Operator: Good afternoon. My name is Stephanie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Quality Systems First Quarter 2003 Earnings Results 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 the pound key. Thank you.
Mr. Silverman, you may begin your conference.
Lou Silverman: Thank you, Stephanie and welcome to Quality Systems� Fiscal Year �03 Q1 Conference Call. Once again, I�m joined by Greg Flynn, who runs our QSI Division; Paul Holt, our CFO; and Pat Cline, President of our NextGen Healthcare Information Systems Division.
Please note that comments made on this call may include statements that are forward-looking within the meaning of the securities laws including statements related to anticipated industry trends, the company�s plans and strategies and projected operating results.
Actual results may differ materially from our expectations and projections and we ask that you refer to our SEC Forms 10K and 10Q for discussions of the risk factors that could impact our actual performance.
For the eighth time in the past nine quarters, the company had record revenues and for the ninth time in the last ten quarters, the company achieved record earnings and EBITDA for the quarter. Revenues totaled $12.3 million up 13% from the prior year. Earnings per share at 26 cents per share, exceeded prior year by 30%. EBITDA at $3.1 million was up from $2.4 million in the prior year.
As noted in our press release, the quarter�s top and bottom line results were largely driven by strong performance at our NextGen Healthcare Information Systems unit. Following up on the division�s first $7 million quarter in March, NextGen had it�s first $8 million quarter, coming in at $8.1 million. This represents a year-over-year revenue increase of 23%. Operating income at NextGen was nearly double the prior year�s total.
Our EDI unit came in with revenues of $1.7 million, representing 13% growth on a year-over-year basis which, while contributing to the quarter�s revenue and profit performance, was not up to our internal standards.
On the positive side, our EDI staff in conjunction with our NextGen team was successful in doubling the sell through of our EDI services into our NextGen client base versus the year prior.
The QSI division�s revenues at $4.2 million, were marginally lower than levels achieved in prior quarters and off of our internal standards a bit. Operating income followed suit but remained strong at $1.2 million which represents a very respectable 28% operating margin for the quarter.
Cash and cash equivalents increased to a record $28.9 million during the quarter. Despite the significant increase in cash over the past several quarters, interest income was approximately half of what it was during the prior year; $104K in this quarter versus $206k in the prior year - owing to the low interest environment.
Once again, collections activity was very strong during the quarter as DSO�s dropped under 100 days to 98 days. Annualized revenue per employee stood at $210,000 for the quarter -- that was a record for the company -- and there were no stock repurchases during the quarter.
Though we don�t have any particularly momentous news items to report on the non-financial front, I would like to mention that at the end of May, the company relocated its corporate headquarters and QSI division operations from Tustin, California to Irvine, California. Those not located in Southern California should know that that�s about 5 or 6 mile relocation.
At the end of this month, our NextGen division headquarters and EMR operations will relocate to new and larger facilities near its current location to accommodate present and future growth requirements.
It was another good quarter of progress from a product development perspective, across all of our operating units and that�s exactly the kind of progress that we will look for and will need to fuel our future growth and performance.
In addition, as evidenced by the return to 20% plus growth in NextGen�s top line, our sales and marketing investments and initiatives, as well as our continued investment in operating infrastructure to support our growth contributed to divisional and company performance.
Greg and Pat will give you some additional texture on these items later in the call. From my seat, the quarter�s performance turned in by the NextGen division and team, as well as the performance of our collections staff was particularly impressive.
And, now, I�ll turn the call over to Paul Holt for some additional financial texture on the quarter.
Paul Holt: Thanks, Lou, and hello to everybody who has joined us today. It�s exciting to be able to once again report strong results for this quarter. I am pleased to report strong growth in our system sales revenue which grew to $6.4 million, an increase of 15% compared to the prior year.
We also saw an 11% increase in recurring revenue which I�d like to add has now grown each and every quarter for the past two years.
Gross profit margin this quarter climbed to 60% of revenue. This compares to 56.6% in the year ago quarter. Our gross margin this quarter was significantly higher than our recent historical range of between 55% and 58%. This is attributable to a significantly lower level of hardware content included in NextGen�s revenue this quarter. While I�m happy to see this, I also want to remind everyone that the level of hardware content varies from quarter to quarter and the higher gross profit margin we saw this quarter should not be considered a trend.
SG&A; expense as a percentage of revenue was roughly unchanged at 29.8% compared to 29.7% in the prior year quarter. Total SG&A; expense on a dollar basis was $3.7 million compared to $3.25 million a year ago. The largest contributor to this increase was related to headcount and selling related expenses in the NextGen division, something that Lou alluded to earlier.
R&D; expense came in at $1,135,000 compared to $1,107,000 in the year ago quarter. As a percentage of revenue, that equates to 9.2% which compares to 10.1% in the year ago quarter.
Company�s net after tax profit margin improved to a record 13.2% compared to 12.5% in the prior quarter and 11.5% the prior year. This is attributable to the higher gross profit margin that we saw this quarter, and was also a record.
