NextGen Healthcare, Inc. (NASDAQ:NXGN) Q1 2023 Earnings Conference Call July 26, 2022 5:00 PM ET
Company Participants
Matthew Scalo – VP, IR
David Sides – CEO, President & Director
James Arnold – EVP & CFO
Conference Call Participants
Jeffrey Garro – Piper Sandler & Co.
Stephanie Davis – SVB Securities
Jack Wallace – Guggenheim Securities
Anne Samuel – JPMorgan Chase & Co.
Operator
Welcome to the NextGen Healthcare Fiscal 2023 First Quarter Financial Results Conference Call. Hosting the call today from NextGen is David Sides. President and Chief Executive Officer; Jamie Arnold, Executive Vice President and Chief Financial Officer; and Matt Scalo, Vice President of Investor Relations. Today’s call is being recorded. And now I will turn the call over to Matt Scalo.
Matthew Scalo
Thank you. And before we start, I’d like to remind everyone that the comments made on this call may include statements that are forward-looking within the meaning of the federal securities laws, including and without limitations, statements related to anticipated industry trends, the company’s plans, future performance, products, perspectives and strategies.
Risks and uncertainties exist that may cause results to differ materially from those expressed in forward-looking statements, including, among others, the risks set forth in the company’s public filings with the U.S. Securities and Exchange Commission, including the discussion under the heading Risk Factors in the company’s most recent annual report in the Form 10-K and any subsequent quarterly report on Form 10-Q. Any forward-looking statements speak only as of today. The company expressly disclaims any intent or obligation to update these forward-looking statements.
Our remarks on today’s call include both our earnings results and guidance, which contains certain non-GAAP financial measures. For our earnings results, the GAAP financial measures most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our latest quarterly earnings release that was filed with the SEC and is posted to the Investor Relations section of our website.
This release also provides qualitative descriptions of how we have calculated the non-GAAP financial measures contained in our guidance. At this time, I’d like to turn the call over to our President and CEO, David Sides.
David Sides
Thank you, Matt. I’m pleased to report another solid performance for our fiscal first quarter. Our commercial team continues to execute, closing a handful of 7-figure wins while delivering 14% bookings growth.
These sizable wins from both inside and outside our base reflect NextGen Healthcare’s focus on the independent provider and our comprehensive offerings that enhance the clients’ ability to achieve better clinical and financial results. We continue to see wins across a range of medical specialties from ophthalmology to orthopedics to integrated multi-specialty groups.
And once again, new clients accounted for over 25% of fiscal first quarter bookings. We believe these trends support our confidence and our growth acceleration in the fiscal second half. As for key revenue growth drivers this quarter, I call out our subscription services revenue line grew a healthy 12% and reflects double-digit growth in NextGen Office, and cross-selling of our surround solutions into our enterprise base. We remain on track to achieve our target $100 million and contracted annualized recurring revenue for the surround solutions by the end of fiscal year ’24.
In response to some recent investor questions regarding general market conditions, I wanted to reiterate our positive outlook for the independent ambulatory market and NextGen’s business model. We continue to see overall practice volumes at healthy prepandemic levels. This shows in our volume-driven businesses such as data and reflects an ongoing industry trend of procedure volumes migrating out of higher-cost settings like hospitals, favoring lower cost settings and independent health care providers.
We also continue to see healthy activity levels in our current pipeline. Development activities such as lead generation and demos reflect the positive demand environment. We are not seeing much impact from economic concerns. We continue to constructively engage prospects and our clients to find ways to achieve better outcomes for all.
Since our last earnings call, I’ve had the opportunity to meet with our largest clients in person or at our large client user group, at client sites and at our leaders in Healthcare Summit. We’re excited about our move to cloud native technology, enhanced mobile capabilities and our insights. It was good to get confirmation on our strategies that focus on outcomes aligned with our client strategies.
So from what we are seeing from the market, our positive outlook has not changed. Turning to NextGen’s business model. 91% of our revenue is recurring in nature, and we have no customer concentration risk. And we are building on this steady foundation to achieve our long-term goals. We continue to make progress on certain strategic initiatives.
