Operator: Good afternoon, my name is (Valerie) and I will be your conference facilitator
today.
At this time I would like to welcome everyone to the Quality Systems Fiscal
Year Second Quarter Earnings Conference Call. All lines have been placed on
mute to prevent any background noise.
After the speaker�s remarks there will be a question and answer period. If you
would like to ask a question during this time, simply press 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.
Louis Silverman: Thank you (Valerie) and welcome everyone to our Fiscal 2003 Q2 Conference
Call. Greg Flynn, Executive Vice President of the QSI Division, Paul Holt,
CFO, and Pat Cline President of our NextGen Healthcare Information Systems division join me on today�s call.
Please note that the comments made on this call may include statements that
are forward-looking within the meanings of the securities laws, including
statements relating 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 you should refer to our forms 10-K
and 10-Q for discussions of the risk factors that could impact our actual
performance.
For the ninth time in the past ten quarters the company turned in record
revenue performance and for the tenth time in eleven quarters the company
achieved record earnings and EBITDA. For the quarter, revenues totaled $13
million, up 24% over the prior year. Earnings per share at $0.27 exceeded
prior year by 50% and EBITDA at $3.2 million was up 49% from a rounded
$2.2 million in the prior year.
As noted in our press release, the quarter�s top and bottom line results were
once again largely driven by strong performance at our NextGen division.
NextGen�s $8.6 million revenue quarter represented a 37% increase over the
prior year and a 6.4% increase sequentially. Operating income at NextGen
was more than double the prior year�s total.
Our EDI unit, with revenues of $1.7 million showed growth of 16% on a year
over year basis, which, while contributing to the quarter�s revenue and profit
performance continued to run somewhat below our internal standards. On the
positive side, our EDI growth within the NextGen client base continued to be
strong with divisional EDI revenues increasing 88% at NextGen on a year
over year basis.
The QSI division revenues came in at $4.4 million, which was 4% over the
prior year figure. Divisional operating income came in at a very respectable
25.8% for the quarter in the QSI division.
Greg and Pat will go into division performance in a more granular fashion in a
couple of moments. Cash and cash equivalents increased to a record $29.8
million during the quarter. Owing to the well-documented drop in interest
rates on a year over year basis, interest income decreased from $190,000 to
$123,000 despite the significant year over year increase in cash. Collections
activity was again strong as DSOs dropped from 98 to 97 days. Annualized
revenue per employee stood at $216,000 for the quarter, also a record. There
were no stock repurchases during the quarter.
The quarter�s gross margin percentage came in at 56.4%, well off the 60%
achieved in what we described as an aberationally high figure last quarter. The
level we came in at this quarter was well within our historical band. Just after
the end of the quarter but certainly worth mentioning on this call, the NextGen
division held its annual user�s group meeting in early October. This customer-
only event was attended by north of 600 client representatives, a significant
increase over the 400 plus attendees in the year prior and the 300 plus in
2000.
Forbes named QSI to its list of 200 Best Small Companies for the second year
running. We were pleased to make the list for the second consecutive year but
even more pleased with the fact we moved from #158 on last year�s list to #77
on this year�s list. We participated in two investor conferences since our last
call - the Well Fargo conference in September and the Sidoti conference in
early October.
Also during the quarter we completed n investor-oriented trips to Chicago and
New York. Looking forward, we�ve been given a couple of verbals on
healthcare conferences from some of the larger investment banks which are
scheduled for early calendar 2003 but it�s premature to announce who and
when at this time. It�s likely that investor meetings will be West coast oriented
during the balance of the calendar year.
I want to take a moment and comment on our overall business environment
and say that these are truly interesting times. If HIPAA mandates and
Sarbanes sponsored new disclosures and processes weren�t enough, last week
a couple of our public competitors announced earnings shortfalls as well as
some varied levels of optimism regarding their next few quarters.
Here at QSI we�re pleased to report that most of our internal indicators remain
quite positive. That said we are acutely aware that internal indicators alone
don�t necessarily translate neatly into this quarter�s or next quarter�s company
financial performance. Bottom line I want to reiterate to our investors that our
aggregate internal indicators look strong. I want to acknowledge our
understanding of the importance of continued operational execution, and also
to acknowledge our understanding of the importance of continued confidence
among healthcare IT purchasers.
