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NextGen Healthcare, inc (NASDAQ:NXGN)
Q1 2022 Earnings Call
Jul 29, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the NextGen Healthcare Fiscal 2022 First Quarter Financial Results Conference Call. Hosting the call today from NextGen is Jamie Arnold, Executive Vice President and Chief Financial Officer; and Matt Scalo, Vice President of Investor Relations. [Operator Instructions]

And now I will turn the call over to Matt Scalo.

Matthew Scalo -- Vice President of Investor Relations

Okay. Thanks, Catherine. And before we start, I'd like to remind everybody that comments made on this call may include statements that are forward-looking within the meaning of the federal securities laws, including, and without limitations, statements related to anticipated industry trends, the company's plans, future performance, products, perspectives and strategies.

Risks and uncertainties exist that may cause results to differ materially from those expressed in forward-looking statements, including, among others, those risks set forth in the company's public filings with the U.S. Securities and Exchange Commission, including the discussion under the heading Risk Factors in the company's most recent annual report on the Form 10-K and any other subsequent quarterly report on Form 10-Q. Any forward-looking statements speak only as of today. The company expressly disclaims any intent or obligation to update these forward-looking statements.

Our remarks on today's call include both our earnings results and guidance, which contain certain non-GAAP financial measures. For our earnings results, the GAAP financial measures most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our latest quarterly earnings release that was filed with the SEC and is posted to the Investor Relations section of our website. This release also provides qualitative descriptions of how we have calculated non-GAAP financial measures contained in our guidance.

At this time, I'd like to turn the call over to our CFO, Jamie Arnold.

James Arnold Jr -- Chief Financial Officer And Executive Vice President

Thank you, Matt, and thank you to everyone who has joined the call today. It's been a highly productive quarter here at NextGen Healthcare as our team continues to execute on our goals, in particular, accelerating revenue growth. Our guiding principle is as apparent today as it was when I joined NextGen over five years ago: Believe in better.

And better, in this case, translates to being the preferred solutions provider and trusted advisor to our clients as they continue their journey in a market that is evolving to value. In mid-June, we spoke with our clients, employees and investors regarding the orderly leadership transition of our former CEO, Rusty Frantz. While change can be disconcerting, we approach this transition from a position of strength and confidence, both financially and operationally.

Our clients and employees have expressed a clear commitment to NextGen and the company's long-term growth strategy. With our focus on commercial execution, NextGen is accelerating its revenue growth while continually investing in exciting, longer-term growth opportunities. The company has strong cash flow generation that allows us to self-fund meaningful growth initiatives as well as a strong balance sheet with no debt and access to significant capital should an attractive inorganic growth opportunity arise.

Finally, the company is guided by an experienced leadership team and staffed with employees who work tirelessly to promote NextGen's outstanding culture and to drive continuous improvement in organizational structure and execution. The Board, directly and through the Board Oversight Committee, consisting of Jeff Margolis and Vice Chairman, Craig Barbarosh, strongly and actively supports the interim leadership structure.

The members of the Executive Leadership Committee, or ELC, include me, David Metcalfe, Donna Greene and our new Chief Growth Officer, Sri Velamoor. Having worked with David and Donna for the last five years, I can't overstate the impact they have made on their respective departments and the company as a whole. And with only a month at NextGen, Sri, who recently led healthcare digital strategy as a partner at McKinsey, is bringing a fresh and highly informed perspective to shape and accelerate our growth agenda.

The Board has also initiated a robust executive search process to identify, evaluate and engage top talent for the CEO role. The process includes both internal and external candidates, and we will provide updates on this process as warranted. Turning to Q1 operations. Let's start with a brief update on our Spring '21 rollout. We are still in the early adopter phase but are fast approaching the next phase, ramp to scale. In the early adopter phase, our focus is on planning, testing and resourcing a scalable implementation process that will deliver an enhanced experience to our client.

Our goal is to lead our clients through this process so that we better enable them to fully leverage the system and deliver measurable results. We are seeing a meaningful percentage of clients, particularly those on the most current version of NextGen Enterprise, raising their hand to start the upgrade process. As such, we are adding resources in anticipation of this ramp. In other operational highlights, bookings came in at $34.3 million in the quarter, up 34% on a year-over-year basis.

