NextGen Healthcare, Inc. (NASDAQ:NXGN) Q3 2023 Earnings Call Transcript

NextGen Healthcare, Inc. (NASDAQ:NXGN) Q3 2023 Earnings Call Transcript January 24, 2023

Operator: Welcome to NextGen Healthcare Fiscal 2023 Third Quarter Results Conference Call. Hosting the call today from NextGen are David Sides, President and Chief Executive Officer; and Jamie Arnold, Chief Financial Officer. Today’s call is being recorded. All lines have been placed on listen-only mode. At this time, I would like to turn the call over to James Hammerschmidt, Senior Vice President of Finance and Investor Relations of NextGen. James, you may begin.

James Hammerschmidt: Thank you, operator. Before we start, please note that we will be making forward-looking statements during the presentation and the Q&A part of the call. These statements are based on management’s current expectations and assumptions and are subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings release and SEC filings. This call will also reference certain non-GAAP financial measures. Information about non-GAAP financial measures, including reconciliation to U.S. GAAP can be found in our earnings release, which is available on our Investor Relations website. At this time, I’d like to turn the call over to our President and CEO, David Sides.

David Sides: Thank you, James. In May of last year, we described our multiyear journey to deliver double-digit revenue growth, operating leverage, and disciplined capital management. And I’m pleased to report strong execution and solid results across all three fronts in the quarter. But before I go into my prepared remarks, I’d like to address an important topic. On January 6, we became aware of unauthorized access to a limited part of the NextGen network. Upon investigation, we learned the company was the target of a sophisticated cyber-attack. We immediately executed our internal response procedures and contained the threat, secured our network, and have returned to normal operations. Our forensic review is ongoing and to date we have not uncovered any evidence of access to or ex-filtration of client or patient data.

Based on our investigation to date, this incident impacted select administrative non-client files within our network. In total, this affected less than 1% of the devices used by our employees. Out of an abundance of caution as soon as we noticed the threat, we severed connectivity to some systems and notified clients who were impacted in a timely manner. The vast majority of clients continue to operate as usual without any disruption. Those systems have all been securely restored and operations have returned to normal. While unfortunate, we’re happy to note that previous investments in cybersecurity paid off. We will continue to invest in keeping our systems safe and secure for our employees, clients, and the patients they serve. Now, back to our progress in the quarter, I’d like to start with growth.

Our integrated solution creates a foundation to deliver insights at the point of care, which allows for us to partner with clients to improve outcomes. This differentiation is resonating in the market, especially among leading integrated care organizations looking for a holistic platform to deliver medical, behavioral, and dental care. Our bookings in the quarter reflect this differentiation where despite the macroeconomic environment, we continue to see success in gaining new logos and cross-selling our surround solutions. There were six deals over $1 million spanning both inside and outside the base. Bookings from net new clients represented approximately 30% of sales in the quarter bringing our full-year average back above 25%. We continue to see opportunity to help our clients, address the problems they face in today’s environment.

Such as staffing shortages, wage increases, and higher patient volumes. These challenges demand for our managed cloud services, revenue cycle, and patient engagement solutions as our clients look to gain practice efficiencies and improve financial outcomes, while continuing to deliver quality care. These factors in addition to strong client retention have resulted in continued growth acceleration across our diverse revenue streams. This is especially clear in our recurring revenues, which has been building momentum and exceeded 10% growth in the quarter. While our commercial efforts are focused on delivering growth in fiscal year 2023, our solutions and development organization are innovating to build new offerings that drive growth in fiscal year 2024 and beyond.

We believe there is tremendous opportunity to expand our platform, especially when we look at the patient intake process and other front-end offerings that are currently in early testing with clients. We see strong proof points that our solutions are delivering value and a clear return on investment. I look forward to updating you all on the progress the team is making when we approach the start of our new fiscal year. Moving on to our operations and investments we’re making to scale. Our ability to deliver operating leverage starts with the foundation of our employees and our culture. We just recently conducted our annual vote survey that is voice of the employee, which measures employee engagement across 14 dimensions. I’m pleased to say employment engagement has increased for the sixth year in a row and is well above the benchmark, the strong improvement in culture, working environment, and client focus.

We’ve been thoughtful in managing our headcount throughout the year from the expansion of our sales development rep program, creating the upgrade center of excellence, and moving to a remote first work from anywhere organization, which allows us to access talent pools on a global scale, while minimizing our facility footprint. The company is focused on making investments and taking the actions required to show operating leverage. We will continue to optimize our resource mix, rationalized vendor spend, and processes and technologies to improve our productivity as we closed out the final quarter of fiscal year 2023. Now turning to our capital allocation effort. We believe total shareholder return is enhanced by taking a disciplined and deliberate approach to capital acquisition and deployment.

