NextGen Healthcare, Inc.
Q4 2007 Earnings Call Transcript

Published: 8 Jun 2007

[Operator:]

Good afternoon. My name is Vanessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Fiscal 2007 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Silverman, you may begin your conference.

[Louis Silverman:]

Thank you, Vanessa, and welcome everyone to our fourth quarter and fiscal 2007 earnings call. Paul Holt, our CFO; Greg Flynn, our Executive Vice President and General Manager of the Quality Systems Division; and Pat Cline, President of the NextGen Healthcare Information Systems and Services Division once again join me on this afternoon's call. Please note that the comments made on this call will include statements that are forward-looking within the meaning of the Securities Laws, including without limitation, statements related to anticipated industry trends, the Company's plans, products, perspectives and strategies, preliminary and/or projected operating results, capital and equity initiatives, pending litigations and the implementation of, or potential impact of legal, regulatory and accounting requirements. Actual events or results may differ materially from our expectations and projections, and you should refer to our prior SEC filings, including our Forms 8-K, 10-K and 10-Q for discussions of the risk factors, management discussions and analysis and other information that could impact our actual performance. We undertake no obligation to update any projections or forward-looking statements in the future. Also, as I have mentioned on each and every call for the past many quarters, please continue to note that the Company's past performance is not necessarily indicative of future performance. I'll now provide some summary comments on the quarter and the year. Paul, Greg and Pat will follow with additional details. For the March quarter, the company recorded record revenue of $45.1 million, up approximately 27% over the prior year. NextGen revenue of $40.7 million represents a record for the division and a 28% increase over the prior year quarter. QSII Division revenue at $4.5 million was up nearly 17% over the prior year and represents the highest quarterly total in the recent history. Fully diluted earnings per share for the fourth quarter was $0.31, which represent an 11% increase over the $0.28 earned in the same quarter of the prior year. While we were pleased with our revenue for the quarter, there are no guarantees that financial performance in ensuing quarters will meet or exceed the level of performance attained in the most recent quarter. As detailed in our press release, expenses in the quarter were impacted by a number of factors, including but not limited to, higher FAS 123R expense, driven by the changes in the company adoption, planned targets, and options we announced in late January of 2007, and the company's strong revenue performance for the quarter. In the fourth quarter, FAS 123R expense was approximately $0.01 per diluted share higher than in prior quarter. Cash incentive compensation was also relatively high in the quarter due to the quarter's strong revenue performance as well as the adjustments of certain bonus time targets announced in January of this year. The company's corporate expenses for the quarter were impacted by legal and other professional services, totaling approximately $500,000, which is in excess of $0.01 per diluted share, related to the previously announced SEC investigation of trading activity in the company's equity. The company's tax rate for the quarter was 39.3%, up from 35.6% in the third quarter of the year. As mentioned during our previous call, the low third quarter tax rate was a result of certain favorable factors, including the reinstatement of the R&D tax credit statute. For the year, the company revenue was $157.2 million, up 32% over the prior year. Fully diluted earnings per share was up 42% over the prior year. NextGen revenue was up 36% over the prior year. And NextGen operating income was up 40% over the prior year. The QSI Division had revenue growth of 7% for the year and operating income growth, up 22% for the year. Detailed information about the fourth quarter and the fiscal year as a whole will be provided by Paul Holt. Regarding investor conferences, during the quarter, the company presented at the J.P Morgan, Needham, UBS and Lehman conferences. Subsequent to the quarter end, we presented at the JMP and Citibank conferences. Investor meetings were held in Kansas City, Chicago, Seattle, Portland, Baltimore, Philadelphia and New York City in addition to those held here in our headquarters. Regarding acquisitions, we continue to prioritize organic growth. We will continue to review potentially interesting opportunities that come to our attention. Recapping a number of prior announcements, on February 1st, the company announced, it would pay $1 per share dividend to shareholders of record as of February 13, 2007 with an anticipated distribution date of February 28, 2007, as well as the establishment of a regular quarterly dividend of $0.25 per share, per quarter, subject to Board approval. The first quarterly dividend payment is scheduled for July 5, 2007, to shareholders of record as of June 15, 2007. Also, as previously announced, our annual shareholders meeting is scheduled for August 8, 2007. Before I close, I'd like to reiterate a portion of our press release comments regarding the previously disclosed SEC investigation of trading activity in the company's securities. And here is the excerpt from release. As previously disclosed in our Form 10-Q for the quarter ended December 31, 2006, we received written notification from the Commission stating that the Commission initiated an investigation of trading activity in our securities. While making clear, that the investigation did not mean the Commission had concluded there has been a violation of law. The Commission sought documents and records concerning our Chief Financial Officer. To the best of our knowledge, the Commission's investigation is ongoing and is not an investigation of our company. We intend to continue to fully cooperate with the Commission. After we received the Commission's notification, our Audit Committee, assisted by independent outside legal counsel, conducted an investigation of certain trading activity in our securities, with particular focus on trading, and based on the information available to the investigators and the results of the investigation, the Audit Committee has concluded that it does not appear that our Chief Financial Officer engaged in improper insider trading or tipping, in connection with that trading activity. The legal and professional service expenses associated with the investigation was in excess of $0.01 per diluted share for the March quarter. The Audit Committee's investigation was concluded during the quarter that will end June 30, 2007. That was what was in our release. Our order committee engaged a large nationally recognized law firm to assist in its investigation. The law firm, as well as our Audit Committee, sought a great deal of time and energy into this process. Although our internal process has concluded, the SEC investigation is to our knowledge ongoing. Therefore our ability to provide significant additional commentary on this matter may be limited. In closing my prepared comments for this call, I want to clearly point out that there are no guarantees that the company, or either of its divisions, will meet or exceed past or expected levels of performance in future period. It is possible that investors and analysts will set new short, medium or long-term expectations for the company in response to the possibility, and should continue to note that we do not give our financial guidance to the investment community, and we do not comment on guidance advanced by members of the financial community. Once again I would like to thank the more than 650 members of our team, for their many contributions to another year of record results, as well, the confidence that our clients and investors have placed in us during the past year is greatly appreciated. I now turn things over to Paul Holt.

