, that's where they tend to lean. This quarter
was also the first quarter where we put a concerted effort
for to sell additional licenses or add ons to our existing
customer base. So, that had, I think, a little bit to do
with it. And, that's a program that will continue on into
the future.
Sean Wieland: Okay. Last quarter you mentioned something about moving to
computerized, computer based training to increase margins.
Did that have any impact in the quarter's gross margins?
Pat Cline: No, I hope that I mentioned last quarter that that's a
long term initiative. That's something that hasn't really
kicked in yet. We're investing quite a lot in the
development of those programs and other ways to deliver
these systems more efficiently.
Asking ourselves, for example, how we move from delivering
54 systems in a quarter to 154 systems in a quarter
without taking on a proportional amount of additional
expense. So, the computer based training, as well as other
internal programs are areas where we're making long term
investments.
Sean Wieland: Okay. And, Pat, another question on the trend of the
number deals signed. And, then I compare that with the
revenue in NextGen, where you've had fantastic growth
relative to the past couple of quarters in the number of
deals signed.
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The revenue in NextGen is, you know, I know that there's
not a one to one correlation because that maintenance is
kind of - doesn't grow as fast. But, I guess, what I'm
getting at is, is the average deals - talk about what's
going on with the average deal size.
Pat Cline: The average deal size, as has been predicted, was slightly
down. The number is going to move around quarter to
quarter and that's just based on the nature of the leads
and the amount of sales rep time and effort that it takes
to sell the deals. But, over time we still think that the
average deal size will come down, as the number of deals
increases.
Sean Wieland: Okay. And, the pipeline, what's your - the pipeline, what
did you say, $35 million?
Pat Cline: It's about 35.
Sean Wieland: So, that's fairly flat. Are you expecting that that should
move upwards with the addition of, I think, it was five
new reps in the quarter?
Pat Cline: Yes, we did add that number of sales reps including the
three inside reps that I mentioned. And, we are hopeful
that that pipeline will come up. As I mentioned, we had a
successful spring trade show season with both HIMSS and
TEPR.
And, as the leads that we received at those conferences
move from the initial qualification stage through to
demonstration, presentation, proposal and things, we hope
that a number of them will ultimately make the pipeline.
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As you know, a deal won't make the pipeline until it's
pretty far down the road. Our pipeline is comprised of
deals that we think will close within the next 120 days,
and we think we're 50% or more likely to win that
business.
Sean Wieland: Okay. And, one last question, Lou, can you give any more
detail on the equity compensation issue from the last
board meeting? Was there any progress made?
Louis Silverman: I can tell you that the board continues to work on the
topic. It's a topic of importance for the board, and
management, and the company and really many people in the
company. I can tell you that the board continues to work
on the topic. But, that's about all I can tell you.
Sean Wieland: Okay. Well, great, thank you very much.
Louis Silverman: Thanks Sean.
Operator: Your next question comes from the line of Brandon Osten
with Sprott Securities.
Brandon Osten: Hey guys, how you doing?
Pat Cline: Doing fine.
Brandon Osten: All right, just had to get - Paul, just some numbers you
mentioned. The capitalized software versus the
amortization of capitalized software, what were those two
numbers again?
Paul Holt: Six hundred eighty-four thousand in capitalized software,
$399,000 in amortization.
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Brandon Osten: So, $300,000 difference. Okay, the - on the gross margin,
I just wanted to delve into this issue a bit. So, we're
talking about a lower component of hardware. What's really
- what really caused that in the quarter?
Was it more, you know, was it we're selling to more
doctors that are working off the same server or are we
increasing, you know, the amount of doctors in our
customer base and that go off the same server? Or, is it
customers that are simply buying their own hardware?
Pat Cline: Yes. It is a combination of all of those things, as well
as, the effort that we put forth to sell additional
licenses to our existing customer base.
Brandon Osten: Okay, so we did 59 deals and 37 with new customers. I
don't have my computer in front of me. How did that
compare with last quarter?
Pat Cline: Actually, 54 deals and I don't recall the exact number
last quarter. But, I do know that this is up.
Brandon Osten: It's up, okay, I mean, I'm just trying to figure this out.
Because, obviously, gross margins are higher because of
the greater software leverage. But, you sound like you're
doing better.
I mean, if all else were equal, you might have had another
$2 million in revenues and, of course, the same net
earnings. So, it seems that from a revenue traction line,
you know, the NextGen business - well, I know, the growth
rate was, you know, high 30's.