In closing my prepared comments for this morning I�d like to thank all the
QSI associates for their contribution to the quarter results. And I�ll now turn
the call over to Paul Holt for additional financial texture on the quarter.
Paul Holt: Thanks Lou, greetings to all who joined us today. Once again it�s wonderful
to be able to continue our string of strong operating results and this quarter is
particularly strong relative to our prior year performance. Systems sales revenues
grew to $6.8 million this quarter, an increase of 33% compared to the prior year
and 6% over the prior quarter.
Total recurring revenue grew to $6.2 million, an increase of 15% compared to
the prior year quarter and 5% over the prior quarter. Thanks to our expanding
customer base, recurring revenue has been growing consistently each quarter
for the past three years. . Our gross profit margins this quarter came in around
our historical range at 56.4% of revenue compared to 56.7% in the prior year
quarter.
On a sequential basis the gross margin was lower than the 60% reported in the
June quarter. I will point out, as I mentioned in the earnings call for the prior
quarter, our margin was somewhat higher than usual. The company is
continuing to benefit from our ability to scale revenues faster than SG&A
expenses. SG&A expense as a percentage of revenue declined to 26.5%
compared to 31.4% in the prior year quarter.
Total SG&A expense increased to $3.4 million in the second quarter
compared to $3.3 million a year ago. The largest contributor to the increase in
SG&A expenses was an increase in selling related expenses in the NextGen
division. On a sequential basis SG&A expense declined both in hard dollars
and as a percentage of revenue.
SG&A expense declined by approximately $200,000 compared to the prior
quarter due primarily to comparatively lower trade show and corporate
expenses in the quarter. SG&A expenses as a percentage of revenue also
declined on a sequential basis.
R&D expense came in at $1.2 million compared to $1.0 million in the prior
year quarter. All of the hard dollar increase in R&D expense was related to the
NextGen division. As a result of revenues increasing faster than R&D, R&D
expenses as a percentage of revenue fell to 9.3% in the quarter compared to
9.5% in a year ago quarter.
The Company�s net after tax profit margin grew to 13.2% compared to 10.8%
in the prior year quarter. This margin was just a few basis points under last
quarter�s record setting margin.
Moving over to our divisional performance, the NextGen division continues to
win new customers and expand its customer base while reporting its highest
ever quarterly revenue and operating income numbers.
Driving NextGen�s rise in profitability has been NextGen�s ability to scale
revenues up faster than expenses. NextGen�s systems sales grew 33%
compared to the year ago quarter, coming in over $6 million for the first time
in its history. As the size of NextGen�s user base continues to grow, recurring
types of revenue such as maintenance and EDI should grow as well. Recurring
revenue grew an impressive 44% compared to the year ago quarter at $2.6
million. This also represents a 13% increase over prior quarter�s $2.3 million.
The Dental division reported revenue of $4.4 million as Lou mentioned and
operating income of $1.1 million. This division continues to make a
significant contribution to profits as a result of its lean cost structure.
Moving on to the balance sheet, I want to highlight three notable areas, cash,
receivables, and deferred revenue. As Lou mentioned, we are holding on to
the improvements in our cash collection efforts with our DSO number
improving to 97 days compared to 98 days in the prior quarter and 121 days a
year ago.
At quarter end the company had approximately $29.8 million or $4.86 per
share in cash. This compares to $25.4 million at the beginning of our fiscal
year. Our ending cash balance on September 30 would have been higher if not
for the timing of certain estimated income tax payments made during the
quarter that reduced our cash by approximately $1.1 million.
Despite the increase in cash, investment income declined in the September
quarter by 33% compared to a year ago. The sharp decline in short-term
interest rates negatively impacted investment income.
The other balance sheet item of note is deferred revenue, which grew
significantly during the quarter. Deferred revenue consists primarily of
deferred maintenance and services which grew to $8.3 million this quarter
compared to $7.8 million at the start of the quarter. This increase was
primarily attributable to an increase in the amount of implementation and
training services included in systems sold during the quarter.
I�d like to thank everyone on this call for your interest in our company, and
I�m going to turn things over to Greg Flynn who will provide an update on the
QSI division.