In fact, today, we announced the sale of certain dental assets, a legacy part of the company. Through our more disciplined portfolio management process, we move forward with monetizing these nonstrategic assets. It’s important to note that we are adjusting our fiscal ’23 financial guidance strictly to account for this transaction.
Another example of our progress is the expanded relationship with InstaMed that we recently announced. We are pleased that our patient pay offering is now even more accessible and easy to use for both patients and clients. We expect patient pay to contribute to fiscal year growth and its contribution is already incorporated into our fiscal year guidance. Now let me ask Jamie to provide further details. Jamie?
James Arnold
Thank you, David, and let me welcome everyone to this call. I will start where David left off, strategic activities, specifically the sale of the certain dental assets. This transaction, while relatively modest in financial terms is a good example of how we are increasing focus on our broad portfolio of assets and their contribution to strategic value.
The commercial dental assets include our legacy dental system, Quality Dental Web, our multi-tenant SaaS offering for dental practice and their customer contracts, but excludes EDR, which is the dental record system we licensed to Federally Qualified Health Centers.
These assets generated approximately $10 million in annual revenue per year. And while they generated positive contribution margin, they produced no growth over the last few years and would have required significant incremental investment in future periods. We are pleased these assets have found a good home and we’ll discuss the transaction’s impact on our fiscal year 2023 financial guidance later in my prepared remarks.
Now let me turn to the first fiscal quarter of 2023. First quarter bookings came in at $39.2 million, an increase of 14% on a year-over-year basis. Adding to David’s comments, we continue to see increased demands across our client base for surround solutions like managed services and EDI and new client wins accounted for over 25% of bookings this quarter, a continuation of a trend that we’ve seen for approximately 2 years.
Total revenue of $153 million in the quarter increased 5% year-over-year. Of this total, recurring revenue accounted for $139.8 million or 91% and was driven by growth in subscription services and managed services. Subscription services generated $42.8 million in the fiscal first quarter revenue an increase of 12% year-over-year.
Growth drivers continue to be next-gen office enterprise SaaS as well as a host of surround solutions such as mobile and telehealth. I want to call out that we have introduced a new line in recurring revenue, transactional and Data Services, or TDS. This line comprised of EDI and data plus now includes our patient pay, which was previously reported in the managed services revenue line.
A historical reclassification table is available on our investor web page for modeling purposes. Managed services, which no longer includes patient pay, generated revenue of $30.6 million and grew by 10% over last year. Our managed cloud services as well as revenue cycle management continues to drive performance of this line.
Transactional and data services, which includes patient pay, generated $27.2 million in revenue this fiscal quarter, down 2% over the year ago period due to modest decline in data revenue, which can be lumpy. Software maintenance and support revenue of $39.1 million was up 2% over the prior year period.
This reflects strong client retention and some upfront side from large expansion clients, continuing to pursue a perpetual license and maintenance model. Nonrecurring revenue of $13.5 million was essentially flat over the same quarter last year. Inside this line item, software and hardware line was down reflecting the lumpiness of software license, contract timing, offset by growth in nonrecurring services.
Gross margins of 47.8% were down 240 basis points compared to the same quarter last year. This trend reflects a combination of factors, which we discussed last quarter, including our investments in centers of excellence and other activities to accelerate spring ’21 migration and a products mix shift, particularly given the decline in nonrecurring software license revenue and the low increase in lower-margin managed services.
Turning to operating expenses. SG&A of $49 million increased 1% compared to a year ago. This reflected lower legal expenses associated with shareholder disputes that have now been resolved and cost-saving actions previously discussed, offset by a return to travel and increased personnel costs.
Net R&D expenses of $21.8 million increased $2.5 million from a year ago and represents additional projects across our 3 domains. Fiscal first quarter net R&D spend represents 14% of total revenue. We had a GAAP tax benefit of approximately $250,000 this quarter with a GAAP effective tax benefit of 27%.