If you were basing it on what it was before, you're kind
of back at that, you know, based on the model that you
guys are running at from a gross margin
QUALITY SYSTEMS INC.
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perspective earlier in the year. You're kind of still in
that 40 to 50% year over year growth range. Is that a fair
statement?
Pat Cline: I think, based on the history, that's a fair statement.
Paul or Lou, you may have something to add to that. But, I
think, that's a fair statement.
Louis Silverman: It's a fair hypothesis, I guess, I'd say. You're asking us
to project what our growth would have been if we had an
amount of hardware in the quarter that was closer to what
our historical average would be. I have not run those
numbers. But, you know, what you're saying Brandon, seems
plausible. Again, I haven't run the numbers.
Brandon Osten: Yes, I mean, I guess I'm just trying to think about it in
terms of the other analysts on the call, how we model
going forward. And, while I know past isn't indicative of
future necessarily, it would seem that either our revenue
estimates should be coming up a bit.
Or, it - what happened if it's going to go back to the
normal trend or if, you know, if this quarter is normal,
then our gross margins should come up a bit. I mean, one
way or another, it just seems to be a trade off.
But, in terms of the NextGen new business traction, is
there still, I mean, we're still reading about insurance
companies subsidizing EMR or, you know, or Bush putting
the pressure on EMR and offering, I guess, help for
doctors which naturally is going to help you guys sell
parts. Are we seeing any of that yet? Because, you know,
historically you guys have said you're not really seeing
that yet.
Pat Cline: We are seeing a strong market and a lot of interest. We
see the government drivers. We see the insurance company
drivers. There are a number of
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employer drivers. Employers, in some cases, are starting
to pay physicians for the use of these systems.
Insurance companies are starting to operate a little bit
more, although it's not yet broad based, on what's
referred to as pay for performance.
You may have heard President Bush mention electronic
health records in his recent State of the Union address.
He and other folks in the government are trying to work on
the electronic medical record adoption issue on a number
of fronts.
They're standards, adoption and promotion efforts going
on. You may have also heard about the new sub-cabinet
level position that was created and the appointment of Dr.
David Brailer, who, I guess, is referred to now by people
as the National Healthcare IT czar.
He's developing a plan related to the adoption and
promotion of these systems. And, there's quite a lot more.
I'm just scratching the surface, and it's all good.
Brandon Osten: All right, are we starting now to see a little bit of
subsidization; of buying software from, you know, parties
outside the actual, you know, direct sales that you're
making?
Pat Cline: From time to time, but what we're seeing more than a third
party paying for the system is a third party paying
doctors a little bit more on either a per patient per
month or per patient per year basis.
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We're starting to see and hear about payers paying a
little bit more to providers that are using certain
technologies. There's something going on with
e-prescribing.
And, that looks like it'll be expanded. A lot of people
are looking at what the government will do with systems
and, for example, with Medicare and Medicare payments
relative to docs using these systems. And, the hope is
that that translates to the private payers as well.
Brandon Osten: You said a bit about prescriptions there. I guess, the
customers of yours that I talk to, historically said we
know the government's looking at it. It's not something
our doctors are comfortable using yet. How are you guys
viewing that computer/physician automated entry, the CPOE
products? Is that something that's starting to get some
pick up?
Pat Cline: Yes, it is. And, what I see with our customer base is that
more and more of them are doing electronic ordering and
electronic prescribing. And, I would say, by and large,
the users of our EMR are, in fact, doing the prescribing
within their facilities now.
Brandon Osten: And, you talked about going after the smaller doctors
offices about deal sizes being down as we get into the
sort of onsie, twosies, or you know, fivesie, tensies. Are
you guys looking at sort of an ASP model for that business
or is there still going to be the license sell?
Pat Cline: We offer an ASP model today. And, we have for quite some
time. Our primary business model is the license sale. And,
thus far, that's the model that the market seems to
prefer.
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I also just want to be careful to make sure that I
characterize things as expanding our market into the
smaller system market not any type of change of focus.
Brandon Osten: Okay. And, last question, competition, you know, I guess
you guys used to talk a lot about Epic not seeing them as
much anymore. Who are your, sort of - if you were to say
one, two, three in your target markets?
And, what do you view your level of success against them?
And, if they beat you, when they do and why? If you could
just go through that a bit, it would be helpful? Thanks a
lot guys.