[Paul Holt:]

Thanks Lou and hello everyone. Our consolidated system sales of $24.5 million this quarter, represents an increase of 19% compared to $20.6 million in the prior year quarter. Sales of add-on licenses included in system sales grew 22% to $6.1 million this quarter versus $5 million a year ago. Our consolidated maintenance, EDI and other services revenue rose 38%, to $20.6 million compared to $14.9 million in the prior year quarter. Our consolidated gross profits margin this quarter came in at 67.2% that was down fairly from 68.9% a year ago. The decrease in our gross margin over last year was due primarily to a relatively higher amount of compensation expenses as a percentage of revenue, as well as a relatively larger amount of hardware and third party software as a percentage of system sales. Total SG&A expense increased by approximately $4 million to $14.6 million this quarter compared to $10.6 million a year ago. The increase in SG&A expenses compared to the prior year was due to several factors, including higher selling related expenses due to increase of revenue and headcounts. Higher compensation expenses, due to previously announced revisions to performance targets in strong revenue performance impacted certain bonus programs, As well as stock option expenses, due to the adoption and of FASB 123R, and our corporate expenses and others increases in SG&A expenses. I am going to comment on a sequential basis now, in regards to SG&A expense. SG&A expenses on a sequential basis increased by approximately $4 million, and this increase was composed of several factors, including approximately $1 million in additional corporate expenses, including the company's response to the SEC investigation already discussed. $1 million in higher compensation and benefit expenses. $0.9 million in additional commissions expense, tied to the strong revenue performance. Approximately $0.3 million in tradeshow and advertising and other SG&A expenses. Also, I want to note that the increase in compensation and corporate related expenses includes a portion of the increase in stock option and expenses referenced in our earnings press release. SG&A expenses as a percentage of revenue this quarter increased to 32.2% compared to 30% in the prior year quarter, primarily due to the significant year-over-year growth in SG&A expenses just mentioned. Moving on to our tax provision; the company's effective tax rate returned to more customary levels compared to the third quarter, at 39.3% compared to 35.6% last quarter. As Lou has already mentioned, the reason for the sequential increase in our effective tax rate this quarter is due to the fact that our prior quarter included a benefit from the reenactment of Federal Research and Development tax credit, which occurred in December of 2006. The effective tax rate on year-over-year basis was slightly higher at 39.3% versus 38.7% in the prior year. And before I move to divisional performance, I am going to mention that our results this quarter include $1,150,000 in additional pre-tax expenses related to stock options, due to the adoption of FASB 123R. The after-tax impact of our FASB 123R option expenses was $963,000 or $0.03 per diluted shares, and note that the prior quarter does not include these expenses due to the fact that we haven't adopted FASB 123R yet. This will be the last quarter that we will have that issue. Next quarter we'll have an apples-to-apples comparison in terms of stock option expenses. In terms of divisional performance, system sales in the NextGen Division rose 17% to $23.4 million this quarter, compared to $20 million a year ago. Continued growth in NextGen’s base of installed users drove maintenance, EDI, and other revenue in that division 46% higher than last year, at $17.2 million versus $11.8 million last year. Operating income in the NextGen Division was up 12% to $15,444,000 compared to $13,785,000 a year ago. The Dental Division reported a year-over-year increase of revenue of 17% of $4,460,000 compared to $3,825,000 a year ago. Operating income for the division was $865,000. Moving on to our balance sheet, our cash decreased by approximately $20.4 million this quarter to $60 million or $2.21 per share, compared to 80.4 million or $2.98 at the end of the prior quarter. Note that the March quarter included a dividend payment equal to approximately $27.1 million. This quarter our DSOs declined by 11 days at 129 days versus 140 days last quarter. DSOs continue to remain, however, above prior year levels due to a significant customer, which represented approximately 12.5% of total gross accounts receivable as of March 31, 2007. And also note that DSOs net amounts included in account receivable and deferred revenue remained unchanged at 81 days as of this quarter and last quarter. DSOs by division were 91 days for the QSI Division and 134 for the NextGen Division. Deferred maintenance and services revenue was $39.4 million, that's down $1.1 million from the prior quarter and up $3.5 million compared to the end of the prior year. Primary drivers of the growth in deferred revenue compared to a year ago, is deferred implementation and training as well as maintenance and services in the NextGen Division. An increase in training and implementation services rendered in the fourth quarter assisted the company in bringing down our backlogs of implementation services on a sequential basis. And again, for those of you who are tracking this, our non-cash expenses for the quarter breakdown as follows. Total amortization expense, $931,000, that's $34,000 for QSI and $897,000 for NextGen; total depreciation expense, $564,000, that's $67,000 for QSI and $497,000 for NextGen; stock option compensation, $1,250,000. Our investing activities for the quarter were as follows. Capitalized software, $1,555,000, that's $36,000 for QSI and $1,519,000 for NextGen; and fixed assets, $770,000, that's $67,000 for QSI and $703,000 for NextGen. I want to thank you all for being on this call and your interest in our company. I will now turn things over to Greg Flynn, who will provide you an update on the QSI Division.