While the comparator was low due to the impact of the pandemic in the prior year, we believe our solid booking momentum speaks to the advantages of our solutions in certain medical specialties and attractiveness of the breadth of our solution. New client wins accounted for over 25% of bookings, and we note that we closed a few 7-figure deals in the quarter, spanning both existing and new clients. Speaking of large transactions, I'll provide color on a few of those larger transactions.

The first one is a federally qualified health center, or FQHC, that does great work focusing on whole-person care, serving over 38,000 patients across 48 facilities. The prospect recognized how our comprehensive offering, which supports both physical and mental health and includes virtual visit capabilities, could address their current needs and will scale to support their planned growth. We look forward to supporting this client and their mission going forward. I would also like to mention an expanded relationship with a national medical group with over 2,300 physicians.

Our new agreement provides solutions that surround our core offering, including mobile, virtual visits, automated rules engine and appointment reminders. It is rewarding to see how being a trusted advisor supports our client's growth. Now to Q1 results. Starting with total revenue, the company generated $146.1 million in fiscal first quarter, an increase of 12% year-over-year. Of this total, recurring revenue accounting for $132.4 million or 91% and was driven by strong performances in our managed services, EDI and subscription businesses.

Managed services revenue of $29.4 million grew by 31% due to continued growth in our managed cloud services and revenue cycle management and year-over-year comps reflecting the impact of the pandemic last year. And a change from recent quarters, client encounter volume for the quarter was at or above pre-COVID levels. EDI and data generated $26.2 million in revenue this fiscal quarter, growing 13% over the year-ago period as transaction volumes improved and the year-over-year comps reflected the impact of the pandemic last year.

Software subscription revenue, which is at the crossover point to becoming our largest revenue category, generated $38.3 million in fiscal first quarter and grew 8% year-over-year. The growth this quarter was fueled by clients continuing to incorporate our solutions to better engage their patients and improve the patient provider experience. Consistent with our past commentary, subscription services growth moderated from recent quarters due primarily to the tougher comps, and stronger adoption of select subscription services like telehealth boosted the prior year period.

Software maintenance and support revenue of $38.5 million was flat with the prior year period and slightly better than historical trend. Nonrecurring revenue of $13.7 million increased 21% over the same quarter last year. Software license and hardware revenue of $7.2 million grew over 50% year-over-year. This performance reflects timing of larger deals in the quarter and benefits from lower year-over-year comparison.

Gross margin of 50.2% represents an increase of 90 basis points from the same quarter a year ago due in large part to a mix shift favoring managed services and EDI revenue, which benefited from higher volumes, leading to higher gross margin for those services and the reduction in amortization of acquisition-related software technology. The benefit was offset partially as we started to add staff to support the Spring '21 rollout. Turning to operating expenses. SG&A of $48.5 million increased by $7.7 million compared to a year ago.

This increase includes the accrual of separation costs associated with the departure of our former CEO as well as increased legal expense primarily related to the preparation for the shareholder trial. Net R&D of $19.3 million grew 6% over the year-ago period. Net R&D reflects increased gross spend due to project timing and slightly lower capitalization, which increases net R&D expense. Our GAAP tax rate was approximately 16% with a non-GAAP tax rate of 20%.

On a GAAP basis, Q1 fully diluted net income per share was $0.04 compared to $0.01 net loss per share in the fiscal first quarter of 2021. On a non-GAAP basis, fully diluted earnings per share for the fiscal first quarter of 2022 was $0.25 compared to $0.21 in the year ago period. Turning to the balance sheet. We ended the first fiscal quarter with $63 million in cash and equivalents and no balance outstanding on our line of credit. DSOs in the quarter were 46 days, a decrease of three days from the previous quarter.

Capital expenditures, excluding capitalized R&D, was $1 million for the quarter. Capitalized R&D was $5.5 million for the quarter. Free cash flow generation was negative this quarter, reflecting a higher-than-average bonus payout percentage from overachievement of fiscal '21 goals. We expect free cash flow generation should return to near historical levels for the remainder of fiscal year '22. Now on to our fiscal '22 financial guidance and closing comments. As noted in the press release, we are raising our fiscal '22 revenue guidance at this time by $2 million.