As Lou has mentioned, NextGen�s revenue was $8.1 million, an increase of 23% compared to the prior year. One element of this I�d like to talk about again is the fact that NextGen continues to grow its customer base and we are continuing to see the benefit from follow-on revenues in the form of maintenance and EDI. Total recurring revenue in the NextGen division was $2.3 million this quarter, an increase of 28% from the prior year.
Moving to the balance sheet, I�d like to highlight three items: cash, receivables and deferred revenue. During the quarter, the company liquidated its short-term investment portfolio, which is why you no longer see that on the balance sheet. And, as Lou mentioned earlier, we are continuing to see improvements in our cash collections efforts resulting in our DSO number improving to 98 days compared to 104 days in the prior quarter and 114 days a year ago.
At year-end, the company�s cash balance equated to $4.72 per share compared to $4.17 per share three months ago.
You know, at the end of the day, I like to be able to say, just like Jerry Maguire, "Show me the money!" and this company can show you the money by being able to account for our earnings with actual cash. As Lou mentioned, though, despite the increase in cash, the investment income did decline compared to the year ago quarter. And that was related to the decline in short-term interest rates.
One other item of note this quarter is our deferred revenue which grew significantly. Deferred revenue grew from $6.2 million at the start of the quarter to $7.9 million and this is primarily attributable to an increase in implementation and training services which were sold during the quarter.
I�d like to thank you all for your continued support and interest in our company. I�m going to 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. I have some brief additional comments. While revenues for the quarter were materially similar to the prior quarter, largely due to the continued slowness in our consolidator market niche, I believe that the quarter was noteworthy from a number of positive perspectives for the division.
First, we saw a new purchase of CPS, our Clinical Product Suite. Additionally, within our client base, two of our existing clients expanded their current CPS implementation. Also, as mentioned, our EDI business again grew substantially within our NextGen client base. The growth within NextGen represented 104% growth over the corresponding quarter of the prior year and 18% growth over the previous quarter. We�re proud of this growth and look to continue expanding revenue significantly in this area.
On our Sequoia software development initiative, we had five new data miner software sales and continued deployment of our enhanced user interface screens among several of our clients this quarter.
The quarter was further noteworthy for the upgrade and expansion of our installation in one of our large, prestigious dental school clients. On the whole, QSI clearly remains the pre-eminent player among large dental enterprises.
At this time, I would like to thank our QSI division staff for their contributions to the company. Once again, the division remains a strong contributor of the company�s profitability and record of earnings growth.
Now, I would like to turn the call over to Pat Cline, President of our NextGen Division. And Pat, this is getting to be old hat - congratulations again on NextGen�s quarter.
Pat Cline: Thank you, Greg. Hi everyone. I continue to be very proud of the NextGen team and the record revenue and profit performance that we delivered in the first quarter of FY03.
During the quarter, we executed 20 agreements with new customers and 25 agreements in total. Moving to the product, we�re working on new releases of both the NextGen EMR, the Electronic Medical Record, and NextGen EPM, which is our Enterprise Practice Management system. Both of those releases are targeted for coding completion at the end of September and the releases will come later in the year.
In Sales and Marketing, the leads we obtained earlier in the year through various industry conferences are beginning to impact our pipeline which has increased to about $29 million at this point. We have 19 sales reps as of today - that�s sales reps and managers. Over the last couple of months, we actually hired three new salespeople. We released one and we transferred one to another department, so the net increase is one in the area of sales.
Going forward, I feel very positive about our ability to aggressively grow NextGen and I�d like to say thanks to the NextGen employees who continue to give 100%.
That�s all for now. I think we�re ready for questions.
Operator: 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 Mike Crawford of B. Riley & Company.
Mike Crawford: Lou, good morning! Could you give a sense of the linearity in the quarter, specifically, the last couple of weeks, how that shaped out?
Lou Silverman: Yes. Again, Mike, this quarter had the same profile as virtually every other quarter that we�ve had. We had a nice foundation set in the first couple of months in the quarter but - our money was made down the stretch of the last month of the quarter. So, I would say the profile from a monthly basis is that the linearity of this quarter is virtually unchanged from any other quarter that I�ve been around.
Mike Crawford: I guess, what I was trying to get at more was what do you - sometimes, you figured that more deals than expected close or sometimes a couple might have slipped and how would you characterize this quarter versus those normal expectations.
Louis Silverman: Again, I think it�s really very similar to what we�ve seen in the past. We didn�t have any material variance from what we�ve seen in any past quarter that I can recall. And, again, the big point is that from a sense of how the quarter is working out, we don�t know much through the first couple of months and probably don�t even know much through midway through the third month of the quarter, but we close a lot of deals our last month. This quarter was no different.
Mike Crawford: This one is for Paul. Of the $13 million in receivables, what percent of that is to the dental consolidators? Or what amount?
Paul Holt: Mike, I don�t have the exact number in front of me. I can just give you a rough, round number. Probably less than 5%.
Mike Crawford: Less than 5%?
Paul Holt: Yes.
Mike Crawford: That�s good. And then for - on the NextGen side, is there anything in particular noteworthy about the new EPM and EMR releases, Pat?
Pat Cline: I would say not in particular. There are a number of enhancements in both of these releases. On the EMR side, we�ve added some very nice enterprise functionality, the ability for practices within an enterprise or within a geographic community to communicate patient records between one another.
