Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
Confirmation #9161498
Page 1
QUALITY SYSTEMS, INC.
Moderator: Louis Silverman
August 3, 2004
12:00 pm CT
Operator: Good afternoon. My name is Latoya and I will be your
conference facilitator today. At this time, I will like to
welcome everyone to the Quality Systems' First Quarter Fiscal
2005 earnings 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 star then the number one on your telephone
keypad. If you would like to withdraw your question, press the
# key.
I will now like to turn the call over to Louis Silverman,
President and CEO of Quality Systems.
You may begin sir.
Louis Silverman: Thanks Latoya, and welcome everyone to Quality Systems' First
Quarter Fiscal 2005 Conference Call.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
Confirmation #9161498
Page 2
Paul Holt, our CFO, Greg Flynn, Executive Vice President and
General Manager of our QSI Division, and Pat Cline, President
of our NextGen Healthcare Information Systems Division, join
me on today's call.
Please note, that 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
Forms 10-K and 10-Q 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 June Quarter, revenue totaled $20.1 million,
which was up 23% over the prior year. Fully diluted earnings
per share at 51 cents exceeded prior year by 46%.
The quarter's top-line results were driven by record revenue
performance at NextGen. The $16.1 million in revenue attained
by the division for the quarter represents a 32% year over
year increase.
The QSI division had quarterly revenue of $4 million, which
represents a 2% year over year decline in top-line performance
for the division.
Company profitability was driven by strong bottom line
performance at both the NextGen division and the QSI division.
Gross margin percentage for the Company is slightly less than
60% for the quarter and came in at below the
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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level for the March quarter but certainly at the high end of
our previous historical band.
Operating income at NextGen came in at a record $5.2 million,
55% ahead of prior year performance. QSI division operating
income came in nearly 16% ahead of the prior year, though not
quite at record levels; significant profit performance at the
QSI division in the context of a 2% decline in year over year
revenue.
Quarterly operating margins were strong in both divisions.
Each division came in at approximately 32%.
Our EDI unit set a revenue record, and at $2.3 million,
company-wide EDI revenue for the quarter was 18% ahead of
prior year. Year over year EDI growth of 78% in the NextGen
division offset a 9% year over year EDI decline at the QSI
division.
I once again remind call participants that EDI revenue is
reported as part of divisional totals each quarter. As a
convenience, Paul Holt will break out divisional EDI totals
later in the call.
Corporate expenses for the quarter at $994,000 came in at
approximately 19% over prior year levels.
Cash and cash equivalents increased to a record $54.9 million
during the quarter, up from $51.4 million in the prior quarter
and $36.4 million in the prior year.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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DSO's increased on a sequential basis to 104 days from 99 days
at fiscal year end, but were lower than the 107-day figure for
the prior year. Collections activity remained strong during
the quarter.
Head count at quarter end was 339, which taken with the
revenues for the quarter generated annualized revenue per
employee of $238,000, which is not far off our prior high mark
level.
There were no stock repurchases during the quarter.
The Company filed a Proxy statement on July 28 of this year.
The Proxy statement contains the Company's proposed director
slate, which includes five new Non-Management Independent
Director nominees, as well as returning Directors, Sheldon
Razin and Ahmed Hussein.
Topics related to executive compensation, remain as important
areas requiring continued focus by the Board's Compensation
Committee. Some progress has been made in this area relatively
recently, and the need for sustained progress remains.
The Company continues to be invested in cash and highly liquid
short-term investments,and there is nothing new to report on
the present Board's position on utilization of this asset.
Our management team continues to evaluate acquisition
opportunities, and while we want to continue to reiterate our
strong desire to not commit to completing an acquisition, we
continue to review and evaluate opportunities that make
strategic and economic sense for the Company.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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During the June quarter, the Company met with investment
professionals in Montreal, Toronto, Denver, and Portland,
Oregon. The Company has accepted an invitation to present to
the upcoming Roth Capital Conference, scheduled in New York
City during the month of September.
In closing my prepared comments for this morning's call, I'd
like to point out that the performance of the Company for the
June quarter continues a series of quarters where our
performance has exceeded our internal expectation, at times by
a very wide margin.
I want to again express my thanks to the entire team for their
contributions to the Company's results for the quarter.