[Greg Flynn:]

Thank you, and thanks to those of you on the call for joining us. We, of course, appreciate your interest in our company. As always, the QSI Division numbers have been addressed in detail by Lou and Paul. So, I will focus on continued product enhancement achievements for the Division and then other historical areas of interests for these calls. I am very pleased with the Division's development and implementation efforts for the CPS, clinical product suite software package. We not only introduced new clinical graphics, improved security enhancements, improved integration between CPS and digital X-ray softwares and most importantly to me, we further integrated the CPS package with our practice management systems. Now following the line of historical questions, I will comment on our sales staffing, and pipeline. Our sales staffing remains unchanged from last quarter, and our pipeline has improved to approximately $3.8 million. Our pipeline is defined as sales situations, where QSI is in the final pre-purchase choices, and we believe that the sale will occur within 180 days. This being our year-end call, I would like to make one other comment. I would like to thank the staff at the QSII Division for their efforts this past year. I am both proud and fortunate to work with such talented and dedicated individuals. Thank you. With that, I'll turn the call over to Pat Cline, as you know, President of our NextGen Division.

[Pat Cline:]

Thanks, Greg. Hi, everyone. During the quarter, NextGen once again executed about 80 new customer agreements. I am very happy with the number of new customers and with our record revenue. Also last quarter NextGen reached another high in customer service response time, returning 100% of our customer service calls in under two hours. That has been a goal that we have established for the company quite sometime ago, and we are clicking on all cylinders in customer service. We are also making good progress on resolution time and in overall customer satisfaction. Our sales force numbered 58 at the end of the quarter, which is unchanged from the prior quarter, but all 58 people aren't the same people. I think we traded up in a few positions. Our goal is to continue to grow the sales force and to be at 70 people by the end of the fiscal year. But we are making sure, of course, that we've got the right people in place, and are not just focusing on the number. Our pipeline grew modestly. It stands at over $70 million today. For those who need to refresh around, what NextGen calls our pipeline is just the total value of the potential deals that we think we have a 50% or better chance of closing within 120 days. We closed a lot of business in our pipeline in the last quarter, but with the [Hanse] leads maturing and the [Taper] conference leads coming into the pipeline the pipeline has been doled back up nicely. The market for Electronic Health Records Systems and Integrated Practice Management Systems remains robust, and NextGen continues to win key sales in the marketplace. In closing, I'd like to thank our employees, and once again thank our customers. Vanessa, we are ready for questions.