On the EPM side, a lot of the release is completing contractual requirements that we�ve had for a couple of customers and also, as you know, some of the HIPAA transaction set rules go into effect in October unless clients file for an extension. We�ve committed to having all of our HIPAA transaction compliant claims, remittance and other programs ready and able to go by that date. So, some of the EPM release has to do with HIPAA compliance.
Mike Crawford: Okay. And then, I guess, finally, I just like to make a comment that it kills me to see all that cash sitting there not really going to work earning that looks like about 1.5% when - you know, even at 3%, that would probably add 4 cents to your EPS during the year or even better buying back some of the stocks. So, thanks a lot!
Louis Silverman: Thank you, Mike.
Operator: Your next question comes from the line of Andrew Shapiro of Lawndale Capital Management.
Andrew Shapiro: Hi, good morning! I have a few several questions. I�ll ask a few and want to drop back into the queue here, if you could. Can you give us a breakout on the depreciation and amortization and also the cap ex, including the capitalized software for the quarter so we can work into that EBITDA number?
Paul Holt: Andy, the total depreciation expense for the quarter was $205,000. That breaks down to $163,000 for NextGen and $42,000 for the QSI division. We had $318,000 in amortization, $235,000 at NextGen and $83,000 at QSI. Capitalized software breaks down to...
Andrew Shapiro: Total cap ex and cap software if it�s different.
Paul Holt: Okay. Total capitalized software $325,000, total fixed assets $209,000.
Andrew Shapiro: So, $534 for the total of cap ex?
Paul Holt: Yes.
Andrew Shapiro: The payables dropped pretty substantially. Can you explain a little bit of what that was all about or the time and the payments of something big?
Paul Holt: Well, no big strategy there. We had a few large invoices at the end of last quarter that hadn�t been paid yet, some of them which related to EDI services, but I can�t tell you there�s any strategy that reduced our accounts payable. We�re just pretty straightforward about paying our bills on time.
Andrew Shapiro: Yeah, it looked kind of high actually at the end of the year so that�s a reverse on that one. The deferred service revenue, a portion of that as we�ve talked in other calls, a portion of that is built into the receivables and as such, you know, provides for a higher day�s outstanding number. You made great progress during the quarter already. I�m trying to get a feel for whether the deferred service portion of accounts receivable -- if that portion changed to get that kind of what we�ll consider like the underlying accounts receivable turns. Can you give me a little bit more detail, a breakout of what the deferred service revenue portion is inside of the AR?
Paul Holt: Yes. I haven�t done that work yet but it should be somewhere near where we were at last quarter. As I recall, 40% is in accounts receivable and deferred revenue.
Andrew Shapiro: And the receivables when they�ve down very nicely and you�ve made a really good progress in your collections, was it similar in mix across the two divisions or is there something happening within one division, better collections or quality of customers?
Paul Holt: The progress we made was in both divisions so I can�t really point to one.
Andrew Shapiro: The last one, and then I�ll back out here but I do have more so please come back to us. In your financial disclosures and also here in your script, you talked of taking on - you moved in new headquarters and also NextGen will be moving to new buildings. Your SG&A; is currently $3.67 for the quarter, about how many months of this June quarter in amount was the incremental rent expense that�s kicked in and then also, can you give us some guidance as to the incremental SG&A; on a year-over-year basis when all the spaces faced in here? What we should be looking for just to provide some, I guess, projectability on that fixed part of the SG&A;?
Louis Silverman: Andy, this is Lou. We incurred approximately one month�s worth of incremental expense as we�ve been in our new space for approximately one month here in California. That would have had a relatively negligible effect on SG&A; for the quarter. In the bigger picture and I think more to your point and your question, you can look in ensuing quarters for the rent expense delta to be approximately an additional $60,000 per quarter, company-wide. All in...
Andrew Shapiro: All the new space is just $60,000 a quarter incremental?
Louis Silverman: We are very thrifty shoppers.
Andrew Shapiro: Excellent! Now, that�s for the first few years and the lease has picked up?
Louis Silverman: I would say that�s a fair projection for the first year. There are no huge steps in any of the leases that we have signed although it is fair to say that there is stepped rent throughout the course of the leases. I would also refer you to our 10K.
Andrew Shapiro: That�s what I saw, there was some step-up in the back years. Yeah.
Louis Silverman: So there is some step-up but it�s not in an order of magnitude.
Andrew Shapiro: You said $60 for the quarter not a month.
Louis Silverman: I�m saying approximately $60,000 per quarter.
Andrew Shapiro: And the last piece on this, the space in SG&A; amount is the sizeable NextGen space that you�re talking on, is this primarily an expansion for space to be filled with expectations or growth or a consolidation of the facilities and providing for space for your existing staff?
Louis Silverman: The combination of a number of those things. We are currently overcrowded where we are. We don�t have any plans to consolidate any facilities per se. We�re not going to be closing down any other spaces in favor of the additional space in Pennsylvania though we do have some plans to continue to add staff across virtually all of our departments to support the growth that we�ve experienced to date and to be able to deliver on the future initiatives that we want to deliver on.
