Exhibit 99.1
CCG INVESTOR RELATION
Moderator: Louis Silverman
11-03-04/12:00 pm CT
Confirmation #1822543
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CCG INVESTOR RELATION
Moderator: Louis Silverman
November 3, 2004
12:00 pm CT
Operator: Good afternoon. My name is Cynthia and I will be your
conference facilitator today. At this time I would like
to welcome everyone to the Quality Systems Second
Quarter Fiscal 2005 earnings conference call. All lines
have been placed on mute to prevent any background
noise.
After the speakers' 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 1 on
your telephone keypad. If you would like to withdraw
your question, press star then the number 2.
At this time I would like to turn the call over to Lou
Silverman, President and CEO for Quality Systems. Please
go ahead sir.
Louis Silverman: Thank you Cynthia and welcome to Quality Systems' Fiscal
2005 Second Quarter conference call. Paul Holt, our CFO,
Greg Flynn, Executive V.P. and General Manager of our
QSI division, and Pat Cline, President of our NextGen
Healthcare Information Systems division will once again
join me as presenters and participants on today's call.
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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, projected
operating results, and the impact of legal, regulatory,
and accounting requirements.
Actual events and results may differ materially from our
expectations and projections and you should refer to our
SEC filings including our 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 our projections or
forward-looking statements in the future. And please
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 September quarter revenue totaled $21.2
million, up 20% over the prior year. Fully diluted
earnings per share at 56 cents exceeded prior year by
51%. The quarter's top line results were driven by
record revenue performance at NextGen. The $17.3 million
in revenue attained by the division for the quarter
represents a 28% year over year top line increase.
The QSI division had quarterly revenue of just under $4
million in the quarter which represented a 6% year over
year decline in top line performance for the division.
Company wide gross margin was strong at 62-1/2% which
was at the high end of our historical band. Operating
income at NextGen came in at a record $6.1 million, 58%
ahead of prior year performance. QSI divisional
operating income declined approximately 12% compared
with the prior year.
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Operating margins were strong in both divisions for the
quarter. NextGen came in at 35% and the QSI division
came in at approximately 29%. Company wide SG&A expenses
increased materially on both a sequential and year over
year basis in the quarter.
Our EDI unit set a record at $2.6 million for the
quarter. And I will once again remind participants that
EDI revenue is reported as part of divisional revenue
each quarter. Paul Holt will break out divisional EDI
totals as a convenience later in the call.
Corporate expenses for the quarter came in at $1.15
million. That represented an 8% year over year decline
as well as an 18% sequential increase. Cash and cash
equivalents increased to a record $59.5 million during
the quarter, up from $54.9 million in the prior quarter
and $40.6 million in the prior year.
Headcount at quarter end was 356 which taken with the
revenue for the quarter generated annualized revenue per
employee of $238K. Note that this is not a figure that
we use as an internal management or measurement tool.
The quarter's revenue per employee figure is, however,
relatively consistent with the levels attained in the
recent prior quarters.
The company held its annual shareholders meeting on
September 21, 2004. At that meeting seven directors were
elected to our board. Joining returning directors
Sheldon Razin and Ahmed Hussein on the board are the
following individuals: Bill Botts, Vince Love, Jonathan
Javitt, Maurice DeWald, and Steve Plochocki.
At its most recent meeting the board elected Sheldon
Razin to serve as Board Chairman and additionally the
new board members have quickly begun
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discussions on many of the items and issues that have
been referenced on our prior earnings calls.
On the acquisition front our search activity continues.
The quantity of firms in our funnel continues to be
modest though the quality of opportunities in our funnel
represents an improvement over where we've been in the
recent past.
I'd like to reiterate that as I have mentioned on prior
calls, we're not interested in just doing a deal for the
sake of doing a deal. We will actively pursue
opportunities of strategic significance that also
represents a good financial fit for us. Absent those
characteristics, we'll remain patient and continue to
focus on organic growth.
During the September quarter the company participated in
the Roth Capital Conference in New York City. And in
addition we met with investment professionals in New
York on a couple of occasions. The company was named to
the Forbes List of America's Best Small Companies for
the fourth consecutive year. This year we came in at
number 32, up from number 36 on last year's list.
In closing my prepared comments for the morning, I'd
like to point out that the performance for the company
during the quarter continued a series of quarters where
our performance has exceeded our internal expectations -
at times by a fairly wide margin.
I want to again express my thanks to all members of our
team for their contributions to the company's results. I
also want to clearly point out to current and possibly
prospective analysts and investors that while we are
extremely pleased with the quarter's performance, there
are absolutely no
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guarantees that the company or either of its divisions
will exceed or even sustain the level of performance
turned in during the quarter in 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 don't 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 and hello everyone. We are continuing to see
growth in both of our revenue categories, system sales
and maintenance and other. Our consolidated system sales
rose to $11.6 million, an increase of 16% compared to
$10 million in the prior year, while maintenance and
other revenues grew 26% to $9.6 million compared to $7.6
million in the prior year.