Greg Flynn: Thank you Paul, and good day to you all. As mentioned, revenues for the
quarter in the division were up 4% over the prior quarter to just north of $4.4
million. This gain was made despite ongoing slowness in our core dental
consolidator market niche. Also of note was the continued growth in our EDI
sales within the NextGen client base.
As stated, the growth within NextGen represented an 88% growth over the
corresponding quarter of the prior year and a greater than 22% growth over
the previous quarter. We again look at expanding revenues significantly in this
area. While the QSI division EDI sales remained materially flat over the prior
quarter we still look to enhance sales within this area through new product
offerings.
On the CPS front there were three new clients who purchased CPS as well as
two existing users who expanded their CPS implementations. The hardware
content of these purchases was somewhat greater than recent quarters, thus
impacting gross margins on these sales versus recent historical levels. We are
pleased by the adoption of this product during the quarter.
As I have in recent quarters, let me now report on progress of our Sequoia
software development initiatives. During the quarter we had seven new data
miner reporting software sales bringing our total client sales of this product to
30. Also, we contracted for deployment of 425 of our enhanced user interface
screens. There now are 31 clients who�ve contracted for use of this
technology.
As always I would like to thank the QSI division team members for their
strong efforts during the quarter. For our clients who may be listening, we
certainly appreciate your continued support and commitment to QSI, and of
course thanks to our valued shareholders. Now I would like to turn the call
over to Pat Cline, President of our NextGen division.
Pat Cline: Thank you Greg, hi everyone. As you heard NextGen continued to set records
in the second quarter. In addition to the records already discussed, the number
of new contracts executed was also a record. NextGen executed 27
agreements with new customers and 37 contracts in total. The second quarter
was a little more challenging than some others with a number of contracts
coming down to the wire over the last couple of days of the quarter.
Needless to say I�m very happy that our sales force was able to bring those
deals in. Product wise we�re doing very well. NextGen EPM version 3.0 was
released and is now live in some customer locations. This new release helps
our clients to comply with the new HIPAA transaction set rules, which went
into effect this month. We believe that we are ahead of most of our
competitors with respect to HIPAA compliance.
We also released NextGen EMR 3.8 during the quarter and we�re working on
a number of product initiatives that we�re very excited about. We think that
our products are the best in our industry and we�re committed to maintaining
our lead.
Our pipeline remains steady at about $29 million. We�re now in the middle of
our trade show season having completed three shows in the last three weeks
with another one going on as we speak. Many of you know that these trade
shows represent our single best source of new leads.
Our sales force has grown by one since our last call, and our sales force now
stands at 20 sales reps and managers.
Once again I�d like to thank all the hard working dedicated people that make
up the NextGen family. At this point we�re ready for questions. Operator?
Operator: At this time I would like to remind everyone if you would like to ask a
question press star then the number 1 on your telephone keypad. We�ll pause
for just a moment to compile the Q&A roster. Your first question comes from
(Mike Crawford).
(Mike Crawford): Pat could you talk a little bit further about the new HIPAA transaction set
rules that went into effect and differentiate a little bit what 3.0 does.
Pat Cline: The transaction set rules that went into effect involve electronic transactions
that primarily are comprised of insurance claims and insurance remittances.
But the rules also cover other types of codes that are used within electronic
transactions to identify procedures and diagnoses and drugs and those types of
things. They also pertain to certain managed care electronic transactions like
requests for eligibility verification and referrals. .
We, as many companies in our business have, put support for all of these
transactions sets and standards into our system and we have built the
capabilities natively into our system as opposed to bolting on translators and
things. Many of our competitors had a lot of difficulty making that transition
and in fact many of the insurance payers out there have had difficulty
accepting compliant transactions.
You may know that there was an extension available to those organizations
that could not comply with HIPAA by this month. Organizations known as
covered entities could file for a one-year extension and automatically obtain
that one-year extension based on their application.
Most covered entities filed the application for the extension because there
wasn�t any real harm in doing so and because so many payers and other
organizations weren�t ready to comply. But we�re very proud of the fact that
with our 3.0 release we are able to facilitate client compliance, though again,
most organizations filed for the extension because many payers weren�t able
to accept the transactions yet.