Andrew Shapiro: Okay. I�ll back out then I�ll have some - a few other questions when you come back to me in the queue. Thank you.
Louis Silverman: Thanks.
Operator: Your next question comes from the line of Gene Mannheimer with Roth Capital Partners.
Gene Mannheimer: Gentlemen, nice quarter!
Louis Silverman: Thank you.
Gene Mannheimer: Two questions. First one, I may have missed this but of the $8.1 million in revenues from NextGen, what portion of that was attributable to EDI revenue?
Patrick Cline: Paul, do you have that number handy?
Paul Holt: Yes. EDI revenue was $333,000 for the quarter.
Gene Mannheimer: Thanks. And, secondly, can you comment on the size of the deals that you closed in the quarter -- smaller or larger practices, etc. and variations in average selling price in those deals?
Patrick Cline: This is Pat. I would say that there was really no material change to the average selling price. We signed a few more contracts in the quarter and our revenue from new system sales was up slightly. I haven�t done the math but, again, it wouldn�t be material.
Greg Flynn: On the dental side, our upgrades and CPS sales add-ons as well as the new one were within our typical ranges.
Gene Mannheimer: Thanks a lot.
Operator: Your next question comes from the line of Neil Bradsher with Broadwood Capital.
Neil Bradsher: Well, first of all, congratulations on yet another quarter of unexpected results.
Louis Silverman: Thank you.
Neil Bradsher: Just to do some quick calculations, your operating margin is now up over 20% and your return on equity excluding the cash is at 50%. So, it seems to me that you have made the improvements over the last several quarters in your operating efficiencies that a shareholder would want and that means the remaining issues are the rate of revenue growth and the utilization of your capital. I wonder if you could address each of those.
With respect to revenue growth, I haven�t heard as much commentary on the pipeline and the outlook whether or not we may eventually get some significant acceleration in the markets that NextGen is serving although certainly NextGen�s results have been very good.
And then, with respect to capital utilization, maybe you could talk about where the Board�s discussion of using the cash for buy-back purposes stands. I think at the time of the last conference call, you had mentioned that there had been some discussion of a buy-back at the Board level. And, if the cash is simply going to sit there, why isn�t it being put into a little bit longer-term instrument that would have a higher yield. Thank you.
Louis Silverman: Pat, why don�t you take the first part. I�ll take the second.
Patrick Cline: Okay. I would say relative to revenue growth, our pipeline is growing. It�s up a few million dollars over the last couple of months. Our sales force is growing in size. Our market certainly on the EMR side is growing and heating up and I�m very excited about our ability to more aggressively grow NextGen�s revenue on a go-forward basis.
Louis Silverman: On the issue of capital deployment.
Neil Bradsher: Lou, can I just ask you to comment on the QSI side on the same issues?
Louis Silverman: Sure. And Greg can certainly chime in if he has anything in addition to what I have to say. We continue to be, I�d say, bullish about our product and our ability to deliver good solutions to clients in the dental space. At the same time, we continue to feel somewhat constrained by the lack of cap ex budgets for most of our large customers at this point in time.
So, from a growth perspective, QSI is sitting in an environment, in my opinion, where it�s difficult to be overly optimistic about any kind of significant delta in top line at the QSI division driven by practice management software. We are continuing to focus on EDI initiatives and opportunities and we�re hoping to get that growth rate back up to a level that is more in line with some of our historical performance. It�s been a little off of our internal goals, over the last couple of quarters.
Greg Flynn: It�s also encouraging to see, in this quarter, a little bit of renewed interest in our CPS product. A few people from the QSI division have been out on the road on a series of presentations and prospect meetings. We�ve been putting a lot of emphasis on CPS in these sessions.
Interest appears to be fairly high but it�s a little early to say that we�re going to have a material contribution from CPS to our top line growth over the ensuing few quarters for which we have any kind of reasonable visibility.
And to put some specifics on the pipeline, the QSI division�s pipeline for the last two quarters has been roughly the same at $5.5 million. Two trends within that I see are an increased CPS prospect base, as well as some larger long-term opportunities.
We have the same level of staff selling into the dental market as we had last quarter - that remains five individuals. And to pick up a little bit on what Lou said, I think we�re doing a pretty darn good job of maintaining our existing client relations which is key to our strategy of selling more into that base. We have a number of initiatives ongoing internally to look at new product offerings, which represent more innovative ideas than simply offering our standard stream of practice management products.
Neil Bradsher: Can I just ask you, Lou, if the following summary of what you just said is correct. And I realized you�re not going to want to be pinned down on anything but it sounds as though the overall revenue growth rate of the company would likely accelerate modestly as NextGen becomes a larger portion and because of the improved outlook that Pat cited. But assuming the QSI division remains relatively flat, is that about right or not?
Louis Silverman: I think that�s an absolutely accurate characterization of my opinions and my comments.
Neil Bradsher: Great! Can we move to the capital allocation, Lou?
Louis Silverman: Sure. Your recollection is correct as to the last conference call. I did mention that at the board meeting that occurred in late May, it appeared that the topic of what to do with our cash hoard had taken a bit of a higher priority place on the agenda for the board. We just completed a board meeting here in our Irvine location earlier this week and I don�t have anything new to report on that topic. I would hope that the topic is re-picked up in the next board meeting which is scheduled in concert with our annual shareholder meeting at the end of August.