Our non-GAAP tax rate remains at 20%. On a GAAP basis, Q1 fully diluted net income per share was $0.02 compared to net income of $0.04 per share in the fiscal first quarter of 2022. On a non-GAAP basis, fully diluted earnings per share for the fiscal fourth quarter — first quarter of 2023 was $0.16 compared to $0.25 in the year-ago quarter. This result is in line with our fourth quarter commentary and consensus.
Turning to the balance sheet. We ended the fiscal first quarter with $40.4 million in cash and equivalents and no balance outstanding on our line of credit. We purchased 148,000 shares for $2.5 million at an average cost of $16.93 per share. We have $21.6 million remaining on our current share buyback program. Free cash flow for this quarter was a negative $14.1 million, reflecting first quarter’s seasonal activities such as payout of the accrued bonus.
Now to our fiscal 2023 financial guidance. As noted in the press release, we are adjusting our prior guidance for the divestiture of our commercial dental assets. I want to be clear here we are adjusting our full year guidance to reflect the transaction’s impact and only the transactions impact.
We now expect fiscal ’23 total revenue to be in the range of $621 million to $633 million, down approximately $7 million, reflecting the 8 months contribution from the sold dental assets. Moving to adjusted EBITDA, we are lowering our range by about $2 million to between $109 million and $114 million. And our fiscal non-GAAP EPS is now in a range between $0.92 and $0.98 or a reduction of $0.03.
If you want to adjust your historical models, annual revenue from the products we have divested cell into the following 3 lines: approximately $4 million in EDI, $4 million in maintenance and $2 million in subscription services.
In closing, I am pleased with the continued momentum and diversified growth we generated in this quarter. We will continue to focus on profitable growth as we consider internal and external capital deployment to drive long-term shareholder value. And now let me turn the call back to David for closing comments.
David Sides
Thank you, Jamie. While it feels like some time ago, it was only made at our investor event where we introduced our business model using 3 domains: enterprise, office and insights.
Enterprise is our largest area by revenue and should continue to grow in the mid-single-digit range and ahead of the overall market. We expect growth to be driven by new client wins and further penetration of existing clients with our expanding breadth of solutions. Our second domain office focuses on the smaller independent ambulatory practice market.
This area continues to grow well, reflecting the strength of our SaaS offering and our ongoing success providing managed services. We see the office domain continuing to grow double digits as we execute and expand into slightly larger practices in adjacent medical specialties over time.
In our third domain, what we call insights, it offers significant untapped potential. We are investing in a number of solutions and strategies across connectivity, analytics and outcomes that will provide a solid foundation for strong growth in this business over the long term.
In closing, NextGen Healthcare continues to execute with a focus on driving accelerating and profitable growth. Our overall positive outlook reflects the combination of the general health of the independent ambulatory market, NextGen’s resilient business model and our focus on driving shareholder value. This concludes my comments. We’ll move to questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from Jeff Garro from Piper Stanley.
Jeffrey Garro
Why don’t we start off on the sale of the dental assets. So I wanted to ask is any specifics you can share first around timing of deal close and net proceeds expected. And then maybe more strategically, help us understand retaining the FQHC related assets and the resources needed to support that while maybe it didn’t make sense to support and update the divested assets?
David Sides
Yes. Good question. So we are keeping the assets that support the FQHC, so all that dental pieces for them, tribal community health centers and the folks to keep that up to date.
To your point, the divested assets would have been a big lift for us to bring the modern kind of technical standards. And when we looked at it and looked at focusing the business further, we thought a divestiture was a better way to manage that portfolio from a return and capital allocation perspective. Jamie can give details. They were in the script, but any other details about the…
James Arnold
Your question was when is — is the transaction going to close? It closed today. And the proceeds are — total purchase prices is about $12 million with a sort of normal hold back for a 1-year period. So there’ll be cash in this quarter. And the use of the proceeds is — at this point, we will…
David Sides
Call it cash on the balance sheet.
James Arnold
All of the other cash on the balance sheet.