There are other components of HIPAA that will continue to come on board so
to speak with effective dates in 2003 and likely beyond. The next one is the
patient privacy rules that pertain more to our electronic medical record
product but also impact our practice management product as well. Those regs
come on line as of April 2003.
(Mike Crawford): All right thanks and Lou could you talk a little bit about any changes at the
board level?
Louis Silverman: Yes Mike I can. We had our annual shareholders meeting on August 29 of
2002. At that time, and as everybody that received a proxy would know, all of
our directors stood for re-election. All of those directors were re-elected and
so from a broad perspective the board we had is the board we have. For a little
more granularity, Shelly Razin is the Chairman of the Board, and based on the
votes taken at the meeting on August 29, Dale Hanson was elected as Lead
Director.
We also went through, I think very productively, and made some changes to
the overall board structure from the perspective that a number of committees
that had been four person committees were reduced to three person
committees. In my opinion this is good corporate governance. In addition, the
board passed an internal rule that committee chairmanships will rotate on a go
forward basis annually, so no one person would stand as the chairman of a
given committee for longer than one year.
(Mike Crawford): All right and the final question is with $30 million in the bank that seems to be
some excess capital you need for the business. You are generating 40% return
on non-cash assets. So any further progress on what�s the deal with this $30
million cash.
Louis Silverman: Mike we don�t have anything to report that is tangible and absolutely
substantive at this point in time. I can tell you that from my perspective we are
going to begin the process of looking carefully at acquisition candidates.
That�s different than saying we are going to acquire companies. I think that�s
very premature at this point.
But certainly based on the most recent board meeting, which was Friday of
last week, I�m going to begin the process of carefully looking at acquisition
candidates to bring to the board�s attention if we find anything that�s suitable
down the road. But I want to stop short of saying that we have a full-blown
acquisition program in place. It is simply directionally a move to begin
considering whether there are good opportunities out there.
Mike Crawford: That was my last one.
Louis Silverman: Thanks Mike.
Operator: Your next question comes from Scott Gismal.
Scott Gismal: Hi this is Scott Gismal with Capital Works. Have two quick questions. First,
I�m not sure if I missed this but if you could give the EDI revenue breakout
between NextGen and QSI?
Lou Silverman: Yes the total for EDI was $1.746M. That�s broken out into $1.338 million for
QSI and $407,500. for NextGen.
Scott Gismal: Great and then my other question was, out of the new customer agreements,
what is the make up between - I guess what I�m wondering is how many of
those customers are actually previous customers for other practice
management software companies versus new to practice management
software in total?
Pat Cline: This is Pat. The total number of agreements was 37, 27 were with new
customers. I don�t have the number of those 27 that were practice
management customers but as you probably know we sell both practice
management systems and electronic medical record systems. Practice
management systems have been around for a long, long time. And I�m within
a couple of percentage points when I say that 95% of the medical practices out
there have practice management systems.
So typically when we sell a practice management system it�s a replacement
for an existing system. The market in practice management systems we think
is about a 15% replacement market per year so roughly once every six years a
practice will take a look at and buy a new practice management system. So
again we�re selling on the practice management side into a replacement
market and taking market share from competition.
The medical record side is a far different story. The EMR market is less than
5% saturated in our market niche, which includes medical practices and the
ambulatory or outpatient market. So just about all of the electronic medical
record systems that we sell are brand new systems replacing paper.
Scott Gismal: Do you have any sense of what the breakout is between EMR and practice
management software?
Pat Cline: Typically about half of the systems we sell are combination systems. That is,
sales where a customer buys both products or modules if you will. Out of the
remaining 50% it�s pretty close to an even split. It�s something like 23%
practice management and 27% for EMR.
Scott Gismal: Great, thank you.
Operator: Your next question comes from Andrew Shapiro.
Andrew Shapiro: I have a few questions and I�ll jump back in the queue and come back to us
because I�m sure we have some more here. I�m trying to get a feel for, Pat, in
the NextGen side what kind of portion of your revenue streams are EMR
versus the EPM side. Can you give a little bit of a percentage breakdown and
is it - are those ratios fluctuating a lot per quarter or is it becoming a trend?