The bottom line: nothing new to report on that front other than we have even more cash than we had before. I would add that the management team continues to put forth what I feel are some interesting proposals in terms of things that we could do with the cash particularly on the acquisition front. As a team and, I think, individually as well, we are aware of and bullish about a number of acquisition opportunities that are out there. Failing that, I�d say we all agree that it would be nice to have that $29 million asset performing at a higher level than it has in the past.
Neil Bradsher: Has the board ever discussed that 30% of its book value is earning 50% returns and 70% is earning 1% or 2% returns?
Louis Silverman: Given that I�m not on the board, it�s hard for me to comment on exactly what time they have given to that discussion, Neil.
Neil Bradsher: Okay. One last question, your 10K has come out but the proxy has not yet been filed. When do you expect to file it and what will we see in terms of incentives to align the interest of the board and the management with those of shareholders?
Louis Silverman: Paul, check me on this. I believe that the proxy will be filed later on today or early tomorrow.
Paul Holt: It�s ready to go. We just have to pull the trigger.
Louis Silverman: What you will see in the proxy is a grant to me consistent with the contract that I had executed when I joined the company approximately two years ago. There were two option tranches that were contractually guaranteed and the company issued the second grant as contractually specified. That was, I believe, in July of �01. And then you will see that a grant of approximately 80,000 options was made to staff in, I believe, in October of �01 or thereabouts. More precisely September of �01. And that would be the entirety of the option grants done for the year.
And then in terms of bonuses, we have the four-named executive officers that you will see on the proxy and given that this is going to be filed today, I think I can give this information out. You will see, a moderate bonus in the proxy we paid to Pat Cline during fiscal 2002. For the year, Pat Cline�s total cash compensation, even with the bonus, would be under $300,000. You will see a very modest bonus in single digits in terms of thousands of dollars for Paul Holt for the period and you will see that Greg Flynn received no bonus for the year and you will see that Lou Silverman received no bonus for the year.
Neil Bradsher: Okay. That seem surprising -- that seems like a surprising lack of incentives or recognition for what appeared to be pretty good results relative to external expectations. Is there something I�m missing in terms of the board�s expectations?
Louis Silverman: I appreciate the question. I�m looking for an appropriate response. I think that there continues to be some energetic discussions on that topic between the board and management. From my perspective, I do think that stock option grants are a healthy way of aligning management, staff and shareholder interest. I would like to be reporting that we�ve done a lot more in that area for the employees, particularly the NextGen staff who, I think, have really pulled through with some good results over time.
On the bonus front, I feel it�s a little awkward to comment other than I feel like the performance of the company was better than was reflected in the aggregate bonus number.
Neil Bradsher: Okay. And does the company expense options -- I assume the answer is no. and, particularly, given its small number and that other companies are now beginning to - is that something under consideration?
Louis Silverman: A couple of points there, Neil, if you look in our 10K, you�ll find a footnote disclosure that we�re required to put in. And you will see in that disclosure for fiscal �01, if we were extending options, we would have reduced our earnings from 57 cents down to about 52 cents, and for fiscal �02, it would have been approximately a 9 cent hit which would have moved us from 84 cents down to 75 cents. We have not been expensing options. It is a topic that I do happen to know the board is discussing, though no action has been taken on that topic.
Neil Bradsher: Okay, great. Thanks for letting me ask so many questions.
Louis Silverman: I appreciate your questions, Neil.
Operator: Your next question comes from the line of Lance Stringham with Red Chip Review.
Lance Stringham: Hello! Most of my questions have been answered. I think I have one though. I noticed that the provision for taxes moved up a little bit during the quarter as a percent of revenues. Do you have any guidance for us on what that should look at for the rest of the fiscal year?
Louis Silverman: Lance, this is Lou. The reason that it�s up a little bit is due to a change in the distribution of our sales amongst some of the different states and we ended up in a situation where we had a higher percentage of our revenues in some of the states with a higher tax rate -- that accounts for most of the change. And at this point in time, I don�t really have anything else to add to that discussion.
We are always looking for opportunities to leverage our earnings wherever we can that�s responsible and ethical. If we have to pay more taxes, we will. And if we have a means of paying less in the way of taxes, we�re going to look at that quite hard. But at this point in time, based on the data that I have, what we show in the first quarter is what we�re expecting down the road.
Lance Stringham: Okay. So it wouldn�t be fair to say that that was unusually high?
Paul Holt: I wouldn�t characterize that as usually high. We�ve sort of bounced around in that 38 percent range for the past several quarters so it was marginally up, I mean last quarter, it was 38.1% and this quarter was about 39.4...
Lance Stringham: But it shouldn�t stray too far from 38 or 39%.
Paul Holt: Well that�s been our history. We also try not to give out forward-looking guidance.
Lance Stringham: Well, that�s fair enough. Thank you.
Operator: Your next question comes from the line of Andrew Shapiro with Lawndale Capital Management.