I also want to again clearly point out to current and/or
prospective 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 the level of performance turned in
during this quarter, during future periods.
It's 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, our CFO for
additional financial details on the quarter.
Paul Holt: Thanks Lou. This quarter reflected the continued growth in
both of our revenue categories, systems sales and maintenance
and other revenues.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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Consolidated system sales came in at approximately $11.1
million this quarter, representing a 17% year over year
increase, while maintenance and other revenues came in at $9
million, an increase of 32% compared to the prior year
quarter.
As Lou mentioned, our gross profit margins this quarter came
back to the higher end of our historical range at 59.8% of
revenue. This margin percentage was slightly higher than our
margin percentage from a year ago, which was 59.5 %. However,
it also represented a drop from the last quarter's 62.5 %
gross margin.
S,G&A expense as a percentage of revenue was somewhat lower
this quarter at 24.6%. That compares to 29.1% in the prior
year quarter. Our total S,G&A expense on a hard dollar basis,
increased to approximately $5 million this quarter. That
compares to $4.7 million a year ago. The primary contributor
to the increase in S,G&A expense was higher general corporate
expenses, which grew by approximately $161,000, and a $268,000
increase in S,G&A expense at theNextGen division which was
partially offset by a $216,000 drop in S,G&A at the QSI
division.
R&D expense grew 18% compared to prior year quarter. At $1.6
million, that compares 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.
Our effective income tax rate this quarter was significantly
higher compared to a year ago. At 39.4%, that compared to
38.3% a year ago. Our rate this quarter and our rates in
general are impacted by a proportionately lower amount of R&D
tax credits reflected in this quarter's tax provision.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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Moving over to divisional performance, based on the increase
in both system sales and maintenance and other revenue, the
NextGen division reported its highest ever quarterly revenue
of $16,149,000. That represents a 32% increase over the year
ago quarter of $12,242,000.
Systems sales in the NextGen division grew 18% year over year
to $10.6 million, compared to $9 million a year ago.
Maintenance and other revenue in the NextGen division grew 70%
year over year to $5.6 million, compared to $3.3 million in
the prior year.
The 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 a higher level.
NextGen maintenance revenue totaled $3.8 million this quarter.
That's up 73% from last year's $2.2 million,while NextGen EDI
revenue grew 78% to $1,060,000 compared to $596,000 a year
ago. NextGen's operating income of $5,194,000 represented a
55% improvement over the year ago quarter operating income of
$3,359,000.
The Dental division reported revenue of $4 million and
operating income of $1,264,000. QSI division EDI revenue was
$1,228,000 for the quarter. That compares to $1,342,000 a year
ago.
Moving on to the balance sheet, I `m going to highlight, as I
normally do, three notable areas: receivables, deferred
revenue and cash.
Our DSO's moved up five days to 104 days this quarter compared
to 99 in the prior quarter. The DSO number is still a
comparatively low figure compared
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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to our recent history. And for those of you are tracking this,
our DSO's by division were 99 days for the QSI division and
106 for the NextGen division.
Primarily reflecting the growth in the customer base at
NextGen, deferred maintenance and services revenue grew by
$2.1 million this quarter, to $19.4 million compared to $17.3
million at the start of the quarter.
Our quarter end cash grew by approximately $3.5 million, to
$54.9 million which equates to $8.63 a share. That compares to
$51.4 million or $8.13 at the end of last quarter.
For those of you are tracking this, our non-cash expenses for
the quarter breaks down as follows:
Total Amortization Expense: $418,000. That's $58,000 for the
QSI division, and $360,000 for the NextGen division.
Total Depreciation Expense: $225,000. That's $40,000 for the
QSI division, and $185,000 for the NextGen division.
We also incurred a non-cash expense related to deferred stock
compensation of $107,000.
Our investing activities for the quarter were as follows:
$542,000 in capitalized software; $45,000 for the QSI
division, and $497,000 for the NextGen division.
Fixed Assets: $426,000. That's $5,000 for the QSI division,
and $421,000 for the NextGen division.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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I'd like to thank you all for being on this call and for your
interest in our Company and I'll turn things over to Greg
Flynn, Executive Vice President and General Manager of our QSI
Division.
Greg Flynn: Thank you Paul. Good day to you all.
My comments will be relatively brief since QSI division
numbers have already been reviewed in some detail.