Pat Cline: They do fluctuate Andy a lot per quarter. I would say there�s more EMR
revenue than practice management revenue when we look historically over
many, many quarters. Very recently it�s been closer to even, maybe with a
slight edge on the EMR side, driven by, we think, the HIPAA regs going into
effect and the fact that a few of our competitors have sunset old practice
management systems.
On a go forward basis the more explosive market is on the EMR side though
it�s a very small market revenue-wise today in comparison to the practice
management system market. .
Andrew Shapiro: A question for Paul or Lou, there was growth in your deferred service revenue
side as you booked in you know new contracts that you�ll bring along here as
recurring revenue down the road and as you implement. I may have missed it
on the call but if not can you give a quantification and help here regarding
what portion of the deferred service revenue or the quantity of the AR that is
related to the deferred service revenue?
Paul Holt: Andy you�re asking now much of our deferred revenue is in AR?
Andrew Shapiro: You know it�s a standard question I ask each quarter so I can get a handle on
we�ll call it the regular business DSO versus the deferred service revenue
that�s a good chunk of this company�s receivable line.
Paul Holt: It�s just under $4 million that�s included in AR this quarter.
Andrew Shapiro: Okay and did you provide the depreciation, amortization and cap ex including
the capitalized software numbers so we could come up with an EBITDA
number?
Paul Holt: Are you ready?
Andrew Shapiro: Yeah.
Paul Holt: $238,000 in total depreciation expense, $300,000 in amortization of
intangibles. Your $238,000 in depreciation expense breaks down into $65,000
for QSI, $173,000 for NextGen. Your $300,000 in amortization breaks down
to $72,000 for the QSI division and $228,000 for NextGen.
Andrew Shapiro: Okay and then on the cap ex, which would include the capitalized software,
what would that work out to be?
Paul Holt: Cap software $42,000 for the QSI division, $312,000 for NextGen.
Andrew Shapiro: Is that all the cap ex...
Paul Holt: Cap ex is in total $500,000, $170,000 for QSI and $330,000 for NextGen.
(Andrew Shapiro): And that amount that included the capitalized software, the $500 some odd
amount?
Paul Holt: No that�s your cap ex on fixed asset side. Cap software is $354,000.
Andrew Shapiro: Okay so for a total of eight, around eight.
Paul Holt: $854,000, yes.
Andrew Shapiro: Okay, in terms of the dental side, are you noticing, Greg, the reliquification of
the consolidators or a resurgence of some of the consolidators now getting
back on the acquisition track? I�ve noticed some consolidators are merging
together which may or may not facilitate their reliquification and their ability
to acquire things. But I�m wondering what you are seeing down there in the
trenches?
Greg Flynn: I wouldn�t define it as resurgence. There certainly is some merger activity as
you�re well aware with some of the public companies. That�s certainly well
known. What we are seeing though is some increased business for QSI with
some of the spin-offs or break-offs if you will from the consolidators.
That isn�t to say that once there�s a business resettling that the consolidators
might become acquisitive, but at this point in time I�m not seeing any rush to
acquire new practices to any significant level.
Andrew Shapiro: Right, okay and Pat what are the upcoming trade shows that you�re out there
presenting at that we might be able to stumble into and check out the company
versus the competition.
Pat Cline: That�s a good question Andy. I don�t have the trade show list in front of me.
The one that we�re attending this week is the MGMA meeting in Las Vegas,
the Medical Group Management Association meeting. We�ve just completed
the Family Practice meeting and the American Academy of Opthamology
meeting. There is a list of trade shows on our web site, www.nextgen.com, so I�d
invite folks that might be interested in stopping by one of these shows to hit
that site.
Andrew Shapiro: Great, thanks, will back out of the queue here and come back to us.
Operator: Your next question comes from Gene Mannheimer.
Gene Mannheimer: Thank you, excellent quarter gentlemen. Couple of questions. I thought
I�d heard the NextGen sales pipeline at $29 million. Is there a number for the
sales pipeline for the QSI division?
Greg Flynn: Yes our pipeline right now stands at $3.8 million. We define that as potential
new business within a six-month period.
Gene Mannheimer: Thank you, and do you track a number for the total amount of EPM and
EMR systems that you�ve sold?