A relatively lower level of hardware and third party
software included in our system sales resulted in our
consolidated gross profit margin this quarter coming in
just above the very high end of our historical range at
62.6%.
Total SG&A expense increased by approximately $.6
million to $5.4 million in our second quarter compared
to $4.8 million a year ago. The largest contributor to
this increase in SG&A expenses was a $.4 million
increase in selling related compensation expenses and to
our expanded NextGen sales force.
NextGen also had a net $.3 million increase in other
SG&A expenses which was offset by a $.1 million decline
in our general corporate expenses. SG&A
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expense as a percentage of revenue this quarter declined
to 25.5% compared to 27% in the prior year.
R&D expense grew 20% compared to the prior year quarter
at $1.8 million compared to $1.5 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 higher this
quarter at 40.3%. That compares to 39.3% a year ago. Our
effective rate this quarter was impacted by a
proportionately lower amount of R&D tax credits as well
as a slightly higher federal tax rate.
In terms of our divisional performance, our NextGen
division reported growth in both its software license
and implementation revenues which resulted in 16% year
over year growth rate in system sales in the division.
System sales in the NextGen division rose to $11 million
this quarter compared to $9.5 million a year ago.
Growth in NextGen's base of installed users drove
maintenance and EDI revenue in the division 57% higher
than last year at $6.3 million versus $4.0. NextGen
maintenance revenue was up 62% from last year at $4.2
million versus $2.6 million a year ago.
NextGen EDI revenue grew 108% to $1,361,000 compared to
$652,000 a year ago. Operating income in the NextGen
division as Lou mentioned was up 58% to $6,065,000. That
compares to $3,847,000 a year ago.
The QSI dental division reported a year over year
decline of 6%, reporting revenue of $3,955,000 compared
to $4,190,000 last year. Operating income
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for the division was at $1,137,000. EDI revenue in the
QSI division was $1,227,000. That compares to $1,339,000
a year ago.
Moving on to our balance sheet, our cash grew by
approximately $4.6 million this quarter to $59.5 million
or $9.26 per share compared to $54.9 million or $8.64
per share at the start of the quarter.
Our turnover of accounts receivable measured in DSOs
dropped 2 days to 108 days this quarter. That compares
to 110 in the prior year. On a sequential basis this DSO
number is up 4 days but is still comparatively lower
than last year's number. Our DSO by division this
quarter was 87 days for the QSI division and 113 for the
NextGen division.
Deferred revenue now stands at $20.9 million. That's an
increase of $1-1/2 million compared to last quarter.
Again, for those of you who are tracking this, our
non-cash expenses for the quarter breakdown is as
follows. $514,000 in amortization of capitalized
software -- that breaks down to $58,000 for QSI,
$456,000 for NextGen. Depreciation expense totaled
$241,000 this quarter -- that's $41,000 for the QSI
division and $200,000 for the NextGen division.
Our deferred stock option compensation which is also a
non-cash expense was $107,000 this quarter and our
investing activities were as follows: we invested
$489,000 in capitalized software -- that's $44,000 for
the QSI division and $445,000 for the NextGen division.
We invested $330,000 in fixed assets -- that's $50,000
for the QSI dental division and $280,000 for the NextGen
division.
I'd like to thank you all for being on this call and
your interest in our company and I will now turn things
over to Greg Flynn, Executive Vice President and
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General Manager of our QSI division, who will provide an
update on the QSI division.
Greg Flynn: Thank you Paul and thank you to everyone on the call for
their interest in our company.
The numerics of the QSI division have already been
covered in detail by Lou and Paul so I won't be
redundant. A summary comment: I obviously would have
liked to have seen an uptick in revenue rather than our
discussed marginal decline. This being said, I am
pleased by the QSI division's operating margins and our
ongoing strong contributions to the company's
profitability.
Also of course I am pleased by the EDI growth. As you
know, the QSI division staff pursue and process the EDI
business for both the QSI and NextGen divisions. I
believe that we continue to make significant progress in
expanding this fertile area of our business.
As I have periodically done in the past on these calls,
I'd like to take this opportunity to bring you up to
date on some of the new product development initiatives
of the division.
First is EUI which is our modernized user interface. EUI
Software continues to be a popular update with our
clients. Our Data Miner Report Writer has also met with
continued positive adoption. During the quarter we added
many user customizable capabilities to this reporting
package. They have been well received.
We also expanded the capability and scope of our legacy
software packages by incorporating numerous new
interfaces to third party entities such as labs
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for example. As time passes and as I'm sure Pat would
attest as well, it becomes clear that the software that
our clients purchase from our company is the corner
piece for both their business and clinical management
activities.