Andrew Shapiro: Hi! I might have missed because it might have happened right after my set of questions or you have said it; can you give the breakout on the EDI for the two divisions?
Louis Silverman: Sure. I�ll pick that up real quick, Andy. The QSI Division was $1,348k and NextGen was $333k.
Andrew Shapiro: 333. Okay. Is it correct by reverse engineering your total employee count is around 234?
Louis Silverman: I believe that is correct. I�ll try to double check, but off the top of my head, that sounds about right.
Andrew Shapiro: Okay. The new purchase of CPS that you have going, you had some customers that bought it, expand, and I was wondering how long had they had the products - how long after they had purchased the original products before they stepped up here and expand its use in their practices?
Greg Flynn: I don�t have the exact numbers but I�m eyeballing my data and I would say the two that expanded in last quarter had the product approximately for three years.
Andrew Shapiro: Three years before they expanded?
Greg Flynn: Well, they�ve also done some expansion in the interim -- both of these clients but...
Andrew Shapiro: Okay. So it�s not the first time they expanded?
Greg Flynn: Correct.
Andrew Shapiro: From your recollection or history, about how long after initial purchase did those clients do their initial expansion. You can see what I�m leading up to here because you said you had a new customer sign-up now.
Greg Flynn: Well, I am doing this strictly by recollection but I would say within a year, year-and-half...
Andrew Shapiro: Okay.
Greg Flynn: Let me give you a slightly different way to look at it.
Andrew Shapiro: Okay.
Greg Flynn: The issue of expansion within the groups generally will relate to whether or not the groups themselves are expanding -- that�s one component. The second component would be if they do a full deployment initially or not within their groups.
Andrew Shapiro: Exactly. Did the new customers that signed up, did they do a full deployment?
Greg Flynn: Yes.
Andrew Shapiro: Okay. You have some small customers but mostly they are all fairly large. And your CPS product is designed for certain uses. What portion of your dental client base would you say you�ve identified as candidates for CPS, and what portion of the client-based that you�ve identified have penetrated so far?
Greg Flynn: For the large consolidators to do a full deployment is a lot for them to chew on in terms of change in their entire operation. The more likely profile and realize I�m talking in generalities here - is our smaller to mid-size client-base -- typically one office or multiple offices. That represents, and please understand these numbers are a little speculative, about 50% of our existing dental client base of which we�ve worked with roughly half at this point in terms of CPS marketing.
Andrew Shapiro: When you say "actively working with them," what I�m trying to get a handle on is the prospective size of the CPS market for you amongst your existing installed base, and what of the existing installed base is your prospective market you�ve already penetrated as what�s left to continue to sell to.
Greg Flynn: Okay. I would view approximately 50% of our dental client based as a reasonable target. Of which we�ve probably penetrated 15-20%.
Andrew Shapiro: So 80% of the prospective market for your existing clients for CPS...
Greg Flynn: Is still open.
Andrew Shapiro: It�s still open. And based on the...
Greg Flynn: That�s an off the top of the head number.
Andrew Shapiro: I understand. And just as - what I�m trying to get a handle on is the prospective size of the market, which of course you�re not selling them all -- you�re not going to sell them all at all.
Greg Flynn: Correct.
Andrew Shapiro: It�s going to take several years. Based on the pricing of your CPS in this prospective market size, can you give me a general value on the prospective market size here?
Greg Flynn: Let�s back into the number. We have roughly 3500 dentists at which I�ve told you probably 1750 are our targets. We�ve penetrated small percentage of that. Let�s say a thousand of our dentists are reasonable targets at this point, and that our revenue per dentist is approximately $10,000 per dentist.
Andrew Shapiro: Okay. So the decent size market for the CPS product...
Greg Flynn: Within our existing client base. Remember that�s all I�m commenting on.
Andrew Shapiro: Oh yeah.
Greg Flynn: Broad stroke, $10-$15 million.
Andrew Shapiro: Okay. The margins, this is a NextGen question. The margin bump, NextGen had - Pat, did you have any particular elephant deal that was software based this quarter versus other quarters, was it broadly across the playing field that things are more software. What�s kind of going on within this quarter sales picture?
Patrick Cline: I�m not sure this helps a heck of a lot but we did have a couple of fairly sizable software and service only deals in the quarter; not necessarily what I would call elephants but pretty good size deals. Outside of those, no real trend.
Andrew Shapiro: Okay. And your PDA products - I can�t remember when it went to full sales implementation; I think it was sometime during the quarter, was it?
Patrick Cline: Yes. We started taking orders for the product prior to this quarter, in fact all the way back to last year�s users� meeting, but formal release was just a few months ago.
Andrew Shapiro: Right. And primarily, you described this as an incremental sales tool to sell your overall product line. Can you give us some feedback as to what your experience now has been here with the full deployment, what you�re doing out there and how it�s impacting the sales, et cetera?
Patrick Cline: Yes. We continue to receive a lot of interest. It does continue to act as a very nice sales tool that prospects get excited about as a complement to the full suite of NextGen products.