While I would have liked to have seen increased revenues in
the quarter, I am pleased once again by the division's strong
income contribution to the Company's overall performance.
On a comparative basis, operating income of the division
improved over the prior quarter as well as the same quarter of
the prior year. Diligent cost containment and our mix of
software/hardware sales, among other components, aided these
results.
Of course, I'm pleased as well in the growth of our EDI sales
to the NextGen division client base. As we have noted on
previous calls, these EDI services are provided through the
QSI division.
Significant other events in the quarter were sales of our Data
Miner report writer product, strong sales of our Laser Forms
product, record quarterly sales for our QSI Scan offering, and
our continued sales of our EUI user interface product.
While revenue generation from these types of add-on sales is
typically nominal, these sales are key in further tying our
current existing client base to
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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QSI. Each of these offerings also maintain a technical
freshness in the marketplace for QSI.
Also of note during the June Quarter, the QSI division was
chosen as one of three vendors to participate in a pilot
dental software program for the Indian Health Service. That's
I.H.S., which is a branch of the U.S. Armed Forces, the
government.
The initial pilot contract utilizes both QSI practice
management and clinical software. Implementation is currently
underway. If a pilot moves forward to full national
deployment, the contract for the winning vendor will likely be
a large multi-year award.
As always, let me comment on our sales staffing and pipeline.
Our sales staffing remains unchanged from last quarter and our
pipeline remains at $3.9 million. Our pipeline is defined as
sales situations where QSI is in the final three purchase
choices and we believe that the sale will occur within 180
days.
On a more personal basis, I observed recently that the tenth
current QSI division employee has marked their 20-year
anniversary with the Company. Though still young, I admit that
I fall into this group.
I would like to take this opportunity to acknowledge each of
my co-workers, long, medium, and short-term, for their
efforts, commitment, and loyalty, key ingredients to the
success of the division and the Company. Thank you again.
I appreciate each of you joining us on this call and will now
turn the call over to Pat Cline, President of our NextGen
division.
Great quarter Pat.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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Patrick Cline: Thanks Greg. Hi everyone.
During the first quarter as you've heard NextGen continued to
break records top and bottom line. The Company executed over
40 agreements, 34 of which were with new customers.
Our sales force increased to 30 people, and as I mentioned on
the last call, the sales force now includes three inside sales
people who are focused on selling NextGen systems to the
smaller practice market. Since we continue to have a
significant number of leads to follow up, we still intend to
grow our sales force by approximately one, two if we're lucky,
people per quarter.
The market for electronic medical records systems continues to
heat up and our pipeline has increased to $38 million. As many
of you know, there's been a lot of activity both in the
private sector and in the government surrounding the adoption
of electronic medical records systems. We feel this is a very
positive thing for NextGen.
We also feel that we are extending our lead on the competition
on the product front. Our 5.0 version of NextGen EMR and
NextGen EPM should be released later this month. This new
release integrates the database of the two products, and it's
already live in a number of practices.
In closing, I'd like to once again thank the employees of
NextGen for their ongoing and outstanding contributions to our
success.
Latoya, we're ready for questions.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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Operator: At this time, I would like to remind everyone in order to ask
a question, please press *1 on your telephone keypad.
We'll pause for just a moment to compile the Q & A roster.
Your first question comes from Mike Crawford of B. Riley.
Mike Crawford: Pat on the 40 contracts, you said 34 are with new customers.
What were - how many of those contracts were for both EMR and
EPM, and what was the breakdown?
Patrick Cline: About two-thirds were for both EPM and EMR. Twenty-four of the
34 fell into that category. The remaining was split five EPM
only, five EMR only.
Mike Crawford: Great. And - actually on the dental side, what is the - so is
this a Phase One Award that you got with the I.H.S. and what
would be the expected requirement for the finalist?
Greg Flynn: It's an evaluation phase where we're piloting our software in
two offices. That pilot will last roughly through the end of
this quarter, unless they change requirements. Then those
powers that be will gather together and decide which of the
three finalists currently piloting will be chosen to move
forward.
Of course there's always the possibility that they won't move
forward at all or they'll move forward with more than one
vendor.
Mike Crawford: Right. So I guess - who are the other two finalists and what
is the expected revenue amount for the winner?