In our dental package, we also added the convenient
ability for patient lookup access across the breadth of
an enterprise. To bring this down to a practical level,
what this means is that a large dental client -- in many
instances this represents 50, 100 or more locations --
can now retrieve pertinent patient data at any office
for a patient from any other office within their
enterprise from another state, region, or in the largest
example, nationally.
This is a significant barrier to our competition.
Previously we had a somewhat cumbersome solution to
this. It is now, if you will, a very elegant solution.
Lastly, we continue to make enhancements to our CPS
package. This is the dental equivalent of electronic
medical records. We now allow the viewing of the same
chart on multiple workstations simultaneously. It's very
important in clients of our size.
And this I think is a pretty cool addition. We have
incorporated multiple signature technology into our CPS
patient forms. Now both the patient and doctor can have
their signatures electronically captured on the same
form. This HIPPA compliant process even incorporates
shape and speed of signature verification for the
doctor's signature. This is important for adoption on a
broader basis into the electronic realm of dental
records.
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. At the
QSI division we define our pipeline as sales situations
where
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QSI is in the final three purchase choices and we
believe that the sale will occur within 180 days.
In turning the call over to Pat Cline, our President of
the NextGen division, I would like to note that the QSI
division staff members are proud of the contributions to
our company's financial success and our recognition
through numerous awards. Pat?
Pat Cline: Thanks Greg. Hi everybody. During the second quarter
NextGen executed agreements with over 50 new customers.
Like the prior quarter about 2/3 of these were
integrated electronic medical records and practice
management systems and the balance of the deals were
evenly split between EMR and practice management
systems.
NextGen's sales force has again increased in size. It's
now 32 people including the three inside sales people we
discussed on our last call and I think on the previous
call. Our pipeline has also increased to about $40
million.
Our NextGen Version 5.0 was released for new customers
last quarter and for existing customers this quarter. As
I mentioned on the last call, we feel that this major
new release continues to extend our product's lead over
competition integrating rather than interfacing practice
management and EMR functions. The new version is live in
many practices both large and small and we're converting
more customers to this new version every day.
The market for our systems, again both electronic
medical records and practice management systems
continues to be strong. And in closing my prepared
comments, I'd like to again thank the NextGen employees
for their outstanding performance. And we're ready for
questions at this point.
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Operator: Thank you. At this time I would like to remind everyone,
in order to ask a question please press star then the
number 1 on your telephone keypad. We will pause for
just a moment to compile the Q&A roster.
Your first question comes from the line of Wayne
Kennemore with First Capital Alliance.
Wayne Kennemore: Hello and congratulations on a fine quarter. I wanted to
find out two things. One, you know, you have an
extremely strong cash position and we wanted to find
out, you know, if you intend to declare some dividend or
have been contemplating it in your future. And the
second question had to do with what trends have you seen
in terms of booking numbers for NextGen sales. That's
all.
Louis Silverman: Okay, on the second question we haven't commented on
bookings and I don't expect we're going to start on this
call but certainly appreciate your interest and the
inquiry.
In terms of our cash position as you can imagine, there
are a number of different options that the company has
in terms of deploying the cash. And as I alluded to in
my prepared comments, the Board of Directors which now
has five new board members plus two carryover board
members have, I think, begun their initial deliberations
on what the priorities might be in terms of deploying
that cash and I expect that those deliberations and
discussions will continue over the ensuing weeks,
perhaps months.
So there's nothing absolutely tangible to report at this
point in time other than the fact that there is some
discussion going on amongst the new board members and
film at 11 I guess I'd say.
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Wayne Kennemore: As a quick follow-up and then I'll be finished, do you
have any idea when that process might be completed?
Louis Silverman: Well I guess I would respond this way. It shouldn't be,
in my view, a process that starts and stops but rather
it's a process that is a regular part of the board
deliberations and hopefully deliberations that include
the management team, and I would say that we're off to a
good start there as well. So my view is that it's an
ongoing discussion as opposed to a stop and start.
Wayne Kennemore: Thank you.
Operator: Your next question comes from the line of Andrew Shapiro
with Lawndale Capital Management.
Andrew Shapiro: Hi, good morning. You mentioned I think that Shelly was
elected Chairman or re-elected Chairman. I was
wondering, who was elected the company's lead
independent director?
Louis Silverman: Andy, I don't believe there was a lead director elected.
I believe that ...
Andrew Shapiro: The board has determined the Shelly is independent?
Louis Silverman: The board has determined that to the best of my
knowledge, yes.
Andrew Shapiro: Surprising. Secondly, in the company's build up of cash,
I believe cash is now 59% of the total assets. What are
the factors that create either risks or are addressed
with respect to the company being deemed to qualify
under the Investment Company Act and thus subjecting the
company to incremental regulatory burdens and costs?