It�s, as you know, not a product that we sell on a stand-alone basis so it is, in essence, another module or feature to the full product line. But it has helped us in a number of sales situations. During last quarter, we took more orders for the product than in any prior quarter, whether they were pre-sales or post-release orders. I don�t want to get into the habit of announcing the actual number in use or the number sold, but it was a very good quarter. We have not yet aggressively started to market the product. We intend to do so over the next few months with a big push at this year�s annual users� meeting, which comes up in October to our existing customer base.
Andrew Shapiro: Okay. Speaking of the users meeting and you guys won some awards at TEPR. I think you mentioned in the last conference call an intent to this year -- because it�s the second year you�ve won the awards -- to make as part of your collateral material and marketing campaigns -- the award or the series of awards -- and I was wondering, have you deployed that kind of campaign or where in timing - are you in deploying that campaign and what are you seeing as the impacts of it so far?
Patrick Cline: We are partway through deploying that campaign. You�re right. We do intend to push a lot harder on the fact that we did win these coveted awards this year. Thus far we have built some PowerPoint slides around this subject. Typically, our salespeople will do a PowerPoint slide presentation prior to jumping into product demos to orient their prospective customers regarding the company, our financial situation, target markets and those kinds of things; so we�re highlighting the awards there.
We�ve also enhanced our Web site NextGen.com to highlight the awards. As soon as you go to NextGen.com, you�ll see that it starts talking about the awards. We have not yet put any advertisements in trade journals or publications, but it is our intent to do so. So we�re halfway through the deployment of the campaign. I think it makes a difference, but it�s impossible for me to quantify that difference.
Andrew Shapiro: Is that power - we think this should be useful for investors as well, is that PowerPoint presentation available on your Web site for people to be able to see. Can you make it available?
Patrick Cline: I think we could make it available. I think I�d rather do it by request, and folks can request the presentation from Paul Holt. So much in the PowerPoint, Andy, is already on the Web site. The PowerPoint talks about for example, NextGen PDA, and we�ve got a section on the Web site directed toward NextGen PDA. The PowerPoint talks about certain representative customers and there�s information about that on the Web site; so the same kind of information exists.
Andrew Shapiro: In terms of the user meeting, you mentioned here in October, what other events are upcoming for you and NextGen and then also in dental, what are some of the upcoming trade events do you guys have coming up for which you�ll be making your marketing pushes out?
Patrick Cline: As I mentioned on the last call, Andy, the summer time is relatively slow with the shows and industry conferences. In the fall, it heats up a little bit more. The next largest show is the Medical Group Management Association or MGMA Show that usually takes place in October. And I�m told that we have two or three different shows going on around that same timeframe - different, medical specialty shows as well as the MGMA. Those shows are also listed on our Web site.
Andrew Shapiro: Okay.
Greg Flynn: And on the QSI side, there are really three shows that are important to us. They include NADP, National Association of Dental Providers, AADGP , which is really the dental group practice show, and a large dental school show, which I believe is known as the AADS at this point. And we attend where it�s regionally beneficial to us - community health center shows, in particular, in the South.
What we�ve done this year on our users� meetings is to implement a somewhat different concept. We�re doing kind of a road show this year, where we are going to a number of our local clients with a two-day meeting format. The first day, attendees visit one of our existing dental offices where we invite other dentists in to see the CPS products in use at an office; and then the second day is our standard seminar/ workshop presentation. We�re scheduled to do, depending on the interest level, six to eight in the ensuing six months.
Andrew Shapiro: And then Lou, from an investor point of view, what are -- in the last call, you mentioned that you had plans to go to New York and Boston, which I know you did and met with a bunch of people, we�ve got a few new research analysts, a few that have kicked in. What�s on the - we�ll call it the investor show or presentation kind of calendar you have coming up other than the upcoming annual meeting of course, are there any particular cities you�re planning to go for those things or any I guess investment analysts conferences?
Louis Silverman: As you mentioned, Andy, in June, I spent time in both Boston and New York; I had a very full schedule with interested fund managers and analysts. I also spent a considerable amount of time in San Francisco last month doing the same type of things. Although nothing is scheduled in ink at this point, the next East Coast trip is likely to be some time in the early part of September to do another run through New York and/or Boston.
And the folks from Coffin Communications Group continue to work to set up meetings locally, which are scheduled on an as-available basis. I just completed the paperwork, and we will be presenting at the upcoming Sidoti Conference in San Francisco in October. I believe I�ve got those cities and the months correct. I know we�ve just accepted our invitation. That�s what we�ve got on the docket at this point in time.
Andrew Shapiro: Great. When you talked about the prospective uses of cash that management has been kicking around now and maybe preparing for, you know, alternative analysis by the Board; are these possible deployments of capital to grow the company more of a new product orientation to sell through or would they be an acquisition of existing customer base type of focus? Where in general is the focus for prospective acquisitions do you think might add value?
Louis Silverman: Again, just to reframe your question; I want this to be clear that you�re asking for management�s opinion on what would be exciting and appropriate acquisition opportunities for the company, and I would answer very distinctly that both of the areas that you target are on our list. We feel both types of ideas have merit. We continue to push these ideas at and with our Board and are hopeful that we�ll be able to begin working to execute that kind of a program.