[Operator:]

(Operator Instructions). Your first question comes from the line of [Charles Ray] from CIBC World Markets.

[Charles Ray:]

Yeah. Hi, thanks, thanks for taking question here. I just had a couple of questions. First, more generally, on your R&D spending, I think it was under 6% as a percentage of revenues. Can you talk about the sort of your targets on research and development as we go forward? Maybe you can give us some color and suggestions on where do you think there is need for improvements, either on the QSI or the NextGen side? I mean, do you think this is the right level of R&D spend as we think about the business and the opportunity in the HR in particular?

[Louis Silverman:]

Hey, Charles, this is Lou. We don't run our business by setting percentage targets for things such as R&D. Those who have been around the company for a while would touch the fact that our R&D spending has continued to increase fairly steadily over time. We have a number of talented individuals, and I would dare to say a growing number of talented individuals in our development staff, and we continue to keep them busy. But in terms of a specific target as a percentage of revenue tied to R&D, it's just not how we try to run our business. We continue to try to reinvest in the business and in a number of areas, including development, but not limited to that. And hopefully, our performance willing, we'll be able to continue to do that.

[Charles Ray:]

Okay, great. And then just more generally, I think that the IRS recently passed a rule that allowed for non-profit entities to be able to subsidize cost for EHR, and it seemed like that was the last piece that was missing when the relaxation of the Stark rules happened last fall. Have you seen type of pickup in activity from hospitals interested in sort of subsidizing the cost of EHR?

[Pat Cline:]

Yes, we have seen an uptick, this is Pat. Stark, here with the relaxation of the stock, rules have started to become a little more of a driver for us. We are seeing a reasonable amount of activity from hospitals and health systems in both local health systems and national health systems. Although, as I mentioned, I think on the prior call, a lot of these hospital and large health system deals do take some time to close, as some of the increased activity now might not translate to increased revenue in the current quarter, or even next quarter. But may come online downstream and that's just the way the market works. And I do believe that a couple of the deals that we closed in the quarter that we're discussing, may have been impacted positively by the relaxation of Stark, and I agree with you that the IRS ruling was the last piece and was favorable for our company and those in our business.

[Charles Ray:]

Pat, just adding on to that. When you are talking about the opportunity from hospital customers in particular, should we think that really a lot of these hospitals are Siemens customers or are you able to more broadly go out and reach out to other hospitals that may not be using the Siemens platform?

[Pat Cline:]

We do more sales to non Siemens hospitals as we do to Siemens hospitals. Of course, we welcome the Siemens hospital business, and we're happy with that relationship and have a lot of prospective deals in our pipeline, I think we relate it to Siemens. To answer your question, we do a heck of a lot of business with hospitals that are not Siemens customers.

[Charles Ray:]

Okay. Great. Thanks a lot guys.

[Pat Cline:]

Thank you.

[Operator:]

Your next question comes from the line of Sean Wieland with Piper Jaffray.

[Sean Wieland:]

Hi, thanks guys. Couple of questions. The system sales number in NextGen, according to my math, is the strongest sequential growth, outside of, when you layered it on the Siemens transaction. The strongest sequential growth you've ever had in that division. And which may be overshadowed by your higher SG&A costs. So first, can we talk about, you know, what were the driving factors behind such a strong 31% sequential growth in system sales? Related to Stark, was it macro related, was it just your sales reps were becoming productive, were there any significant transactions in the quarter that would represent a one-time transaction?

[Pat Cline:]

Sean, that's a good question. This is Pat, and unfortunately I don't have a good answer for you in that. It would be tough to decide for example with the hospitals that purchased last quarter, whether that sales rep was a little more productive, was more experienced, learned a little bit more, or whether the hospital was impacted by the relaxation of Stark or some of those things. I could tell you that we are happy to see the uptick in the system sales. I think it was last call or may be the one before that, somebody commented that system sales were flat and I think, I answered by saying that that wasn't necessarily a trend. And as I've said one quarter, is its tough to look at one quarter whether its a good quarter like our system sales part that we've seen or whether it was the quarter where system sales were flat. But overall, we are very pleased with the trend if you look over the longer period of time, we think we've got some room to run on system sales.