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Louis Silverman: We have certainly alerted our counsel to those issues
Andy and we believe at least as far as we know that we
are acting appropriately with regards to those risks.
And the principal thing that we're doing is we're making
sure that the investments that we have made are such
that we are not investing in things that get us termed
an investment company basically.
Andrew Shapiro: So those investment equivalents then generate lower,
they in effect generate lower returns that what you'd
otherwise be able to invest cash in, is that right?
Louis Silverman: Well, there's some - a lot of assumptions in your
statement so I'll let you draw whatever conclusions you
want from that. But certainly we are investing in things
that don't count as investments. So if you were to
believe that gave us lower yield, some would say they're
more conservative investments. It's really in how you
want to look at it.
Andrew Shapiro: Well, I mean, 59% of the balance sheet, obviously it's a
concern. Operational question here, there was a very
nice improvement in the gross margin levels. I'm trying
to assess the recurring nature of such higher gross
margins.
I wanted to get a handle on was there as Pat has used
the term in the past, an elephant sale or two this
quarter? Was there a large preponderance of software
relative to your fluctuating mix of software and
hardware that does occur in a given quarters?
Louis Silverman: As we've mentioned Andy on many, many calls to date,
there is - there can be significant fluctuations between
hardware and software and I think this quarter was a
good example of a quarter where hardware was relatively
lower than it has been in other quarters. So that was a
significant driver of the improved gross margin.
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Andrew Shapiro: So it wasn't any substantial software sale. Was it the
function of - were there some substantial software sales
or a function more there was just less hardware sales?
Patrick Cline: This is Pat. I don't think there was any one particular
deal in the quarter or a set of a couple of deals that
were what I'd call abnormal for us. I think it may be
more of a function of the evolution of the market and
the fact that many of our customers have matured their
IT knowledge to the point where they feel comfortable
buying hardware elsewhere. And I think that's just an
ongoing thing that we'll see.
That's not a statement that these margins or proportions
of hardware or software will absolutely continue, but I
think to get to the root of your question there wasn't
anything that I would see as a big anomaly during the
quarter.
Andrew Shapiro: Okay and the other observation or operational question
and I'll back out of the queue is if you could speak to
the declining rate of growth in the NextGen division
which over the last four quarters now on a trailing
12-month basis is coming down.
The business is growing fabulously so the nature of my
question is, is there increased competition occurring?
Is it that the company's gotten to a now amassed size
that it's in the life cycle of rapidly growing
companies? You're moving up the life cycle where the
growth curve is diminishing?
What are your comments on this is an observable trailing
12-month trend now for a while. Growth is great but I'm
just trying to understand if it's competition, a maxing
within the market, etc., or your size that's creating
the declining rate of growth.
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Patrick Cline: This is Pat again. The answer is probably made up of a
lot of different things. Part of that might be related
to your prior question. For example I think I can grow
revenues quite a bit faster if I could put focus on
selling hardware, but I don't think that's the right
thing to do.
I think it's more appropriate to focus on the margins
and the profit and I think you'll see very handsome
gains on a percentage year over year, quarter over
quarter basis in the things that matter to our
shareholders.
I think it's also as you probably know more difficult to
grow a company with many hundreds of employees than it
is to grow a company with 50 employees. It's very
difficult to add, you know, 100 people in a quarter to
manage the kind of business that may or may not be
possible out there should we just forsake the other
areas of our business and focus on increasing revenue.
We need to make sure as we grow revenue and as we focus
on profits that we maintain a very high level of
customer satisfaction, so it's a real balancing act.
Andrew Shapiro: Great, well thank you and great job this quarter.
Patrick Cline: Thank you very much.
Operator: Your next question comes from the line of Mike Crawford
with B. Riley.
Mike Crawford: Great, Pat, could you talk a little bit more about what
you think the penetration is of your target market for
EMR and integrated with practice management? I think in
the past you talked about it maybe being 15% to 20%
penetrated. I don't know if that perception has changed
at all.
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Patrick Cline: No, that perception hasn't changed. I think it's right
in that neighborhood. And as we've discussed, a lot of
the answer depends on what you call an electronic
medical record and whether you're including component
technologies like e-prescribing or scanning and
digitizing documents or those kinds of things.
But if you were to define an EMR as something that a
practice uses to get rid of all of its paper and do all
the patient documentation electronically and maintain
all of that information electronically, I think probably
the number is closer to 10%.
Mike Crawford: And then if the - if a deal comes down to you and one or
two others, who are the companies - are the products
that you're most likely or most often bumping up against
these days?