So the new revenue range is $576 million to $586 million. While the fiscal first quarter's performance was clearly strong and well balanced, we believe that given the number of variables, including the COVID Delta variant, it is prudent not to get out over our skis, particularly after one quarter. Those of you that have followed the story for some time know that the potential timing of a few large software transactions can impact any single quarter's performance but, over time, the trend typically returns to normal.

While managed services and EDI generated 31% and 13% year-over-year growth in Q1, for the full fiscal year, we see managed services and EDI data generating healthy year-over-year growth in the high single digits. Our current outlook incorporates our belief that the volume spike we noted for Q1 will be temporal; that Q2 through Q4 have, on average, two less workdays than Q1; and we're monitoring the known unknowns of the COVID Delta variant, which may have an impact on service volumes for our clients.

We expect subscription revenue to grow in the high single-digit range for the balance of this year. Gross margins for the fiscal '22 will reflect increased personnel associated with Spring '21 upgrade and slightly higher amortization of previously capitalized R&D. As noted in prior calls, we are making ongoing investments in sales and lead-generation personnel and enhancing our offerings. This will accelerate throughout the remainder of this fiscal year. And therefore, we are reaffirming our non-GAAP EPS range of between $0.89 and $0.95 per share.

For perspective, I recently looked back at our commentary in prior years. In fiscal '20, we talked about our expectation for annual GPS range to be in the low $0.80 level through fiscal '23 as the company invest in longer-term growth opportunities, and revenue would grow at an increasing pace. Since fiscal 2020, our revenue growth trajectory has steadily improved, and our fiscal '22 non-GAAP EPS is actually higher than we envisioned back in fiscal 2020.

Reviewing the significant progress the company has delivered may provide useful context when looking at forecasts for fiscal '22 and beyond. Before we close, I'd like to provide an update on a long-standing legal matter. As noted in the 2021 10-K, the Hussein trial is scheduled to start on July 6, and it did. The jury deliberations began today. While we believe we will prevail and do not have liability, however, if the jury determines otherwise, then the appropriate accounting treatment would be to record the accrual as of June 30 before finalizing and filing the 10-Q.

First, we do not think we are liable. And second, if the jury sees this differently, we would view this as a nonrecurring item and would exclude the expense from our calculation of non-GAAP EPS. We see NextGen as a revenue growth acceleration story. We just reported a 12% growth driven by strong, balanced performance of our portfolio.

We also raised the midpoint of our fiscal '22 revenue target and have clear line of sight to achieving our longer-term annual revenue growth rate target of 5% to 8% based on our platform's breadth that addresses the most important trends in healthcare and especially the interaction between the patient and the provider, what we call our Surround Strategy, the growing number of targeted medical specialties and other integrated provider models where our solutions have a clear advantage.

You can see this in the positive momentum in new client wins as well as some of the larger deal sizes NextGen has called out. And finally, our continued reinvestment in commercial operations that is critical to our ability to execute and elevate our clients' overall performance and satisfaction. In closing, I am pleased with the overall momentum and diversified growth we generated in the quarter. NextGen is making the right investments to drive the adoption of Spring '21 platform and overall revenue growth longer term.

This concludes my review of the first fiscal quarter, and let's move to questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question today will come from Jeff Garro with Piper Sandler. Please go ahead.

Jeff Garro -- Piper Sandler -- Analyst

Yeah, good afternoon. Congrats on the quarter. I want to ask about the guidance increase. You had some helpful comments about the reasons why you beat revenue more than you've raised, but could you help us parse out where your plan for the most recent quarter might have been higher than consensus estimates? Any other onetime items worth mentioning in the quarter? And then with the expectations for the rest of the year, any more specificity you could give around volume-related revenue lines?

James Arnold Jr -- Chief Financial Officer And Executive Vice President

Yes, Jeff, thank you. So what I would say is -- I tried to note it in my comments. I think the license revenue can be lumpy, and it was a little ahead of our expectations. And we also talked about the number of days. And when I look at the consensus, it appears to me that this was not well known, and that's why we're calling it out.

To be direct, there were 64 workdays in this quarter, and it will average about 62 for Q2 through Q4. And Q1 had 61 days in it last quarter. So I think that probably helped shape the consensus for our managed services. It seemed to be lower than where we came in. So just trying to -- those are the areas where I think there was the biggest disconnect between The Street and where we are, so we tried to be a little more clear here. I hope that's clear enough.