[Sean Wieland:]

Have you seen any changes in win rates or anything in the competitive landscape which could have contributed to the higher growth?

[Pat Cline:]

No, nothing in particular. I don't think there has been much of a change to the competitive landscape. We continue to be happy with our win rates. As I mentioned we win a lot of key accounts, especially the ones that we feel are strategically important. That's not to say, we win all of them, but unfortunately, there's a share of business out there for a lot of organizations in our business. 83 new customer contracts that is at the high end of our range, which has refurnished from the 50 mark to about the 80 mark. But no, I don't see a big change. Let me add a little more text to that, Sean. I do think I see, and I think we touched on this part partially in the last call, a couple of our competitors, getting a little more aggressive. I am trying not to use the word desperate, but getting a little more aggressive with pricing and some other tactics that are being used and those kind of things. I am not sure I characterize that as a change in the competitive landscape, but it's interesting to me nonetheless.

[Sean Wieland:]

Thank you. And as related to the SG&A expenses, about $1 million was due to additional corporate expense, just related to your Audit Committee. Just so I can be clear on this, so, the Audit Committee has looked at this with some outside counsel. They've closed the book, so we could expect that that portion of the $1 million essentially goes away in next quarter?

[Paul Holt:]

Sean, just to clarify, what we said was that corporate was up about $1 million. And as part of that roughly half of that approximately was tied to legal and other professional services related to the SEC investigation. So, you are using $1 million. I know we tried to point out, but there was about $0.5 million that was tied to that.

[Sean Wieland:]

Okay.

[Paul Holt:]

That was through 3/31.

[Sean Wieland:]

Okay. So then, half of million should go away in the next quarter?

[Paul Holt:]

As we also mentioned, the internal work of our Audit Committee in the independent outside counsel was concluded in June. So, we had April and May and have some of June in there and so we will have expenses in the June quarter related to this. So I think it would be inappropriate to say that all the expenses are going away. I think it's a little tough to commit it now, June 7, we would be able to project it with a 100% certainty. What the exact expenses are going to end up for the quarter, we think it would be fair to at least think that the expenses might be a bit less than we incurred in the quarter, but they are going to greater than zero.

[Sean Wieland:]

Okay. And then one another question related to the additional, the higher compensation related to certain bonus programs. This is related to when you took the option, you loaded up on options from 70,000 to 160,000, for those executive numbers is that correct?

[Paul Holt:]

Loaded up would be your term. But there are a couple of things going on in that category, Sean. That's one of them, there was a reference change in one of the performance targets, the revenue in target that was in place. And the third factor and it shouldn't be discounted in any way, shape or form, is that we did have a very strong revenue quarter. So, the three of those things operating together contributed to what you are talking about, not one or the other, or not any one individually.

[Sean Wieland:]

Okay. And is that going to be an ongoing expense in SG&A or do you think -- I am trying to get SG&A expense guidance out of you.

[Louis Silverman:]

Yeah. Paul, I appreciate you being direct about that, and no other tactic has worked, right? So, the issue is that we do have these performance plans and ability to project the expense related to those plans is really tied our willingness and ability to predict or predict accurately what the revenue and profits are going to be. So, it's a little hard to do.

[Sean Wieland:]

Okay.

[Louis Silverman:]

Okay?

[Sean Wieland:]

Okay. Thank you very much.

[Louis Silverman:]

Thanks, Sean.

[Operator:]

(Operator Instructions). Your next question comes from the line of Richard Close from Jefferies & Company

[Richard Close:]

Yeah. I guess the first question, if we look at the NextGen revenue, I guess specifically on the systems sales, is there any way you could give us the breakdown between the software, hardware and implementation and training?

[Pat Cline:]

No, we typically don't break that down. But the software tends to be the lion's share of things. We did book more hardware in the quarter as was mentioned previously than we have historically booked, I think to the tune of maybe a couple of million dollars over the prior quarter or maybe a little bit more than that. Again I don't have that in front of me. As far as another breakdowns are concerned, typically it's asked, so I'll go ahead and answer in advance, roughly two-thirds of our customers purchase both our Practice Management System and the Electronic Health Record, which is right in our historical range.