Patrick Cline: That's a very good question to which I don't have a good
answer. A lot of that depends on the area of the country
and the size of the practice. We continue to see for
example Epic at the very high end, GE and A4 at the low
end, AllScripts, Medical Manager and Misys kind of in
the mid-tier.
Part of that also depends on the incumbent system, if it
tends to be a Medical Manager practice, and that is a
practice that has a Medical Manager product, then we
might see Medical Manager in there talking to the
practice about their electronic health records system.
Or if it's an IDX customer we might see AllScripts in
there. But the answer is it really depends. There hasn't
been any major change in the competitive landscape from
the last call.
Mike Crawford: Okay, what about (Athena) Health. Do you run into them
at all?
Patrick Cline: Very infrequently.
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Mike Crawford: Okay good, thank you.
Operator: Your next question comes from the line of Gene
Mannheimer with Roth Capital Partners.
Gene Mannheimer: Hi, very nice quarter guys.
Patrick Cline: Thank you.
Man: Thanks.
Gene Mannheimer: Pat, you refer to component technologies like
e-prescribing. Can you just elaborate on what role
e-prescribing plays in your total EMR strategy perhaps
in light of your PDA product or can you speak to number
of e-prescribing transactions that your system has
generated?
Patrick Cline: We have e-prescribing capabilities as part of the
NextGen EMR. We have not elected to date to break those
out and create what I might refer to as an e-prescribing
product or that component technology to be sold on a
stand-alone basis.
To date I haven't been or we haven't been comfortable
with the business model, the pricing points, and revenue
basis involved with that. But we're very proud of the
e-prescribing features and technology that's built into
the more comprehensive package that we market.
Gene Mannheimer: Okay so you don't track at this time a number of
e-prescribing transactions for example?
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Patrick Cline: No we don't, across our entire customer base we don't.
We would have to get into mining the data within our
practices since those transactions would not flow
through our central servers here. We'd have to get into
dialing into our customers' systems or connecting to our
customers' systems and taking a look at those things.
We have done that with a few customers here and there as
we did a study about a year ago. We found for example at
one customer in New York, I think we estimated 230,000
prescriptions out of that particular practice in a
12-month period based on their utilization of the
system.
And of course we have many, many hundreds of customers.
So you might take a reasonable guess but the bottom line
is I don't know that answer.
Gene Mannheimer: Do you know approximately what percent of your customer
base uses electronic prescribing?
Patrick Cline: This will also be a guess, but I'm going to guess at 3/4
of them.
Gene Mannheimer: Okay, thanks Pat. And to switch gears a little bit, back
to the gross margin question. And I know you don't give
guidance, but do you - could you break out for me the
gross margin on system sales versus services?
Paul Holt: I don't think we're going to do that at this time Gene,
but we might contemplate that in the future. Stay tuned.
Gene Mannheimer: Okay. Does it make sense then, you know, as your NextGen
user base grows, maintenance revenue obviously
increases. So to the extent that gross margin is higher
then we can see - we might be able to see a trend, an
upward trend in gross margin.
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Louis Silverman: We're working on some potential changes in that area
Gene, and so as Paul said, stay tuned.
Gene Mannheimer: Okay, thank you.
Operator: Again, to ask a question, please press star then the
number 1 on your telephone keypad.
Your next question comes from the line of Brandon Osten
with Sprott Securities.
Brandon Osten: Hey guys, how you doing?
Patrick Cline: Terrific.
Brandon Osten: Just I missed the first bit of the call so excuse me if
I'm sort of repeating stuff that you guys have already
talked about. Last quarter you guys referred to a large
potential deal for the QSI division. Is that still on
the table or is it gone or was it lost competitively or
no comment?
Greg Flynn: Actually I'll comment. This is Greg. The test pilots
have been concluded. We're expecting first calendar
quarter of next year to know the results. Other than
that it would be inappropriate for me to comment on
where we're at.
Brandon Osten: Do you know how many people are still in the running to
win that?
Greg Flynn: There were three competitive vendors involved, ourselves
being one of the three.
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Brandon Osten: And is this being bandied about as an all or nothing, or
is there a chance it will get split between two guys or
something?
Greg Flynn: Both of the above named possibilities I think exist.
Brandon Osten: Okay.
Greg Flynn: Some of that is speculation on my part.
Brandon Osten: Great, okay. In terms of new customers in the quarter,
how many net new customers were there for NextGen?
Patrick Cline: Over 50.
Brandon Osten: Sorry? Okay, what were the total deals then?
Patrick Cline: I think the total deals were in the neighborhood of 60.
Brandon Osten: Okay, so we say over 50 and that leads nicely into my
next question actually. The small practice initiatives,
you had two, you said that was going to be okay for a
while and I understand you've got like three or four
now. Like is that a big part of the new customer build
there?
Patrick Cline: Are you talking about number of reps or number of
customers?