Jeffrey Garro
Excellent. That helps. And I’ll follow up on the capital allocation front. It does seem like this dental sales plus your ongoing cash flows and recent increased liquidity could allow you to more actively use the balance sheet.
So I want to ask what the current thought process is on share buybacks versus M&A and then get your pulse on whether private company valuations are getting more realistic.
David Sides
So on your first question, our bias is toward M&A because to answer your implied third question, we think private valuations usually show a 2-quarter lag to public, and we’re starting to see the private company valuations get to be more attractive.
So I’d say we have a bias towards M&A with cash over share repurchases, though in the quarter, we did buy back shares at a modest level, about $16.93. So we are still buying shares when we see them at what we see as an attractive price, but our preferred use of cash is to further the strategic investments and products that we can offer to the industry to further grow the business more quickly and get to that double-digit growth that we’ve talked about.
Operator
Our next question comes from Stephanie Davis from SVP Securities.
Stephanie Davis
I just want to finish a little bit more on that portfolio management question. When you think about your strategy for assets, that you are debating divesting from your core portfolio, is there any general rule of thumb in either growth or margins of what you’re not looking to keep?
David Sides
I’d say we have a preference for growth, right? So we’re trying to grow the business, assets that aren’t growing as quickly or we don’t see a near-term opportunity to grow as quickly as the 10% on the whole are probably the ones that we’re going to take a closer look at.
Some of the way that we’ve looked at if you’ve seen some of our recent announcements, doing business with others to fill in parts of our portfolio or where we’ve seen clients rapidly adapt parts of our portfolio that are growing better, those are places that we don’t have to buy everything. We can partner. So you’ve seen us partner recently with InstaMed where about half of our clients were using InstaMed.
There’s opportunity to get into market more there. And so we’ve made that change. So it’s just another example — it won’t be — divestitures won’t happen very often, actually, I don’t think that you’ll see us do things like InstaMed where we see opportunities to accelerate growth where we already see good client uptick.
Stephanie Davis
Understood. So less of a focus on the margin side, just given the premium portfolio in the dental assets?
James Arnold
Could you say that again, Stephanie?
Stephanie Davis
So is there less of a focus on the margin side, given the premium EBITDA profile for the dental assets?
David Sides
Yes. I mean we think about both. But your question before was where is our bias and I’d say our bias is to grow. So if there are assets that are growing slower than the 10% that we’re ascribing to, those are the ones that we’re taking a hard look at either getting them to that growth profile or how strategic are they to our business.
Stephanie Davis
Understood. Hey, going to that growth side of the business. One follow-up for me. Can you talk about the pace of converting bookings into revenues? You’ve had a lot of really strong booking speeds over the past few quarters. So curious why there was a reiterated core revenue guidance.
David Sides
We’re only 1 quarter in. So I’d say we had a good, reasonable quarter. We did exactly as we’ve said. There’s still work to do in the year. We’ll see how the rest of the year plays out from that perspective.
Operator
Our next question comes from Jack Wallace from Goenheim.
Jack Wallace
Two for me. I just wanted to get some incremental color on the hiring cadence coming into the year. It seemed like you’re a little behind schedule on — or you would have liked to have been able to hire a bit faster third, fourth quarter last year, we knew there could be an uptick particularly in R&D this quarter. Where are we with that cadence? Did we catch up the plan? And is there any more, let’s call it, lumpy hiring goal to go as we progress through the year?
David Sides
We continue to make good progress with the sales, a good sales quarter. We’re looking for more implementation people to help us get through that backlog. We could hire more there, and that’s a focus of ours in our HR team. There’s a ramp behind that.
So you have to ramp the people to get the skills to install next gen and they install next gen. So in the beginning, there’s a carrying cost there. But that carrying cost is preferable to using third parties. So we’re prudent in that mix, but we’re still hiring there. I think on the engineering side, we’re mainly good, always looking for good developers. So appreciated any resumes you sent our way on either of those 2 roles.
James Arnold
Yes. But just to go back, I think we have caught up. We were behind in Q3, Q4. Q1, we caught up largely. So with the exception of the one area that David talked about, implementation and training resources, we’re pretty well caught up with where we expected to be.