Our strategy is focused on investing in innovation, growth through M&A, and returning capital to shareholders through opportunistic buybacks. Following our last earnings call, we raised $275 million in convertible debt and concurrently purchased approximately 2.1 million shares for $40 million as part of the offering. These proceeds in addition to our cash generation and credit facility provides ample capital to execute on our inorganic growth agenda. We also announced the acquisition of TSI Healthcare, a long standing partner in the first acquisition the company has done in almost three years. TSI expands the addressable market served by our enterprise demand, unlocking new attractive specialties such as cardiology, rheumatology, and pulmonology.

The company provides purpose built clinical content and a differentiated service offering, which when paired with our strong commercial channel will drive long-term sustainable top line and bottom line growth. Given the similarities in culture and in the line strategy, I’m pleased to say the integration effort is going well as we start making foundational investments back into the business. Looking forward, we maintain an active M&A pipeline and will continue to assess future acquisitions, especially as it relates to capabilities that accelerate our effort behind NextGen insights. We believe data, analytics, and value-based care enablement will continue to be an attractive opportunity for the company to pursue. Lastly, I’d like to acknowledge the passing of NextGen Healthcare’s Founder, Sheldon Razin.

was an intensely passionate and entrepreneurial innovator. By digitizing health records and automating workflows, decades before the HITECH Act mandating the use of EHRs. has improved the lives of thousands of clients, tens of thousands of providers, and millions of patients. He will be missed. In building upon his legacy, the company is more focused than ever to innovate and deliver better healthcare outcomes for all. And now, I’ll turn the call over to Jamie to provide details on our financial performance in the quarter. Jamie?

Jamie Arnold: Thank you, David. Now turning to the third quarter fiscal year 2023 financial results. Total bookings came in at 44.8 million. This represents a increase from the third quarter of last year and a 20% increase from last quarter bringing year-to-date bookings growth to 9%. Software license bookings were below recent trends, which has an outsized impact on both quarterly revenue and earnings. Total revenue for the quarter was 161.9 million, an 8% increase year-over-year. Recurring revenue accounted for 148.7 million or 92% of total revenue. This equates to 11% year-over-year growth. Excluding the impact of the TSI acquisition, our organic growth from recurring revenue was 8%, primarily due to the strong performance in transactional and data services and managed services.

Most of the contribution from the TSI acquisition is reflected in the subscription revenue line. Non-recurring revenue for the quarter was 13.2 million and represents a 14% decrease, compared to the same quarter last year and a 17% decrease from last quarter. While we expect Q4 software bookings will return to the prior six quarter trend, we are closely watching for changes in client purchasing preference that could be affected by the macroeconomic environment. Gross margin of 47.3% was down approximately 310 basis points, compared to the same quarter last year and down 94 basis points, compared to the prior quarter. As noted in the discussion about non-recurring revenue, software revenues are off recent trends, which had a significant impact on gross margin decline.

Additionally, as discussed on last quarter’s call, we have made significant investment in our upgrade center of excellence and professional services, as well as a shift in product mix. Margin improvement will continue to be a focus and spend related to upgrade should start to rate in the back half of fiscal year 2024. Turning to operating expenses, SG&A of 46.2 million decreased by 2%, compared to the same quarter last year, due to lower variable compensation, as well as cost reduction actions we have been executing such as reducing facilities footprint. Net R&D expense was 19.6 million for the quarter and represents 12% of total revenue. This is a 1% increase, compared to the same quarter last year. We had a GAAP tax provision of $1 million this quarter with a GAAP effective tax rate of 11.5%.

Our non-GAAP tax rate remains at 20%. On a GAAP basis, Q3 fully diluted net income per share was $0.12, compared to net income of $0.08 per share in the fiscal third quarter of 2022. On a non-GAAP basis, fully diluted earnings per share for the fiscal third quarter of 2023 was $0.26, compared to $0.24 in the year ago quarter. Turning to the balance sheet. We ended the fiscal third quarter with 241.6 million in cash and equivalents and no balance outstanding on our line of credit. Free cash flow for the quarter was a negative 6.9 million. As David noted, in November, we issued $275 million convertible senior notes with net proceeds to the company of after debt issuance cost. Key terms include a 3.75% coupon rate, five-year maturity period, and a conversion price of $25.68.