Brandon Osten: Yeah, number of customers.
Patrick Cline: I would say that we've got a fair number of small
practice customers. It has not been a focus of our
company with respect to where we've spent our
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marketing dollars in the past, but we've always had
terrific products for the smaller customers.
We feel that since the small practices comprise about
80% of the market space, that it's a market that we
don't want to ignore so we have been putting things in
place like the inside sales force that I talked about on
the last call and the call prior, those kinds of things.
So yes, it's a market that we're paying attention to. I
think I'd like to look forward to increased penetration
in that market space provided that margins can remain
healthy.
Brandon Osten: And you talk about the inside sales force, how many
people do you have doing that right now?
Patrick Cline: We have three right now.
Brandon Osten: Three, okay. And what - how is the average deal size
coming in on the smaller practice front?
Patrick Cline: I don't have that number in front of me. Anecdotally the
deals that I've seen come through range anywhere from
$30,000 or $40,000 up to the hundred range.
Brandon Osten: Okay and that's the largest amount of new customers that
I have you guys signing on in a quarter since I started
following you like a year and a half ago. Like sort of
what's driving that exactly?
Patrick Cline: Well I think there are a lot of drivers. Part of it is
the selling model and bringing on a few of these inside
reps who have built their initial pipelines.
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So there were a few smaller system sales made in the
quarter. But a lot of it has to do with the business and
the industry itself. There are all kinds of drivers,
government drivers and industry drivers and
pay-for-performance programs.
The bottom line is everyone's interested in improving
the quality of healthcare and everyone's interested in
lowering the cost of healthcare and most everyone
believes that these kinds of systems are key to that. So
a lot of it has to do with the market, the sales model,
and our ability to manage through it.
Brandon Osten: What is the largest deal you guys just signed in the
quarter, like roughly?
Louis Silverman: Brandon, we really haven't gone into metrics on that and
I think we'll continue to stay in that mode.
Brandon Osten: Okay. In terms of the pay-for-performance that you
talked about, what's the trend there? I mean, I keep
hearing more about Medicare coming in and paying, you
know, a little extra based on the Medicare, Medicaid
paying extra based on electronic records versus
non-electronic records and insurance companies saying
the same thing. Are you seeing any trends there that
either, those initiatives or the temperature on that
picking up or slowing down?
Patrick Cline: I would say the temperature is picking up though I have
no idea whether or not Medicare or various Medicaid
programs or private payers will put those kinds of
programs in place. Thus far, as far as I know, there is
not a federal budget to be able to do that though the
government is moving forward with a number of
initiatives.
We do see some of the private sector payors instituting
pay-for-performance programs, not necessarily just being
tied to the implementation of an
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electronic system, but programs that are most easily met
with electronic systems and virtually impossible to meet
in some cases with manual systems.
So the temperature is picking up. There are a lot of
drivers relative to pay-for-performance. All kinds of
different models in different areas of the country and
even payor by payor.
Brandon Osten: Okay and every now and then I sort of hear about, you
know, region XYZ or city XYZ or state XYZ dedicates, you
know, $200 million to electronic medical records. You
know, they're somewhat blanket statements but how does
stuff like that get allocated when you hear that it's
sort of a state initiative? You know, how do you guys
get involved in that process?
Patrick Cline: Well again it depends on the state, it depends on the
initiative. Sometimes they're private initiatives,
sometimes they're large groups of practices that get
together and put something in place that they're calling
a statewide initiative, large IPAs or those kinds of
things.
Some of them happen to be government grants smaller than
the kind of number that you threw around. But it kind of
depends on the area. Once again, the bottom line is
there is a lot of activity in that regard picking up.
Brandon Osten: Okay, last couple of questions here. In terms of, you
know, the pickup on the various modules that come along
with the EMR system, you know, how - I guess what I'm
really looking for is how many - how are you guys doing
in terms of further penetration of the existing customer
base? Like are you seeing expansions in deployments that
you guys might have seen an initial order for last year,
stuff like that?
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Patrick Cline: Yes we are, absolutely. We're seeing customers that
purchase either EMR or EPM later coming along and adding
the other products because they feel that we've done a
good job for them implementing and supporting the
initial modules. We see people that purchase perhaps EMR
and come along and add our imaging modules or those
types of things. And the trends are all good.
Brandon Osten: Okay and then last question just so I can get my two
bits in on the gross margin question, the - okay, so 63%
and the suggestion there is people have said is that
more software relative to hardware. You know, if I sort
of equalize that to your target 60% gross margins and
take into account that your salespeople are primarily
selling software, you know, the stated year over year
growth is, you know, 17 - or I'm sorry, is 28%.
But if I were to look at software alone and, you know,
it's very hypothetical because I know you guys don't
break it out in that much detail for us. But, you know,
would you guys - like my number says like 37% growth.