Jack Wallace
That’s helpful. Switching gears, put out a press release in the quarter about the Insights business, the Insights Data Hub. Just wondering if you could talk a little bit more about how that press release and product so far has been received in the market and if there’s any bookings activity that’s taken place that, that offering set out.
David Sides
Which insights on are you…
Jack Wallace
The next-gen data hub?
David Sides
Yes. So the next-gen data hub, so far, good uptick. We’re still training the sales force on what’s the approach, how do we target that market, building the pipeline there. So I’d say it’s impact in Q1 was nominal, very small. But really, our goal is to exit this year with some good momentum behind that. So early days, but promising from a pipeline build, no results yet really in the revenue line item at this point.
Operator
[Operator Instructions]. And our next question comes from Anne Samuel from JPMorgan.
Anne Samuel
I was wondering if maybe you could touch a little bit on utilization, what you’re seeing there and if there’s any impact to your payments business?
David Sides
Okay. Yes. Thanks, Andy. So from a — we’re seeing from our clients from an RCM EDI perspective, we’re seeing still elevated use there above the kind of prepandemic levels. So that’s returned to normal.
We think that continues. So we’re not seeing a slowdown there. If your question is a little bit around the economy, that still seems to be at elevated levels, and we’re comfortable with how we’ve thought about it for the year. We don’t see any changes there.
Anne Samuel
Great. And maybe just on the RCM business, just wondering how that’s going, particularly given some of what we’re seeing around labor in the hospital environment.
David Sides
Yes. It’s a good question. The labor environment actually is a tailwind for that. In our view, we see clients looking for even spot work that needs to be done like working at Claims SKU or working AR. We’re — we’ve started offering — I think we mentioned last quarter, we started offering those services a little bit piecemeal just so that they can try our services and then expand as they have difficulty perhaps in the market.
And so we expect to see that strategy of helping clients be sure they achieve their financial outcomes, will continue to drive growth for us because they’re competing against the market that has dramatically increased kind of at the lower end when you think about $15 to — read about $15 to $17 an hour is the new normal. That was not where many offices were before that switch.
So we see that as an opportunity. We see clients looking to us for automation and for services that further automate, especially as they have a hard time recruiting. So we’re bullish on that part of the business.
Operator
And our next question comes from Jeff Garro from Piper Stanley.
Jeffrey Garro
One more for me. I wanted to touch on the InstaMed partnership. Just wanted to ask what’s kind of — what’s new and expanded about that relationship? Is it more than — in the release I noticed, Apple Pay, Google capabilities reference, but maybe there’s a stronger go-to-market partnership there as well. And anything you could share on the level of adoption of that offering or recent level of client interest, I think, would be helpful, too.
David Sides
So the InstaMed piece really took off for us during the pandemic. Our internally developed pay feature didn’t support contactless payment. And so you can imagine in the pandemic, that became a really hot item that we had InstaMed clients who were supporting that, both contactless and Google and Apple Pay.
And so we saw good client uptake, also has some nice features as far as how you manage collections and other pieces and a go-to-market that’s attractive. So for us, it was a really fairly straightforward decision to say, let’s move more in that direction and move forward in that way. It’s been in our plans and guidance that piece.
So there’s no real change there. But early indications are good because clients like that — the new functionality that comes with it compared to what we offered and the patient experience is better. using it because we accept all kinds of payments where we didn’t have such a broad range before.
Operator
And it appears we have no further questions at this time. I will now turn the program back over to David Sides.
David Sides
Thank you, everyone, for joining this Q1 earnings call. We thought it was a good quarter and appreciate your continued interest in the company. Solid quarter. The pace of activity is picking up for us.
And we think we have good momentum as we enter through this fiscal year, and we look forward to talking to you next quarter and 3 months for our fiscal Q2 earnings call. Thanks again.
Stephanie Davis
Thank you, ladies and gentlemen. This concludes today’s conference. You may now disconnect.
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