[Louis Silverman:]

And Richard, this is Lou, although I don't have an exact date and time that we're going to file our K, the usual and customary breakdowns will be in the K. So hopefully, in a couple of days or not too long from now, you'll have that information to work with as well.

[Richard Close:]

Okay. I guess just a point of clarification on that last question, when you say a couple of million, maybe higher than the prior quarter, just to be clear, the prior quarter year-over-year or sequential?

[Pat Cline:]

Sequential, I was referring to sequential.

[Richard Close:]

Okay. I just wanted to be clear on that.

[Pat Cline:]

The hardware portion.

[Richard Close:]

Correct. Okay. And then, I know you guys have been detailing how much revenue comes through, I guess VARs over the last couple of quarters. Is there any way you guys can maybe give us details on that front?

[Pat Cline:]

That's another area that we don't breakout. What comes through VARs and what comes through our direct sales force. By far, most of our system sales comes through our direct sales force. We are happy to have the value-added reseller channel with resellers like Siemens and many others that we think bring a lot of value to us and good partners for us in many respects. But our sales force, again numbering the 58 people outsells the VAR channels by a lot.

[Richard Close:]

Okay. I appreciate that. And one final question, with respect to the gross margin, maybe an additional clarity on that front. You mentioned two reasons for the decrease, I guess year-over-year, obviously the higher hardware sales and then additional comp, I guess, higher comp expense in the quarter. And I was wondering if you could give us a little perspective on which one, maybe the percentage contribution of that 170 basis point decline?

[Paul Holt:]

You'll see -- this is Paul. You'll see that following the K when we come out with that level of detail. We've brought the skinny binders in here with us as opposed the real thick ones for the call, Richard.

[Richard Close:]

Okay. So, we shouldn't look at that decrease in gross margin as maybe discounted pricing occurring in the quarter or anything like that?

[Pat Cline:]

Well, I don't think you should. I don't see any decrease in the quarter. We did about the same number of agreements with new customers and obviously revenue from system sales was way out, so that would kind of lead you in the other direction.

[Richard Close:]

Okay, great. Thank you.

[Louis Silverman:]

Hey, Richard, just one kind of clarification. Pat was doing the best he could with none of the hard numbers in front of him. I think that you'll see that the hardware delta on a sequential basis was a bit less than the $2 million that was discussed, well over $1 million, somewhere in there. But directionally, Pat was correct that the order of magnitude -- or the size of the delta may be a little -- it may have been a little high.

[Richard Close:]

Okay. I understand correctly. Thank you, Lou.

[Louis Silverman:]

Thank you very much.

[Operator:]

Your next question comes from the line of Dave Scially with Kingsford Capital.

[Dave Scially:]

Thanks. So, I wanted to follow on there. So, Lou, you are saying that it was roughly a delta of $1 million over the last quarter number that was reported in there for the hardware for NextGen?

[Louis Silverman:]

I am having a note passed to me from our finance staff that it was $1.2 million.

[Dave Scially:]

$1.2 million, terrific.

[Louis Silverman:]

Approximately.

[Dave Scially:]

That's fine. That's a very good number to use as approximately. And then, back to Richard's question, so going forward, I guess, the gross margin is the area that we're trying to figure out here. And do you feel comfortable in, for modeling purposes, at the current levels or do you see initiatives that might go back to the previously achieved margins that you had earlier this year?

[Paul Holt:]

As I said on many calls and in many meetings over many years, for us, at least gross margin percentage is an outcome as opposed to a goal or target. And we are happy to take hardware orders from those customers who'd like buy hardware through us. And if customers decide to make other plans, we certainly respect that decision as well. So, it's really hard for us to forecast that hardware sales are going to go up or down. I can tell you that we wouldn't turn down any hardware sales or opportunities that came to us that we thought we could make a little profit on, a reasonable profit on. But that's really hard to forecast and therefore, it's a little hard to address your question. The short answer is, we don't have any initiative per se to stop selling hardware so that the gross margin percentage can go up. I am not sure that's exactly what you were suggesting. But that's really what it would amount through it. We are happy to get them. We are happy to take the orders if and when they come in. And if they don't, we'll move along and try to find some business in other places.