Would you guys feel that software and services and
maintenance alone, like if I took out the hardware
revenues that the NextGen growth rate would probably be
somewhere closer to the high 30s? Does that make sense
to you?
Lou Silverman: Your methodology is logical but we are not going to
comment on the end result of your analysis. But it
certainly to me appears to be a logical way to try to
look at the business.
Brandon Osten: Okay great, thanks guys. Good quarter.
Men: Thank you.
Operator: Your next question comes from the line of Neal Bradsher
with Broadwood Capital.
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Neal Bradsher: Yeah, I add my congratulations on a great quarter. My
first question just is very close to the one just asked
and that is were hardware revenues at NextGen down year
over year?
Lou Silverman: We, I don't believe, haven't broken out hardware each
quarter and so again, we are looking at enhanced
granularity in terms of how we present our numbers, but
I'd like to have us get all the way through that process
before we start blazing new ground on calls like this.
Neal Bradsher: Okay, I'm not asking for a specific number, this is a
purely qualitative question.
Paul Holt: I believe that qualitatively that is true.
Neal Bradsher: Okay so hardware down year over year at NextGen, okay. I
won't ask for any more detail on that and I'll await
further disclosure decisions on your part.
On another topic which was potential policy changes as a
result of the Board change, the company is one of the
few with the kind of track record that it has that
provides no guidance whatsoever regarding future
prospects. And I understand the reason that's been the
case in the past and I think many companies probably
provide more guidance than they should.
But your business seems to have become far more
predictable over time for a variety of reasons including
the fact that you've got substantial margins. You now
have a bigger percentage of your business that's from
maintenance and service and so forth.
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So is the issue of guidance one of the topics that you
were referring to Lou when you mentioned earlier that
the Board will consider issues that have been brought up
on past conference calls since this is one of the issues
that's been brought up?
Louis Silverman: That was not one of the issues that I was referring to
and as regards to my own thoughts on the process, I
continue to be comfortable with not providing guidance.
That's not to say that this topic couldn't come up or
wouldn't come up from the Board at a future date, but at
this point in time they're busy on some other discussion
topics and that's not one of the ones that's in the top
ten, I don't think.
Neal Bradsher: Okay. It seems to me it's sort of a tough call actually.
I'm not sure you should go as far as a lot of companies
go but I just wanted to see if that's an issue.
And then in terms of another potential policy change,
you've repeatedly said that the principal reason the
company hasn't made any acquisitions has been the lack
of interesting acquisitions out there and I think you
reiterated that earlier on this call. But would a change
in the Board's focus on this create a greater focus on
the part of management that might result in a greater
likelihood of a deal or is that really not a relevant
factor?
Louis Silverman: Just to qualify or reiterate what I said earlier, I did
mention that while the quantity of prospects in our
funnel remain modest the quality was a little bit better
than it has been for some time. So that's just part one
of my response to your question.
I think it is fair to say that while we're in the early
stages of the board going down its learning curve and
understanding our operating environment and
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discussing what to do with our cash. I think it's fair
to say, although it's very early to draw any conclusions
from this, I think, that the new board members in
general are at a very early stage in their tenure with
the company and do have a pretty high level of interest
in thoroughly exploring acquisition opportunities.
That's not to say that anybody has committed to doing
deals at all costs, but I do think from my early
interactions particularly with the new board members
that will be a topic of frequent discussion in the near
term.
Neal Bradsher: Okay, so what about the aspect of whether or not this
has been a constraint? You're saying that there's going
to be more push for it from the board. Has it been a
constraint in your opinion in the past?
Louis Silverman: I think it would be unfair to say that there was a
constraint in the past, other than our working hard to
deliver good results to our customers and our
shareholders. Our acquisition searches have been a part
of our activity for longer than people probably care to
remember or discuss.
But, I think that at the end of the day I think it would
be inaccurate to say that there was a huge constraint
placed in front of us in the past. The biggest
constraint I think has been trying to figure out deals
that are both strategically interesting and financially
appropriate. And those deals are fewer and further
between, at least in my view, than people might like to
imagine.
Neal Bradsher: You just referred to the issue of criteria which was my
next question. What are roughly your top three or four
criteria for an acquisition?
Louis Silverman: Yes, I'd like to defer that Neal to a later discussion.
That's a topic that I know is going to be part of my
future discussions with the board. And rather than
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front run that discussion on this call I'd rather give
the new board members the courtesy of a thorough
discussion and then be able to answer your question a
little bit better down the road.
Neal Bradsher: That's very reasonable and appropriate and I appreciate
that. My last question is for Pat. Pat, I guess if I
look at the growth of NextGen and normalize for hardware
fluctuations, it seems to me that you guys continue to
grow pretty steadily at a pretty nice rate. And so at
the same time everyone recognizes the long term
opportunity is big. You mentioned the very low
penetration levels earlier.