We can call them on or after November 20, 2025. For more detail, please refer to the debt footnote in our financial statements. Concurrent with the convertible debt offering, we purchased 2.1 million shares for $40 million at an average cost of per share. Since the authorization of our share repurchase program in Q3 of fiscal 2022, we have purchased a total of 4.8 million shares for 85.8 million at an average cost of $17, and $0.68 per share. As of December 20, 2022, we still have $74 million remaining in the share repurchase authorization. On November 30, we acquired TSI Healthcare. The acquisition provided minimal impact to our Q3 financial performance since it represents only one month of actuals. We expect the acquisition to contribute between $10 million and $12 million of revenue for fiscal year 2023 and will be accretive to earnings within a year.

As mentioned earlier in the call, the impact to revenue will be mainly in the subscription revenue line. Turning to our fiscal 2023 financial guidance. As noted in the press release, we are updating our prior guidance to account for the acquisition of TSI and the convertible debt offering. We now expect fiscal 2023 total revenue to be in the range of $642 million to $650 million, which represents a year-over-year growth of 8.3% at the midpoint. Moving to adjusted EBITDA, we are maintaining our prior guidance range of $110 million to $115 million, and our prior fiscal non-GAAP EPS range of $0.93 to $0.99. In closing, I believe the company is well positioned to meet our long-term objectives based on our strong bookings performance in Q3, operational execution, and disciplined deployment of capital for smart acquisitions like TSI.

And now let me turn the call back to David for closing comments.

David Sides: Thank you, Jamie. NextGen continues to execute with a focus on driving growth for both us and our clients and we’re making the investments required to deliver long-term profitability and scale. Our overall positive outlook reflects the tailwinds we created by solely focusing on ambulatory care, our resilient business model, and our focus on driving shareholder value. In summary, I am pleased with this quarter’s results. And it sets us up for sustainable double-digit revenue growth in fiscal year 2024, which starts for us in April. This is one-year earlier than we said at our Investor Day in May, which targeted double-digit growth in fiscal year 2025. We will provide fiscal year 2024 guidance in May after we announce our fiscal year 2023 year-end results. And I am incredibly proud of the commitment and care shown by the NextGen family both to each other and to our clients. This concludes my comments. Let’s move to questions. Operator?

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Q&A Session

Operator: We’ll take our first question from Stephanie Davis, SVB Securities.

Stephanie Davis: Hey, guys. Thanks for taking my question. Just a quick one from me when I think about what takes up most of your guys’ time. I think about the progress of NextGen as first, your that he had to focus really on turning around user experience. It felt like your first priority was getting to that double-digit growth target. Now that you’re there, is it just pure execution or is there anything else in mind as your next to goal?

David Sides: I think it’s pure execution from here. So, some of the new organic products that we’re coming out within the insight domain, we’re seeing good early client interest. And so, we’ll talk about those more, but some of the things we talked are like, behavioral health. Last quarter, we had a really good sales quarter for behavioral health, which is a new organic area for us. So, those were part of the contribution to having a record sales quarter. So, I think from here, it’s just execution, getting those new products out driving the margin expansion that we know is there now that we have the revenue growth and then continuing to be smart on how we deploy capital that we’ve raised and make really smart acquisitions. It’s just doing that from here should get us where we want to go.

Stephanie Davis: Not a bad place to be. And just a quick follow-up then when I think about the quarterly cadence of margins for the year. Is the uptick in 4Q, should I just assume that’s license sales shifting from 3Q to 4Q and helping the margins?

David Sides: Yes. I mean that’s basically it. And then I think next year too, we think over time as we’ve, you know we’ve talked about this before. We sell more subscription. We’re going to temper our expectations for recognizable in our next year plan and account for that by taking out some cost to allow for that reduction in, kind of higher octane revenue. So, we can see the growth that we’re looking for from that next year, but yes, it’s mainly €“ you’ll see a rebound next year as Jaime said in his comments €“ or next quarter, I mean, in the recognizable license revenue, and we’ll be, as we talked about on the full-year number as we projected in the guidance.

Stephanie Davis: Super helpful. Congrats on a year.

Operator: Our next question comes from Jack Wallace from Guggenheim Securities.

Jack Wallace: Hey, thanks for taking the questions. Just a quick question on the hacking incident. Has that had any impact both your current and potential clients? And I got a couple of follow-ups.

David Sides: No, not so far. Unfortunately, it’s more common than you would think nowadays. We were glad to contain it to no client systems affected at all. No client data, no patient data, no provider data. None of those systems were compromised at all. So, we had a few less than 1% of devices that were compromised. We quickly shut that down within a day of realizing that. So, we contained it and then restored everything, communicated with any clients who might have had a process disruption because we didn’t answer a support call or other, kind of ancillary things, but overall, all the practice that we’ve done and all of our policies and procedures served us well during this. As you can imagine, we’re speeding up some of our investments in cyber that we had planned.