Pat Cline: Thank you. The outside of Epic, the ones that I've
mentioned on prior calls, I think, remain in the hunt,
that being, GE, Allscripts, A4, and four or five others.
You wanted me to mention a few, so I'll stop with those
three. There are many, many others however. And, rather
than going competitor by competitor, I'll just tell you
that typically when we lose a deal to competition, a lot
of it has to do with the price of the systems or prior
established relationships. Very infrequently, does it have
to do with functionality of product.
Brandon Osten: Thanks a lot guys.
Operator: Your next question comes from Bill Linahan, private
investor.
Bill Linahan: Thank you for taking this call. I have just a general
question and that is, if there is a percentage of medical
practices, the dental practices that use our methodology?
Anyone could answer.
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Pat Cline: I can take it from the medical side. We believe that fewer
than 15% of medical practices are using an electronic
medical record system today. The numbers that the industry
throws around are anywhere from between 5 or 10% up to 20
or 30 or sometimes 40% depending upon which analyst you
talk to.
And, a lot of that has to do with the various definitions
of what an electronic medical record system is. With a
very broad definition, the numbers get a little bit
higher. But, a true electronic medical records system,
that is, a system that physicians are using to document
patient care primarily as opposed to a paper based system,
I think penetration is 15% or less. On the practice
management side, that's a far more mature market with
probably between 90 and 95% of all medical practices in
the country having those types of systems; systems for
administrative purposes, billing, scheduling, management
reports. Greg, you can take it from the dental side.
Greg Flynn: Yes, on the dental side I've never seen what I would call
precise numbers, but, let me give you some round numbers.
Our target market is dental groups of five or more.
Typically, what we really look at is dental groups of six
or more. Well, of six or more, there are approximately
5,000 dentists of which greater than 60% are currently
using the QSI system.
Louis Silverman: I think, it's also likely to be the case that the general
usage in dentistry parallels the figures that Pat gave in
terms of practice management systems being well penetrated
in the dental sector.
And, clinical systems or electronic patient record systems
are far less penetrated in dental than practice
management. So, there would be some parallels between the
two sectors from that perspective.
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Bill Linahan: So, are you saying then that our company is probably has a
break down of 85% of 90% dental practices versus perhaps
10% or 15% of medical approximately?
Louis Silverman: I don't think we've said that. We may be answering a
different question than what you're asking or vice versa.
But, that would not be an accurate conclusion.
Bill Linahan: Okay, thank you very much.
Operator: At this time, I would like to remind everyone, if you
would like to ask a question, press star *1 on your
telephone keypad. Your next question comes from the line
of Gene Mannheimer with Roth Capital Partners.
Gene Mannheimer: Guys, congratulations on a good quarter.
Louis Silverman: Thank you.
Pat Cline: Thank you.
Gene Manheimer: My question; a couple of them. One, Pat, I think, you
indicated that you're placing what seems to be a new focus
on the low end practice, i.e. the small practice. And,
this seems to be an area you haven't played in the past.
What would be the rationale for that? Do you see perhaps
better growth at the smaller practice than the medium to
large?
Pat Cline: I wouldn't say it's a new focus. But, I would say it's an
increased focus. We have sold to the smaller practice
market for some time and have many, many solo and two and
three doctor groups already on board.
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The rationale is that the small practice market tends to,
with technology, follow the large practice market by a
couple of years. And, the other part of the rationale is
that roughly 80% of the physicians practices are either
solo or are very small groups. So, being a company that
doesn't want to ignore 80% of the eventual market that we
thought it was about time to increase our focus.
Gene Mannheimer: And, do you envision the offering being scaled down
somewhat to, you know, perhaps enable these small
practices to afford the solution?
Pat Cline: Yes, we do.
Gene Mannheimer: Okay, second question, a little bit more on the market
penetration. How many doctors would you say you have of
the 500,000 or so office based physicians?
Pat Cline: That's a number that I don't have in front of me. And,
it's a number that we don't track very closely internally.
And, that's large because of our licensing models. In many
cases, we'll do an enterprise or a site license for a
particular network of doctors or hospital organization.
And, we'll license them for as many providers as they have
or can bring on for a fixed fee. And, that fee tends to be
in the seven figure range. We do those from time to time.