What do you worry about? That's my question. What do are
the primary issues that you're looking at in terms of
executing to over say the next two or three years take
advantage of what could be the ability to build a much
larger business?
Patrick Cline: First let me say that's a very good question. And with
that behind me I would say that customer service and our
ability to deliver high quality and the best support in
the business is and will remain a challenge. We are
constantly balancing resource demands, demands to spend
money internally let's say against the needs to grow
profits and deliver handsome return to our shareholders.
So walking that fine line is something that is a
challenge and it's something that we spend a lot of time
thinking about.
Another challenge is staying ahead of our competitors.
We think we've done a great job in that area. We think
we're going to continue. But it's not easy. We think if
we stay ahead of our competition with regard to product
and we continue to deliver terrific customer service
that a lot of the rest will fall into place.
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We also spend time thinking about how we can move from
selling 50 systems or 60 systems in a quarter to selling
250 systems in a quarter should we be so lucky as to
have to face that. And so we think about new, innovative
ways of delivering product and supporting product and
implementing product and training our customers and
those sorts of things. There's never a want for
something to do around here.
Neal Bradsher: Just to clarify, it sounds as though essentially you're
discussing execution and managing growth issues as
opposed to market interruption or competitive issues. Is
that right?
Patrick Cline: At this point I would say that's a good characterization
of what I'm telling you. I don't have market issues or
competitors keeping me awake at night.
Neal Bradsher: Great, okay. Thanks very much and again, congratulations
to all of you.
Men: Thank you.
Operator: You have a follow-up question from the line of Wayne
Kennemore with First Capital Alliance.
Wayne Kennemore: Hello, thank you for taking my follow-up question. This
is a kind of qualitative question. I mean, obviously
NextGen is a, you know, best in breed EMR that - and
you're neck and neck with Epic and AllScripts who make
similarly high quality products.
So to me it seems like given the general acceptance of
EMRs as the future part of quality healthcare, from a
marketing standpoint, how are you persuading prospects
to purchase your system? From a marketing standpoint
what do you
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do to convince your potential customers that NextGen is
the system that they need to use rather than those
offered by your competition?
Patrick Cline: Another very good question. I would first have to differ
with your assumption that we're neck and neck with other
companies and I don't want to beat on one competitor or
another or necessarily mention one or cite one. But I do
feel that our products are way out in front of most of
our competition.
Wayne Kennemore: Fair enough.
Patrick Cline: Part of our job is to make sure that the prospects and
customers understand that. Another thing that we are
struggling with is some of our newer competitors and
frankly a couple of the competitors that aren't so new
tend to sometimes write checks that are difficult for
them to cash. There are companies that are bent on
winning a sale at almost seemingly to me at whatever the
cost.
And on one side I have to hand it to them because they
like to win and they don't like to lose. On the other
hand to the extent that they can't deliver on their
promises, you know, it's bad for not only the customer
in that way but it's bad for the industry in general.
And again, I'm not necessarily tying this to the
companies that you mentioned but more competition in
general to try and again give you a little texture to
the question.
Wayne Kennemore: Okay.
Operator: Your next follow-up question comes from the line of
Brandon Osten with Sprott Securities.
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Brandon Osten: Hi guys. I was just going through some of the numbers
you mentioned earlier on the call. First of all Paul,
did you talk about the capitalized R&D and the amortized
R&D?
Paul Holt: Yes I did.
Brandon Osten: Oh I'm sorry, can you just repeat that number for me?
Paul Holt: Yes, we amortized $514,000 in cap software and we had
$241,000 in depreciation expense. We capitalized
$489,000.
Brandon Osten: Okay, so capitalization was below amortization.
Paul Holt: Yes.
Brandon Osten: Okay, the other question, EDI revenue in NextGen, $1.8
million? Is that the right number?
Paul Holt: No, it was closer to $1.4 million.
Brandon Osten: Okay, $1.4 million. All right, I'm good. What was the
EDI in QSI then?
Paul Holt: EDI in QSI was around $1.2 million.
Brandon Osten: Okay great, thanks guys.
Operator: At this time there are no further questions. Mr.
Silverman, are there any closing remarks?
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Louis Silverman: Yes. I'd like to thank everyone for their interest and
participation on the call and would also like to remind
people as we've put out on our most recent two earnings
related releases that beginning next quarter we will
move our earnings releases and earnings calls to after
the market close. So that's just a heads up, next
quarter and thereafter the releases will be coming after
the close along with our earnings call.
Again, I'd like to thank everyone for their
participation.
Operator: Thank you for participating in today's Quality Systems
Second Quarter Fiscal 2005 Earnings conference call. You
may now disconnect.
END