[Dave Scially:]

Yeah. Well, but I guess, what I am more trying to get at is that, in the previous quarter, the December quarter, the hardware sales for NextGen were roughly $0.5 million and in the September quarter they were $0.5 million, but yet we saw a sequential decline in gross margins if I remember. So, that isn't related directly to hardware. There is some other component going on. So, I'm trying to ask if we can see those other components of costs?

[Paul Holt:]

Well, gross margin on a sequential basis went up slightly. So, we were talking about the year-over-year change in gross margin. But sequentially--

[Dave Scially:]

I am sorry yes, okay so it did go up. But down from where it had been earlier, that's what I was getting at. Anyway moving forward, would you folks consider also you would -- I don't remember it was Pat or not, you were talking about the decline. It might have been any of you, that was talking about the decline in the receivables from the one customer, 12.5% down from other levels. Would you folks consider giving out the revenue from those in the K, whenever it's filed?

[Paul Holt:]

No, we, what we have done. The 12.5% number comes from a disclosure of significant customer concentration that happens to be a receivable concentration, a net receivable concentration, growth receivable concentration. And then on a parallel basis, we have not had any revenue concentrations and therefore haven't disclosed any revenue concentration.

[Dave Scially:]

But wouldn't it make sense though if the level of receivable from this customer is in the -- and if its 12.5% to roughly $8 million and it has been higher than that in past. Wouldn't that make sense that they were a significant customer?

[Paul Holt:]

What you are missing is what's in deferred revenue.

[Dave Scially:]

Okay. So they could be in deferred. I got it, okay. Okay. Thank you.

[Paul Holt:]

Thank you.

[Operator:]

Your next question comes from the line of George Hill with Leerink Swann.

[George Hill:]

Hey guys good afternoon. I am going to follow-up on a couple more of the SG&A items. I just want to make sure that I wrote these numbers down. And on selling expense, as part of the increase, contributed $0.3 million, headcount expenses contributed about $1 million, bonuses were $0.9 million, options were $1.25 million pre-tax and corporate was $1 million, half of which was legal?

[Paul Holt:]

Well, well, well, let's go over that again.

[George Hill:]

Alright, of the $4 million sequential increase?

[Paul Holt:]

Yeah, $4 million sequential increase you have $1 million in corporate.

[George Hill:]

Right.

[Paul Holt:]

You have $1 million.

[George Hill:]

A $1 million in corporate. Half of which was the legal, I am calling that the legal because of the stuff associated with the investigation?

[Paul Holt:]

Yes.

[George Hill:]

Okay.

[Paul Holt:]

Then you have $1 million in compensation and benefits.

[George Hill:]

Right.

[Paul Holt:]

And you have $0.9 million in commissions.

[George Hill:]

Right.

[Paul Holt:]

And $0.3 million in trade show and advertising.

[George Hill:]

Right.

[Paul Holt:]

Then you have other.

[George Hill:]

Right.

[Paul Holt:]

That makes up your $4 million.

[George Hill:]

That’s my number. And I guess as we think about that going forward, we could say that the selling expenses could be contributed to [hymns]. Would it be safe to assume that the headcount expenses will probably continue, as far as that bonuses or the commissions are concerned. Is that something that you are expensing for the year end and have accrued for year end or is that something that is reflective of what was done this quarter?

[Pat Cline:]

Reflective of what happened this quarter it's what's in there is the strong revenue performance that we achieved this quarter.

[George Hill:]

Okay. And okay alright some or all I am clear. And then, alluding to something that you spoke to earlier, the number of new contract signing, 80 close to the top end of where you guys have been with the revenue numbers, higher, does that mean you guys are selling to larger practices as opposed to smaller practices? And which direction would you say that the sales are trending?

[Pat Cline:]

Well as I've said, I am not sure that one quarter it's a trend. But last quarter we did have a fair number of large organizations. Our software is highly scalable and our customer base is comprised of many-many large organizations included in our bookings for last quarter were two or three in fact national organizations that made purchases, a couple of which will hopefully continue to role out and continue to make purchases in the future as they move the product nationally.

[George Hill:]

Okay. And one last question I'll ask is, was there any sales concentration, particularly in the quarter? Was there any one deal over $3 million or $4 million?

[Pat Cline:]

No, there was not.

[George Hill:]

Okay. Thanks a lot.

[Operator:]

(Operator Instructions). Your next question comes from the line of [Rama Rao from R&R Capital Management].