We also recognize that acquisitions are not the only potential use for the cash. But certainly as an operating management team that likes to succeed and likes to keep the best interest of our shareholders in mind, we are happy to have the $29 million in cash that we have. It beats not having it. But having it there and earning between 1 and 2 percentage points of interest, we happen to think individually and collectively that we can do better than that.
Andrew Shapiro: Right.
Louis Silverman: But certainly, having it is better than not having it, and we in no way view the cash as a liability.
Andrew Shapiro: Right. Well, you know, generating more than three million a quarter in incremental cash flow each quarter certainly probably have a room to do both. Your non-cash assets, as (Neil) so aptly pointed out, generating such high returns are certainly -- I wouldn�t call it a risk-free investment medium to deploy capital, but those certainly carry a lower level of risk than possibly the returns generated from an acquisition, but there�s certainly got a lot of room to do possibly both. And hopefully, the August Board Meeting will generate some movement, at least for you folks, internally on that matter.
Louis Silverman: We are inherently optimistic.
Andrew Shapiro: Great. Thanks. I�ll back out.
Operator: Your next question comes from the line of Dino Taglioferi with TradeKing.Org
Dino Taglioferi: I just want to compliment you on a job well done -- good work guys -- and as far as the balance sheet - good defense there. Don�t worry about the cash. Like you said, it�s good to have it, beats losing it. Thank you.
Louis Silverman: Thank you very much.
Operator: Your next question comes from the line of Gene Mannheimer with Roth Capital Partners.
Gene Manheimer: Hi. Two quick questions; I�m not sure if this was asked, but could you comment on PDA shipments during the quarter - let�s go with that and then I�ll ask a follow-up, if that�s okay.
Patrick Cline: We did have, as I mentioned, a record number of new orders for the NextGen PDA product last quarter. We�re not going to get into the habit of announcing quarter-by-quarter numbers, but we are very happy with our progress thus far.
Gene Mannheimer: Okay. Thank you. And finally, any change in the competitive landscape out there specifically as it relates to your win-loss ratio?
Patrick Cline: No, not really. I think we continue to fare very well on the EMR side against our EMR competition. There is competition, but typically when we go head-to-head and price is not the primary concern, we�ll win those opportunities.
Gene Mannheimer: Thank you.
Patrick Cline: You�re welcome.
Operator: Your next question comes from the line of Ilona Yulman with Sidoti.
Ilona Yulman: Hi guys! Congratulations on a really good quarter. Just one quick question; in terms of DSOs, I know they went down significantly -- just want to find out your opinion on whether or not that trend is going to continue on going forward, and how you feel on that.
Louis Silverman: Ilona, this is Lou. I think if you go back through prior calls, you�ll see that our performance has exceeded my expectations in this area. So I would say privately to my staff that our performance is not good enough, and I would say privately to you guys that it�s better than I expected.
We continue to work to try to improve the numbers. There�s no sense in just sitting back and relaxing. But I do want to point out that the performance we�ve achieved has exceeded every expectation that I�ve had of our credit and collection staff, which has worked well in cooperation with our operating team. And if we can do better, we will, but I feel that it would be inappropriate to lead you to believe we�re going to push materially past where we�ve been. Although as soon as I leave this meeting, I�m going to sit with our collections staff and tell them that they have a lot of work to improve their performance next quarter.
Ilona Yulman: Thanks Lou.
Operator: 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.
Your next question comes from the line of Andrew Shapiro with Lawndale Capital Management.
Andrew Shapiro: Hi. It�s a follow-up question; has anyone looked into, and I would think it became an issue at some point, has the company encountered an Investment Company Act of 40 - 40 Act problem because of the high proportion of cash that�s accumulated on the balance sheet as a percentage of the company�s assets; when does that kick in?
Louis Silverman: I�m not certain, Andy, but we certainly will take the cue from this call and make sure that we do have appropriate amount of information on that point. I know the point you�re getting to; I just don�t know the answer.
Andrew Shapiro: Because the cash now over - it�s over half the assets, you know, maybe a 40 Act issue here that might force - to finally force the Board�s hand on resolving some of those issues.
Louis Silverman: We will look into that with extreme...
Andrew Shapiro: I can see the smile on your face. Thanks. That�s it.
Louis Silverman: Okay. Thanks.
Operator: Your next question comes from the line of Neil Bradsher with Broadwood Capital.
Neil Bradsher: Just back on the proxy; I assume we won�t see any new directors nominated or any existing directors stepping back?
Louis Silverman: That is the current information we have. All current directors are standing for re-election.
Neil Bradsher: And they haven�t chosen anybody new to join?
Louis Silverman: That is my understanding -- that is correct.
Neil Bradsher: All right. Thank you.
Operator: At this time, there are no further questions. Mr. Silverman, are there any closing remarks?
Louis Silverman: I�d just like to thank everybody for their participation and interest, and would point out that our annual Shareholder Meeting is August 29th here in Southern California. If anybody is interested in attending and needs some information on where and how and when, feel free to give our office a call. We will be back with you to announce our September quarter results in October and look forward to hearing from everybody then. Thanks for your time.
Operator: This concludes today�s Quality Systems� First Quarter 2003 Earnings Result Conference Call. You may now disconnect.
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