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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Greg Flynn: It's unclear what the expected revenue amount would be. It
certainly should be in the multi-seven figures over time. The
other two finalists are a company called Software of
Excellence, which is a New Zealand based firm and Dentrix.
Mike Crawford: Thank you.
Operator: Your next question comes from Brandon Osten of Sprott
Securities.
Brandon Osten: Oh, hey guys.
Greg, on that contract, sir, what was the nature of the
customer again?
Greg Flynn: Indian Health Services, actually a branch of the Armed Forces
of the Navy. They employ naval doctors to provide services to
Indian reservations and other tribal areas.
Brandon Osten: And is that a licensed deal or is that going to be more like a
sort of million bucks a year switching deal type thing.
Greg Flynn: It's a licensed type of transaction.
Brandon Osten: Okay. Who was that first competitor you mentioned?
Greg Flynn: Software of Excellence.
Brandon Osten: Software of Excellence?
Greg Flynn: Correct.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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Brandon Osten: Okay.
Greg Flynn: It's a New Zealand company as I said.
Brandon Osten: Gotcha. In terms of margins, obviously you guys are kind of
peaking at a new level here at 27% operating margins. I know
you guys don't - can't give guidance and you're very clear on
that. But is that a level that can be sustained, without
saying, if it will be sustained?
Louis Silverman: Anything's possible Brandon. I would say as I've said many
times, we're not running the Company focused on a bottom line
margin percentage. We work hard to generate as good a top-line
growth as we can. We try to maintain a reasonable level of
expense discipline while continuing to reinvest in the
business.
And it just so happens that this quarter we ended up with
better margins than we've had in some time. But it's not a -
it's not the result of a carefully architected plan to boost
margins.
So if we do get to that level again, it'll be for the reasons
that I've discussed; that we're working hard on the top-line
and trying to re-invest in the business, but also watch our
expenses, and if our numbers drop a little bit or rise a
little bit, it'll be because of a different mix with some of
those factors. We're not managing the business with a
particular margin percentage, or even a margin trend in mind.
Brandon Osten: Right. But I - just to get a sense of where your heads are at,
are we basically looking at if revenues took another spike in
Q2, but operating margins were a bit down, your goal will be
to keep increasing EPS regardless of, you know, where those
margins might fall out on that - on that general strategy?
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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Louis Silverman: I think that's a fair characterization of our mindset.
Brandon Osten: Great. And how about small market strategy? I know it's still
early days, but how is that coming along in the NextGen
Division?
Patrick Cline: I think it's coming along fairly well. The new salespeople
that we added to focus on that market have made sales. Three
or four sales have been made, by that relatively new team. I
think that's very positive given that it takes folks time to
build a pipeline from the small system leads.
I don't want to get into reporting in on a quarter-to-quarter
basis the particular numbers or even numbers of sales made by
that group.
But let me just say that early indications are positive.
Brandon Osten: Okay.
And do you have a sense of where these guys are going to be
starting out quota -wise on sort of an annual basis?
Patrick Cline: I think their quotas are starting at around $650,000, $700,000
on an annual basis, but I'll emphasize that this is a learning
experience for us. We may learn that that number's too high,
and hopefully we'll learn that the number is too low.
Brandon Osten: And how's the pricing worked vis-a-vis your normal pricing. Is
it, you know, is it substantially lower, is it half of, or 75%
of, like without disclosing any actual dollars for competitive
purposes.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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But how's that trend for the small market?
Patrick Cline: I think it's a little bit lower. I don't think I'll go into
great detail, as you mentioned, for competitive purposes.
But it's more attractive at the low end and I think to off set
that somewhat, the cost of sale is also greatly reduced based
on the new selling model that we're exploring.
Brandon Osten: Okay.
And on capacity, you know, system sales at NextGen were up,
you know, a healthy, I guess it was 16% year over year.
You know, in terms of that 16% versus what happened last year,
is the business getting a little lumpy in that sense, or is
there sort of, you know, can we still scale at, you know, at
25% to 35% growth rate on the systems side for NextGen if
demand dictates, or are we going to see mostly growth on the
maintenance and services side?
Patrick Cline: My hope is that you see growth both on the top-line system
sales side as well as on the maintenance and services side.
Services are typically sold along with new contracts and then
rendered as time goes on.