Pat Cline: I�m sure we do. We have all of our customers in a database, in fact in a couple
of databases, but I don�t have that information in front of me. Our total
number of providers is at this point approaching 10,000 and that�s not an exact
number. Providers would be doctors, nurse practitioners, physician assistants;
those folks that are licensed to use our products.
Gene Mannheimer: Okay, thank you, and it was mentioned that some of the contracts that you
closed in the quarter came down to the wire. My question is why - what were
the factors contributing to that? Was it a competitive selection? Was it
negotiation on price or other factors?
Pat Cline: Well, typically all of the selections that are made are very competitive. I
would say subjectively it seemed to me like decision cycles were a little bit
extended and our reps because of that factor did put a few special deals on the
table at the end of the quarter in order to drive the business. Why decision
cycles seemed to be extended? I�d be speculating. It�s possibly a result of our
prospects feeling a little more apprehensive investing in expensive systems
given the continual news about the economy. But it also could be an isolated
thing with a few of our prospective customers last quarter. I really don�t
know.
Gene Mannheimer: Okay makes sense, and last question, sales - SG&A expense looked
disproportionately lower this quarter. Do you see that as a trend going forward
or how do you see operating expenses trending the next few quarters?
Louis Silverman: Gene this is Lou, I agree with you. It was lower than we expected to see also.
Paul mentioned we received some help in that trade shows were lower than
they had been in the past, which is not atypical for the summer quarter. We
also had some corporate expenses that as we mentioned were a little higher
last quarter than usual. They were back in line this quarter.
Some of our additional expenditures in the quarter ended up in the R&D line
and in the cost of the sales line with some of the additions to staff moving to
categories not in the SG&A line. So it is a bit hard to predict. We are running
our business and making additions to staff as we see appropriate.
I don�t see us running at 26-�% and dropping on into the future but we�ll see
what the next quarters bring and how accurate that prediction is. Looking at
percentages is a little bit misleading because if we had a couple fewer deals
close, our SG&A percentage would have been higher and we would have
been talking about revenues and not SG&A.
So we�re spending money on a measured basis, trying to continue to invest
where we think the money is best spent, but also trying to lead with revenues
and follow with expenses. Bottom line I think 26 �% is lower than I�d expect
to see in the future but what percentage we would see in the future I wouldn�t
hazard a guess.
Gene Mannheimer: Okay thank you.
Operator: Your next question comes from David Rogers.
David Rogers: My question was just answered about SG&A. I�m out, thank you.
Operator: You have a follow-up question from (Andrew Shapiro.
Andrew Shapiro: Hi, a few follow-ups. First, can you give us an update on your pocket PC base,
your PDA products and the reception they�ve received in the market place
with respect to closing and helping you sell big systems?
Pat Cline: The product continues to move along well both with respect to development
and with respect to how well it�s received by our customers. We�re working
on a number of new enhancements to the product as we get more of the
product out and as we receive feedback from the users that are beginning to
enjoy use of the product. To answer one other part of your question, we do
feel that the product is helping us to close business and that it is a feature that
docs want to see and want to use.
Andrew Shapiro: Touching on that, I don�t know if it was maybe six months ago, the company
for the second year in a row won some very nice trade kudos in your industry
as being designated as one of the best products around. Are you now closing
sales or is it still premature that would have been generated or moved forward
by that kind of award recognition? Is it been enough months where that�s
moving things forward or is it still in the pipeline?
Pat Cline: No it has been enough time Andy. The leads that we generated at the TEPR
conference you refer to are moving through the pipeline now. I don�t know
specifically but I would guess that a few of the sales that we made last quarter
were sourced at that conference or were moved forward in some manner
through the awards. The awards themselves obviously won�t close business
for us. When prospects look at electronic medical records systems or practice
management systems they look at all kinds of things.
They look at the product and the technology and fortunately in that area we�re
ahead of competition. They look at the company�s financial strength and that�s
another area where we do quite well. The TEPR awards and some of the other
awards we�ve won such as being named to the Forbes list - all those things are
considered by prospects. But, there�s a heck of a lot more that goes into the
decision process, price and many other things, obviously.