Jeff Garro -- Piper Sandler -- Analyst

That helps. Maybe we could also dive into the subscription revenue line. That was up modestly sequentially. Any puts and takes that we should be aware of in both the quarterly result or, looking forward, the visibility you have into sequential growth the remainder of the year and either the backlog or ability to book new, the cross-sell revenue that might quickly convert into the subscription line item?

James Arnold Jr -- Chief Financial Officer And Executive Vice President

Yes. So the subscription revenue -- I think -- I was looking back at our comments at the end of Q4, and we had indicated that we thought it would be -- that we would be down from the growth rates we had experienced in fiscal '21. But I don't think we gave as precise guidance as we have this quarter. We expect it to grow in high single digit for the full year.

Jeff Garro -- Piper Sandler -- Analyst

Then is anything further there in terms of visibility into the backlog of subscription products that you've already sold that might convert the rest of the year in terms of the magnitude of that? And any particular product areas worth calling out?

James Arnold Jr -- Chief Financial Officer And Executive Vice President

Jeff, there are a number of areas, and I'm not prepared to dive into all of the various subscription products. I can tell you we had a strong quarter for bookings. Sometimes the timing of when a subscription goes live is dependent upon the client being ready to implement. So the timing can be a little bit varied. But I think I've given the amount of data that we are prepared to talk about. And I would just reinforce that our Surround Strategy is working. And that's part of what I highlighted when I talked about the large client, the existing client that signed the large deal with us this year because some of that would be in the -- would show up in the subscription line.

Jeff Garro -- Piper Sandler -- Analyst

Thanks for taking the question.

Operator

Our next question comes from Sean Dodge with RBC Capital Markets. Your line is open.

Thomas Kelliher -- RBC Capital Markets -- Analyst

Hey, good afternoon. This is Thomas Kelliher on for Sean. And so maybe starting off on product adoption. I know you didn't want to get too specific on that. But I know you had mentioned before that the typical call it base package being kind of the upfront software license, support and maintenance and some EDI services. But I guess, looking at bookings now, in terms of add-ons on top of the stuff, where are you seeing the most traction? And what products would you say have the most penetration so far?

James Arnold Jr -- Chief Financial Officer And Executive Vice President

Thomas, give me a second to sort of -- to put my -- we have good -- I'll give you a little bit of color in some of these lines. The Patient Experience Platform, which is the replacement for the legacy portal, we have pretty strong penetration there. We've had a lot of success that we've talked about over the last four quarters about virtual visit. And we've had pretty good success with mobile when we think of the Surround Strategy. So in the subscription area, the subscription services line, that would be the areas that I would highlight.

Thomas Kelliher -- RBC Capital Markets -- Analyst

Okay. That's helpful. And then kind of along those lines, you still have a lot of, I guess, dry powder, call it. Any plans to deploy any capital to any specific area? Are there any solutions you think you guys are still missing? And then is it easier to then add stuff, I guess, to the platform just given the micro services architecture and everything? Is that going to simplify some of the integration processes going forward?

James Arnold Jr -- Chief Financial Officer And Executive Vice President

Yes. We have historically when Rusty was here, and I would continue the tradition. We're not going to get into the areas that we might be interested in M&A. I guess I would say to you that with Sri joining us and with his experience, I want to give him time to get in. He's been very helpful in the first month, and I'm looking forward to working with him in the coming months as we assess opportunities. So that's how I would respond to that question.

Thomas Kelliher -- RBC Capital Markets -- Analyst

Okay, sounds good. Thanks, Jamie.

James Arnold Jr -- Chief Financial Officer And Executive Vice President

Yeah. Thank you.

Operator

We'll go now to Donald Hooker with KeyBanc. Your line is open.

Donald Hooker -- KeyBanc -- Analyst

Thank you, Jamie. Maybe just wanted to kind of go back to that managed services line. I just want to make sure I understand this. I got -- there would be a sort of a step down here. I guess is it solely due to the days that was picking those fast? It sounds like there was some sort of spike in the quarter. Is there something onetime in there, in that $29.4 million?