With respect to our ability to deliver systems, I feel very
confident in our ability to scale from a delivery and
installation and project management and training perspective
should, as you put it, demand dictate.
Brandon Osten: Sorry. I'll circle back with some more questions.
Thanks, guys.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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Operator: Your next question comes from Gene Mannheimer of Roth Capital
Partners.
Gene Mannheimer: Good morning and congratulations on a great quarter.
Louis Silverman: Thanks, Gene.
Gene Mannheimer: A couple questions.
One, to follow up on the small practice strategy, could you,
Pat, could you just define what you would call the small
market.
Is it the less than ten doctors? Or how would you characterize
it?
Patrick Cline: I would characterize it as under five physicians.
And let me just also say that, as I mentioned on the last
call, this small-market strategy is an expansion of our focus,
as opposed to a shift in our focus.
We're still also very focused on the higher-end and mid-range
practices.
Gene Mannheimer: Okay. Thanks, Pat.
And would you, you know, certainly there's been a lot of
discussion that the government has set a frame work for
electronic health records over ten years.
Would you say that that has - is that impacting physician
sales cycles at all? Is it accelerating as a result of this
event? Or is it the same?
Patrick Cline: Well, the frame work that you talk about was actually just
released on the 21st of July. I think it's too soon to tell
whether that particular announcement is
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Moderator: Louis Silverman
08-03-04/12:00 pm CT
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going to shorten the sales cycles.
But I would say that overall, the initiatives, both on the
government side and in the private sector, the
pay-for-performance types of things, and all of the talk and
all of the buzz relative to paying physicians for producing
better quality because better quality reduces overall the cost
of care is very positive for us, and my gut is that sales
cycles have been shortening for the last few months.
Gene Mannheimer: Great. Thanks very much.
Patrick Cline: Thank you.
Operator: Your next question comes from Rick Leggott of Arbor Capital.
Rick Leggott: Good afternoon. Good quarter.
Louis Silverman: Thanks, Rick.
Rick Leggott: The, NextGen division accounted for 80% of revenue, and it
looks like 95% of operating income. They grew 32%. Quality
Systems really didn't.
Now in the past when I've asked you for the rationale of
keeping these two companies together, it was because Quality
Systems was a nice contributor to operating profits.
With the quarter we just had, can you still make that case
today?
Louis Silverman: Rick, let me respond this way.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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I think your numbers at least at the operating income line are
off.
Rick Leggott: What was the contribution of NextGen to operating income?
Louis Silverman: Paul is going to work on that.
Now, the issue there is we have to figure out how to allocate
corp - to answer your question, we have to deal with corporate
expenses, which we report divisional - NextGen division, QSI
division.......
Rick Leggott: So in your press release when you have operating income of
$5.2 million from NextGen...
Louis Silverman: That reflects no allocation for corporate overhead.
Rick Leggott: Okay. So...
Louis Silverman: So basically the calculation for the company as a whole, just
to cover this point, would be operating income at NextGen plus
operating income at QSI minus corporate expenses
equals.........
Rick Leggott: Okay. So can you give me revenue and operating income in the
same manner as you did for NextGen for Quality Systems?
Louis Silverman: Yes, Paul will give you that in a second.
But let's just take your question and just - the numbers
aren't going to be quite as lop-sided as you laid out.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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But your question - the general theme of your question
remains, and that is - I believe your question is why keep the
two divisions separated, and/or why keep both divisions at
all?
I guess those were the two parts to your question.
Rick Leggott: Yeah. I mean, I just look at where the growth, and
increasingly where the profits are generated, it's pretty
clear.
Louis Silverman: Well, we agree that where the...
Rick Leggott: And it seems to me Wall Street always prefers a simpler story
to understand, not that that makes it right.
Rick Leggott: And I've listened to your arguments, but, you know, we'll see
what the balance is like when you give us the numbers here.
Louis Silverman: We remain very comfortable that we can run the two divisions -
that there continues to be good rationale for...
Rick Leggott: So what kind of revenue growth do you look for over the next
three years out of Quality Systems?
Louis Silverman: I think it's fair to say, first of all, that we haven't given
forward guidance, and don't intend to begin.