Andrew Shapiro: Right, Lou I appreciate the board is involved frankly on both the acquisition
end as well as in the determination of the buy-back end. But I�m curious to
know in terms of your opinion based on the acquisitions that you might now
start to carefully look at, do you feel that given the amount of cash and the
cash flow generation that your non-cash assets continue to basically mint that
a buy-back activity by the company and an acquisition strategy need to be
mutually exclusive?
Louis Silverman: In my opinion they don�t need to be mutually exclusive and they shouldn�t be
mutually exclusive.
Andrew Shapiro: Okay, Paul in previous quarters you�ve been able to break out the DSOs from
the NextGen side as well as from the QSI dental side because the DSO
attributes, the payment, timing of the different customer bases is so vastly
different. Can you provide a breakout of what they have been for this last
quarter?
Paul Holt: Yes. QSI division was 77 days and NextGen 108 days.
Andrew Shapiro: Okay great, that�s all for now, thank you.
Operator: Your next question comes from Tim Barlow.
Tim Barlow: Hi this is Tim Barlow, I appreciate you having the conference. I�m a family
practitioner and I�m a potential customer. I�m interested in the recent couple
years of the evolution of competitor companies that are funded by large
capital, the Amicores, and the Logician and GE mix. How does the board
respond to those kinds of threats?
The reason that we�re so interested in this sort of a question is because the
chart�s been a stable entity for 30 years if imperfect. And we�re looking not to
change every five years in the future if we can help it from one product to
another. We�d like to continue on with a product that does have staying
power. And to that end I appreciate the last 11 quarters of marks that you all
have made.
Pat Cline: Thank you, this is Pat Cline. We pay attention to the companies that come and
go that are very well funded in our business but frankly in my 22 years in this
business I�ve seen many, many companies that are funded by very large
organizations do just that. They come and go. In fact we call them tourists.
We�ve seen four or five very large drug companies, some of the largest
companies in the world fund electronic medical record and practice
management systems and subsequently pull the plug if that particular division
or particular product is not performing like their other divisions or other
products.
And that�s been the case, frankly, with most of them. I�d say five out of six
large drug company investments, acquisitions of or start-ups of practice
management in EMR companies have had the plug pulled. And other
companies have been in and out of this market over quite a number of years -companies
such as Nestle and Black and Decker and many, many, many
others. So, we look at these small practice management and EMR companies
that happen to have good funding as competition. But we don�t fear them and
again feel that our products are way out in front, that our business model is
way out in front and that we have sustainability that they probably don�t have.
Tim Barlow: Thanks for the answer. That�s all I have.
Pat Cline: Thank you.
Operator: Your next question comes from Christopher Shultz.
Christopher Shultz: Hi gentlemen, congratulations for your quarter, I have a couple of brief
questions. On the NextGen pipeline, the $29 million, is that also measured for
potential over the next six months?
Pat Cline: No, we measure our pipeline a little bit differently than the dental division.
Our pipeline of $29M is comprised of those deals that we feel we have a 50%
or better likelihood of winning that business within the next 120 days.
Christopher Schultz: Okay that answered that one. On the dental side QSI, I�m wondering about
the brief reference was made to some of the issues with competitors and
maybe you were making reference to the big drop in Practice Work shares or
some of these companies.
I�m wondering if you are gaining any of their business in terms of like you
also mentioned that a lot of your competitors are sunsetting software products
so I think immediately about this other company, Practice Works. There are so
many old software programs. I�m just wondering if you�re kind of gaining
some of their business...?
Louis Silverman: This is Lou. I would say the short answer is yes. When we make a sale,
particularly on the practice management side the reality is we�re typically
replacing another vendor. I would also say that there has been no single
vendor whose misfortunes have been of particular benefit to us.
We�re out there selling actively and we�re taking the leads and the
opportunities as they come to us. It would be a mistake to point you in the
direction that any single company�s problems directly benefit us
disproportionately to any other company that�s out there.
Christopher Schultz: I�m just wondering whether kind of with those conversions that you�re
doing whether you�re also at the same time getting into a much smaller
practice level kind of away from the big consolidators to more like the one
and two practitioner shops. Is that a trend that you see or is that not at all.