And, when we do a deal like that, we're not very concerned
about the number of docs that they bring on board or are
using the system. We have one customer in New York that I
think licensed for all of their physicians -maybe 1,000 or
1,500 physicians. I think, they have about 600 live on the
product at this point. And, that's a typical situation for
the very high end customers.
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Gene Mannheimer: Okay, thanks Pat. And, one final question, you also
mentioned that there was a considerable amount of add-on
business to existing customers. Can you just characterize
that? What sort of sales were they? You know, feature
functions?
Pat Cline: It was a combination of feature function. We've come out
with some new features and functions, additional modules
if you will. And, it was also an effort to take advantage
of the growth of some of our customers, as they add
providers. And, we put some special opportunities on the
table for them. And, some of them took advantage of it.
Gene Mannheimer: Thanks again, guys.
Pat Cline: Thank you.
Operator: Your next question comes from the line of Neal Bradsher
with Broadwood Capital.
Neal Bradsher: Well, first of all, I want to add my congratulations on
your very strong results. Most of my questions have been
asked, so I'll just ask a couple of odd ball questions
that people haven't asked.
One is, has there been any consideration about changing
the name of the company recently? Since the QSI division
is now such a small part of the company and getting
smaller as a percentage, has there been any consideration
to naming the company NextGen or some third name that
wouldn't be associated with either division?
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Louis Silverman: Neal, this is Lou. I would say, no formal serious
consideration recently. I'm sure that there may be some
water cooler conversation around that from time to time in
different places, but it's certainly not a discussion that
our board has taken up any time in the recent past.
Neal Bradsher: Does it make any sense from a business perspective to do
that? Obviously, there are always other than business
reasons, people think about doing these things. But, does
it make sense from a business perspective to do that or is
it sort of irrelevant?
Louis Silverman: I would say my answer is somewhere in the middle and goes
like this. It may make some sense at some time down the
road. I personally don't view that as an urgent business
issue at this point in time.
Neal Bradsher: Okay, then my other question relates to your initiative to
go down to smaller practices. You also recently put out a
press release to go even more micro than that which is
directly to the patient with a personal health record
through a partnership with another company, which if I'm
reading, looks like they're a neighbor of yours, Pat, in
Pennsylvania.
And, I'm just wondering what your thoughts are on that?
This has been an area where people have talked about some
sort national program for everybody in the country.
And, obviously, you guys are doing it on your own. What
kind of a revenue model is there? And, does this have the
potential to be a real business over time? And, if so, you
know, does it scale to millions of people or is this sort
of a minor little add on here?
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Pat Cline: Well, I think, it may ultimately scale to millions of
people. There are a lot of people who feel that the keeper
of the patient's health record ought to be the patient.
And, we're excited about the relationship, the product as
it relates to the integration of the personal health
record with the office space electronic medical record
system, and think that a lot of the power of these systems
lies in the exchange of data between them.
It's far too early to tell what revenues may come out of
this relationship. And, I would say that's true if you'd
ask either company about it. We are experimenting with
some things. We're learning about business models relative
to the personal health record.
And, we're talking to existing customers about it, have
some pilots kicking off, and those types of things. So, I
think, that's a question that I may be able to better
answer six months from now. Right now, I would be careful
to caution the folks on this call against forecasting
short term revenue.
Neal Bradsher: What is the revenue model? And, what do you guys do? And,
what does Capmed do?
Pat Cline: Well, our involvement will come in the promotion of these
systems, offering this personal health record to patients
through our customers offices, as well as in content for
their entire patient base.
Typically, when that happens, it tends to be on CD. Our
customer base may also offer the electronic key chain
device to their patients. And, both of those, the CD ROM
or the electronic key chain, would come with the software
application, as well as, the patient's health record.
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Whether it's the practice of the NextGen customer, if you
will, footing the bill or whether it's ultimately the
patient footing the bill or some other third party footing
the bill remains to be seen.
Neal Bradsher: So, does Capmed basically make this and you're just going
to make sure that it can easily work with your system and
inform all of your customers about it?
Pat Cline: I would say, at this point, that's pretty close. We've
done some integration work and some interface work. We've
done some co-branding and co-promotion kicking off at the
recent TEPR conference.
We're also working with them on a couple of other
initiatives relative to content and promotion and relative
to co-branding and some additional features that our
customers may want to see in that product.
Neal Bradsher:
And, is there revenue directly from the patient or from
the patient's insurer? Or, does the revenue have to come
from the practice?