But on the other hand, clearly most of whatever growth
expectations we have internally and whatever growth
expectations are out in the public market are
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Moderator: Louis Silverman
08-03-04/12:00 pm CT
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really tied to the growth of the NextGen division. I think
that's not a state secret.
Rick Leggott: Have you made any changes to compensation plans for gentlemen
that are running these two divisions in the last 90 days?
Louis Silverman: Well specifically in terms of the people running the divisions
they are the top corporate folks, so certainly any
going-forward changes would be work done at the Board level.
Rick Leggott: And I had the impression in talking with Management that we
were working on in particular for Pat something new or
different.
Louis Silverman: The compensation committee and the Board as I referenced in my
comments have been working on this issue. They continue to
work on the issue.
I did reference that we had made some progress in the very
recent term and I would say that that progress included Pat
but was not limited to Pat. It was really more on the Next...
Rick Leggott: So what should we as shareholders expect? I mean what's the
timeframe? What - give us a flavor for what's coming down the
pipe.
Lou Silverman: What - I can tell you what I hope for. But I would also temper
that by reminding people that I'm not on the Board and it's
hard for me to speak for the Board in general.
So my hope is that the progress that was made over the last 60
days or 90 days or so is sustained and that the Compensation
Committee and the Board come to really all the members of the
Management team with some, I'd say,
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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energizing compensation plans that include both short and long
term compensation elements.
But for me to speak for the Board or to set any kind of a
threshold I think would be pretty inappropriate at...
Rick Leggott: I hope the Board is listening and I'll just register with
those that are listening. It's very important that Management
get representation on the Board so that we don't have to go
through these kind of discussions each quarter.
Louis Silverman: Certainly appreciate the vote of confidence and your
sentiments and second the motion that...
Rick Leggott: And you should, you know, we should expect progress with
regard to the matter you just discussed.
Louis Silverman: Again thanks for the vote of confidence and voicing your
opinion.
Rick Leggott: Can I have those numbers now?
Paul Holt: We've given out net - total operating. If you want me to break
it down for you $5,454,000 was our...
Rick Leggott: Yep total.
Paul Holt: So you've got $5,194,000 at NextGen and $1,264,000 at the QSI
division.
Rick Leggott: Okay.
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Paul Holt: You back out of that $994,000 in unallocated corporate
expenses and there's your $5,464. So you referenced 95% that -
it's actually 80% which is in line with the - each division's
share of revenues.
Rick Leggott: But my point to make it again is that the operating income
contribution from NextGen has rapidly become the dominant
driver...
Louis Silverman: We all agree.
Rick Leggott: ...of the economic wealth creation of this company. And if the
Board and the Management don't recognize that and do things so
that shareholders can properly value the growth business visa
vi the other business that's really not growing, I think
that's a mistake.
Louis Silverman: Again we appreciate your sentiments. Thanks.
Operator: You have a follow-up question from Brandon Osten.
Brandon Osten: Hi that was quick. Paul, just on the - what was the
capitalized software number in the quarter?
Paul Holt: $542,000.
Brandon Osten: Five and - okay 542 gotcha. And in terms of the NextGen
breakout you said $10.6 million was systems up 18%,
maintenance was up 70 something percent - or maintenance
services and EDI. I think you said maintenance is 3.8, EDI was
1.1 so the balance is going to be pro serve?
Paul Holt: The balance is just going to be miscellaneous items -
reimbursed travel, tax stuff, or, you know, miscellaneous
other. It's a small portion of the total.
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Brandon Osten: So where does Professional Services fit in there?
Paul Holt: That would be included in there as well.
Brandon Osten: Okay.
Paul Holt: Outside of implementation of systems...
Brandon Osten: Okay so implementation of systems is in system sales?
Paul Holt: Yes.
Brandon Osten: Okay got you. And looks like your average deal size is ramping
a bit. Is that a fair statement?
Lou Silverman: It bounces around, Brandon. I think we've mentioned on a
number of calls that it's really hard for us to pick out a
trend in that number. So I - it would be hard for us to point
you to a trend because it just does bounce around a bit.
Brandon Osten: Okay. And competitively, you know, are we seeing the same
people or is there anything interesting changing in the
competitive landscape that we need to be made aware of?
Pat Cline: Nothing real interesting as far as I'm concerned - the same
players - a few newcomers but they seem to be struggling.
Brandon Osten: Okay and - yeah?