Greg Flynn: That�s not a trend for us at this time. Our traditional market still remains the
larger group practice, scaling up to what we call the consolidators, which are
really an amalgamation typically of larger practices.
Pat Cline: And that is true in both of our divisions, both medical and dental.
Christopher Schultz: Okay, thanks a lot for that. Then on an additional point, like on the
HIPAA advantage that you seem to have over kind of in terms for readiness
for compliance, have any of your other competitors reported compliance?
Pat Cline: Yes in fact, a number of them have. More of our competitors have not
reported any compliance or certification or they have bolted on translators or
forced customers to move through clearinghouses to transact compliant claims
and remittances.
Christopher Schultz: Is that particular capability, is that right now of any strategic advantage?
Or are there insurance companies who are at the back and simply the ones
who are not complying either and it doesn�t really help you that you guys are
complying the whole back office isn�t really up to speed?
Pat Cline: Well I think it does help us in a couple of respects. One is that most
purchasers aren�t buying systems that are not HIPAA compliant, or at a
minimum they�re insisting that companies contractually commit to catching
up with respect to HIPAA transaction sets with their software.
Many of the payers are accepting HIPAA compliant ANSI 835 and 837
transactions, accepting and sending transactions and many of them are not.
But one thing is fairly certain. Over the next year all of them will. Purchasers
are looking at that particular capability very hard. Another area that I think
weighs in our favor is our early compliance - well, early or on-time
compliance, depending on how you look at it, on a native basis again as
opposed to bolting on a translator, so to speak. I think it helps prospective
customers to understand we are committed with respect to technology and
with respect to keeping our product lead.
Christopher Schultz: Okay thanks a lot for that update. Just a follow-up question for Lou. As far
as the acquisition front is concerned, given that you have two fairly
established businesses, what type of capabilities would you want to have at
this point that you don�t have? Could you imagine getting into an entirely new
line of businesses or would those be sort of complimentary to your existing
business just for additional subscribers? How would you go about in that
process?
Louis Silverman: Sure. Again this is very, very early in the process, but I would say that things
we would at least be interested in looking at would break down into three
broad categories. One would be classically defined market share acquisitions
where we would seek to add additional practitioners to our current base of
doctors and dentists.
The second would be technology additions that might add to our EDI line of
products and services. And a third category might be what I would call special
situations, which would still be healthcare related. Not far afield from what
we�re doing today, but perhaps a little different from the exact business
models that we�re following now.
That�s the Lou Silverman version. We would be looking at all of those types
of possibilities but again it�s very early in the process, and therefore premature
to suggest that we have a full-blown acquisitions program. It�s just the very
early stages of making sure that we are appropriately looking at the nearly $30
million cash asset that we have and trying to be as responsible as we can in
leveraging that to shareholder advantage.
Christopher Schultz: Okay, thanks for your questions and your answers and your clarifications.
Pat Cline: Thank you.
Operator: Once again you have a follow-up question from Andrew Shapiro.
Andrew Shapiro: Hi, I want to get a feel for conceptually if I�m correct on this. Your medical
division is growing at a much faster pace than the dental side at present and
it�s becoming more and more the sales mix. And this last quarter it looks like
now that NextGen is two-thirds of the business and dental�s only one-third.
As these growth rates continue, is it correct to assume then that the
consolidated numbers of the company of the growth ought to accelerate at
least to the top one?
Louis Silverman: Andy I think you�ve asked and answered your own question and that�s how
the math would work.
Andrew Shapiro: And the relative margins of the two divisional product mixes. Have the
products on the NextGen side from its division, have they gotten to the point
now that as the NextGen division�s growth exceeds dental and it becomes
more of the revenue sales mix accelerating your revenue will the similar
impact be expected on the cash flows and bottom line?
Louis Silverman: At this point, and it varies a little bit quarter to quarter, but the operating
income percentage generated by each division has started to move pretty close
to one another. It flip-flops a little bit quarter-to-quarter, but over the last two
or three quarters they�re not extremely dissimilar. .
Andrew Shapiro: Okay great, thank you.
Operator: There are no further questions at this time.
Louis Silverman: Thank you everyone for joining us and we�ll see you next quarter.
Operator: This concludes today�s conference call. You may now all disconnect.
END