Pat Cline: That's something that we're going to figure out through
the pilots that I mentioned.
Neal Bradsher: Okay. And, would there be any benefit to a patient just
directly getting one of these? Or, would it only be
relevant if you are a patient of a practice that has a
compatible practice management or EMR system?
Pat Cline: I think there is benefit to the patient directly getting
one of these provided that the patient is willing to enter
their health record data. Again, I think, the real bang
for the buck comes from the electronic exchange of data
and the
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automatic population of the patient's health record
through their physician's office and the NextGen system.
Neal Bradsher: Okay. Well, again, I apologize for these odd ball
questions. But, particularly, the potential of getting
directly to the patient, I think, in the long run could be
very interesting for you. So, thanks.
Louis Silverman: I would reiterate Pat's comment that we're still very,
very early in this particular game. We're learning a lot.
We're not prepared - we have drawn any conclusions yet. We
think, it would be premature for others to draw
conclusions on this as well.
Neal Bradsher: That's what I would expect.
Pat Cline: Thank you.
Neal Bradsher: Thank you.
Operator: Your next question comes from the line of Matthew Richey
with Centaur Capital.
Matthew Richey: Hey guys, question for Lou. Can you give us an update on
your acquisition pipeline?
Louis Silverman: It's a short update. And, it's basically unchanged, an
unchanged update from prior quarters. I continue to spend
time, although it's only a portion of my time, on the
search.
But, there's really nothing to report; nothing significant
to report at this point in time. So, it's a work in
process, albeit a slow one and a methodical one
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without any promises on my part or the company's part for
any particular outcome at any particular time.
In other words, we're just keeping our ears open, working
along, but, not feeling a huge amount of pressure to bring
a deal to the table unless there is a great deal to be
brought.
Matthew Richey: Okay. Lou, I know you don't have final say on the use of
cash. But, given that the acquisition pipeline is looking
less and less likely to offer candidates. Do you think, in
your opinion, this ads emphasis to considering alternative
uses for the cash like a dividend or a share buy back?
Louis Silverman: My own personal opinion has been and continues to be that
the board should be looking continuously at those types of
ideas. But, you're right, I'm not on the board. And, mine
is not an opinion that is officially registered as a board
member at the board table.
Matthew Richey: Okay, I appreciate that.
Louis Silverman: Thanks Matt.
Matthew Richey: Thank you.
Operator: Your next question comes from the line of Corey Tobin with
William Blair & Co.
Corey Tobin: Hi, good afternoon.
Louis Silverman: Hey Corey.
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Corey Tobin: Just following up on the comments regarding expanding your
target market into smaller practices. This is an area
where a number of vendors have struggled to earn,
certainly the types of margins that you've earned over the
years.
Most usually due to, you know, just cost of service into
smaller accounts and lower ASP's. Can you just give us a
feeling for your expectations regarding profitability in
this segment of the market? Any commentary regarding your
current margins?
Pat Cline: We expect that segment is of the market like the other
segment of the market to be very profitable. And, we're
making sure that, as we have in the past, where we're
keeping a close eye on that - that new selling approaches,
new delivery approaches that will allow us to bring the
cost of the system down without sacrificing a large amount
of profit.
Corey Tobin: And, are these things that you're currently implementing?
Or, are these things that you either expect to see, you
know, closer to fiscal year 2006? Or, is this something
that we should expect, you know, in the next couple of
quarters or so?
Pat Cline: It's actually something that we have been implementing
over the last year. The change that just happened was the
addition of three new sales people who will be, by and
large, focused on that segment of the market rather than
having our outside sales force expand or change their
focus.
That's not to say that we won't have an outside rep
calling on a small practice. We will if that's appropriate
and requested by the small practice. But, it's really
something that we have been doing for quite some time. We
have sold
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since the company was created to small practices. It's
just, again, an expansion of the focus.
Corey Tobin: Okay, great. So, we wouldn't necessarily expect to see any
decrease in margin simply due to going into that area of
the market?
Pat Cline: I've got my fingers crossed.
Corey Tobin: Okay, great, thank you.
Pat Cline: Thank you.
Operator: At this time, there are no further questions. Mr.
Silverman, are there any closing remarks?
Louis Silverman: I'd just like to thank everyone for their participation on
today's call. And, we'll wrap it up.
Operator: Thank you. This concludes today's Quality Systems
Conference Call. You may now disconnect.
END