Greg Flynn: On the dental side -- excuse me -- it's typically the same
players we've seen.
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Moderator: Louis Silverman
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Brandon Osten: Same guys okay. And just in relation to what Allscripts have a
thing on their recent conference call with regards to
electronic medical records. Obviously, you know, they're
saying similar things to what you're saying in terms of the
market hitting a tipping point they're seeing an acceleration
in growth.
And, you know, from a macro standpoint it just looks like EMR
is just, you know, we're going to be heading into, you know,
call it a two to three year phase that's going to probably,
you know, it's probably going to move the market from whatever
the guess is now -- 17% penetration -- to something like 40 or
50%, you know, three years from now.
Do you guys feel that you're set up well from a sales capacity
standpoint to get your fair share of business given that you
are, you know, a market leader on the ambulatory care side.
Pat Cline: The short answer is yes, we think we're very well positioned
to capitalize on the market as the market heats up.
Louis Silverman: I would add to that, Brandon, that we also know that nothing's
handed to us. And as we've said on numerous occasions, our
biggest challenge is that we need to continue to execute in
the near term and continue to invest in the infrastructure so
that we can sustain whatever execution we can to the highest
levels we can.
Brandon Osten: Yeah, I'm just again - terms of sales capacity. Like, I mean,
if this market heats the up the way, you know, some groups and
Leapfrog and guys like that are saying it could heat up, do
you feel like the NextGen division can sustain a 35% or 40%
growth rate for three years if the demand's there?
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Moderator: Louis Silverman
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Patick Cline: No.
Patrick Cline: We think we'll be able to handle the demand from a sales
perspective.
Brandon Osten: Okay, and the installation perspective. And on the insurance
side, is there any movement on that front? We saw a Leapfrog
group report that suggested $5,000 a year reimbursement for
doctors if they - you know, by insurance companies and
Medicare if they converted to electronic medical records. Is
that something that's becoming more pervasive in the industry?
Patrick Cline: We are seeing a number of those types of words and suggestions
and those types of things. It's something that's being talked
about more frequently in the industry. And as I mentioned
earlier, there are more programs that have actually been put
in place, mostly on the private sector at this point. These
programs seem to be taking off and getting legs over the last
six months or so.
Brandon Osten: And just sort of last question. What's the - you know, does
that change the sales process at all in terms of if an
insurance company's reimbursing? Are they looking at putting
in, you know, approved software lists or having a say in terms
of what software programs you can go to? Are they asking, you
know, software vendors to check off with them or anything like
that? Or are they just saying, if you're electronic medical
records we're going to give you this reimbursement, but it
really is your decision in terms of which EM or system you're
going to use?
Patrick Cline: It depends on the program. And there are a lot of them out
there and they differ. But there has been a lot of discussion
recently relative to the certification of electronic medical
record systems. And it's starting to smell like there will be
a certification process for these systems so that both the
insurance -- private insurers and perhaps the government --
should they put
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Moderator: Louis Silverman
08-03-04/12:00 pm CT
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financial incentives in place for doctors to buy systems and
utilize systems or if you use systems to deliver certain
performance, those organizations will be able to have
confidence that the systems that are being funded or partially
funded can do the job.
Brandon Osten: Okay, great. Great, thanks a lot guys -- great quarter.
Man: Thank you.
Brandon Osten: Thanks very much.
Operator: If you would like to ask a question, please press star 1 on
your touch tone phone. Your next question comes from James
Byrkit from Salem Clinic.
James Byrkit: Hi. I'm just trying to get an idea of the number of physicians
you have using your systems.
Patrick Cline: The bottom line is we're not sure. We have various licensing
mechanisms, one of which is an enterprise or a geographically
limited license, so we don't necessarily track all of the
physicians' licenses and users of the system. I would think
that a reasonable guesstimate right now would be somewhere in
the neighborhood of 15,000, but that's just a guess.
James Byrkit: Okay, thank you.
Patrick Cline: Thank you.
Operator: At this time, there are no further questions.
Quality Systems, Inc.
Moderator: Louis Silverman
08-03-04/12:00 pm CT
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Louis Silverman: I Would like to thank everyone for their participation on the
call, and we will see everyone next quarter.
Operator: This now concludes today's Quality conference call. You may
now disconnect.
END