James Arnold Jr -- Chief Financial Officer And Executive Vice President

Yes, Donald, there is. We had three more days in Q1 than we had in Q4. So that's 5%. And we also did -- we did see a spike in the number -- in the clinical encounters. We obviously have access to that data for many of our clients. We did see some spikes in the first quarter. It appears that, that was a bolus of pent-up demand.

And then as people got their vaccines and felt more comfortable, went to see the -- went out to see their doctors for treatments that they have been postponing. We have seen that fall back a little bit in July, either through because of the Delta variant or because the pent-up demand has been satisfied partially. So I would point to managed care in Q1. We do expect Q2 to still be strong but not as strong as we saw in Q1.

Donald Hooker -- KeyBanc -- Analyst

Got you. Sorry, I make you repeat that.

James Arnold Jr -- Chief Financial Officer And Executive Vice President

No, no. I want to be clear.

Donald Hooker -- KeyBanc -- Analyst

And then the -- and then just another sort of -- just from my understanding, you're rolling out the Spring '21 platform. Is there any reason -- would that cause any sort of pause in add-on sales? I guess, as folks are waiting for this new technology platform, would that affect the subscription line in any way? I guess with this new platform coming out, would that sort of slow your -- you're going to wait for that to come out first and then you sort of -- would that pressure near-term SaaS revenues?

James Arnold Jr -- Chief Financial Officer And Executive Vice President

We had -- in the first -- to answer to the first question, I mentioned that we have had a good quarter from bookings on subscriptions. I highlighted one of our customers, that it was a larger transaction part that had some of the Surround solutions. There may be a little bit. But we are seeing interest in the Surround solutions. They can be implemented. It is a little easier when they are on the new platform, and particularly, the Patient Experience Platform, but it is not necessary. So as of now, it is -- we are seeing performance in line with what we expected. And we will let you know if we start to see any change in that.

Operator

[Operator Instructions] We'll go now to Stephanie Davis with SVB Leerink. Your line is open.

Stephanie Davis -- SVB Leerink -- Analyst

Congratulations on the solid quarter and for smoothly [conducting this call]. I think you are doing a fantastic job. I just want to call that out first. But just touching on the volume side of things, you mentioned this a little bit in your last question. But how should we think about the volume assumptions baked into the rest of the year? And how are you factoring any risk from Delta variant?

James Arnold Jr -- Chief Financial Officer And Executive Vice President

Good question, Stephanie, and thank you for the kind remarks. What I would say is that we have -- as indicated by my prepared remarks, we have factored in the volume wheels temper a little bit as we move forward. And we are highlighting that if the Delta variant continues to spike and affects people's willingness to go see the doctor, it could pull us to the low end of the range. Obviously, we don't know how bad it could get. But we think we have factored in based on what we know today.

Stephanie Davis -- SVB Leerink -- Analyst

Okay. Understood. So little bit of things got worse now, but its current conditions continue with more of a -- in line with the range at least.

James Arnold Jr -- Chief Financial Officer And Executive Vice President

Yes, that's correct.

Stephanie Davis -- SVB Leerink -- Analyst

And then with HIMSS coming up, is there anything you'd want to call out or highlight that you will really be focusing on the expo, in the Surround services?

James Arnold Jr -- Chief Financial Officer And Executive Vice President

So Stephanie, we are not attending HIMSS this year. We made that decision a while back. We do have a small group of people that are going to be in the interoperability showcase area, but we are not a presenter there on the main floor.

Stephanie Davis -- SVB Leerink -- Analyst

Okay, understood. Thank you.

James Arnold Jr -- Chief Financial Officer And Executive Vice President

All right, thank you.

Operator

And there are no further questions at this time. I'll turn the call back over to Jamie Arnold for closing remarks.

James Arnold Jr -- Chief Financial Officer And Executive Vice President

Thank you, operator, and thank you for everyone participating in the call today. I am proud to be a part of this team, the success we had in the quarter. And I am looking forward to future quarters. I look forward to seeing all of you at upcoming investor conferences. Thank you, and have a good day.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Matthew Scalo -- Vice President of Investor Relations

James Arnold Jr -- Chief Financial Officer And Executive Vice President

Jeff Garro -- Piper Sandler -- Analyst

Thomas Kelliher -- RBC Capital Markets -- Analyst

Donald Hooker -- KeyBanc -- Analyst

Stephanie Davis -- SVB Leerink -- Analyst

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