[Rama Rao:]

Hi guys, thank you for taking the call. We have become your shareholder very recently. I have one comment and one question. When we analyzed the data, it was truly amazing to see that you guys have consistently grown sales and EPS year-over-year for the last 10 years. I think it's a remarkable achievement and yet few companies can accomplish this. A job well done.

[Pat Cline:]

Thank you very much.

[Rama Rao:]

Now my question is a bigger picture question. It would be nice if you guys can share your view with shareholders, about what are the growth drivers for the next two to three years, in terms of product, market, and geographical region. Thank you for taking the call.

[Pat Cline:]

Thank you. Well the drivers relative to product are numerous. There are federal and state government initiatives, and legislation, both enacted and being talked about. One of them we mentioned a little bit earlier on the call was the relaxation of the Stark rules and in addition to the federal and state government initiatives, there are a number of pay for performance programs, where physicians essentially in health organizations are essentially paid more for better outcomes and meeting certain metrics and providing certain quality, and that caters quality data and that type of thing. And those pay per performance programs are both on the private side and on the government side. There's a trend towards interoperability and exchange of health records, because of the benefit that that will provide both to the health organizations, providers, and their productivity and efficiency and also the benefit that will provide to the patients of their trends towards consumerism and personal health records that we think are drivers for the type of systems that we develop and sell. There are a lot quality initiatives, there are trends towards different subscription based and other financing programs, their licensing mechanisms, and hardware technology improvement and hardware costs coming down. I think open up the market to a broader range of providers. There are some demographic trends and drivers, for example, the number of physicians in the country is expected to grow by 20% I think by the year 2014. As the baby boomers require more and more healthcare. So, hopefully that will address the driver question. I am not sure, you had mentioned relative to product and geography. I don't want to get into a place where I am disclosing on this call our product plans. I'd like to try to fly under our competitors' radar model, in that regard, so I am going to just talk about those kinds of drivers and tell you that we are committed to keeping the lead that we feel we have product-wise on our competition. And I think the final part of your question related to geography, we have an initiative within the company to broaden our focus over a period of time to the certain global markets or international markets. This is not a change of focused, but again, a broadening of focus. And as we move on that initiative, and we'll do so relatively slowly, it's highly likely that we will move on that initiative through partners. Perhaps, for example, with Siemens, who I believe is in over a 140 countries and those types of things.

[Rama Rao:]

Very good. It's a pleasure to be your shareholder and keep up the good job. Thank you.

[Pat Cline:]

Thank you very much. Pleasure to have you.

[Rama Rao:]

Thank you.

[Operator:]

Your next question comes from the line of Gene Mannheimer with Caris & Company.

[Gene Mannheimer:]

Thank you. Most of my questions have been answered, a great quarter. I guess I would be looking for a little more granularity with respect to, if you bifurcate the market into small, medium and large, are you able to talk about where you see the growth rates in each of those segments and how you are fairing, particularly at the low-end, which seems to have the higher growth prospects given its under penetration? Thank you.

[Pat Cline:]

The low-end, I think, does have higher growth prospects. But I think that growth will come over a number of years. I think the accelerated growth right now tends to be towards the high-end, as we see, as I mentioned, more activity or reasonable uptick in activity, partially due to the stock and certainly partially due to the other drivers. Our system plays very well at the mid-range, very well at the high-end. And as I've mentioned previously, we are again broadening our focus as opposed to changing our focus so that we can do a great job for the smaller practice in bringing the product to them at an affordable price yet keeping those sales profitable for the company and for our shareholders.

[Gene Mannheimer:]

Thanks, Pat.

[Pat Cline:]

Thank you.

[Operator:]

Your next question comes from the line of Dr. [Peter Shane], Private Investor.

[Peter Shane:]

Yes. My question is concerning the SEC investigations. Did you say that the SEC concluded that the CFO did not engage insider trading?

[Paul Holt:]

Sir, we did say that the audit committee of the company, the audit committee engaged independent legal council that grouped to the significant amount of work on internal investigation. And a review from our [belief] said that the audit committee has concluded that it does not appear that our Chief Financial Officer engaged in improper insider trading or tipping in connection with the trading activity. We also mentioned that, to the depth of our knowledge, the SEC investigation is ongoing.

[Peter Shane:]

Has there been any SEC investigation in the last six months regarding any accounting irregularities in QSI?

[Paul Holt:]

No.

[Peter Shane:]

No? That's good news. Thank you.

[Louis Silverman:]

Thank you.

[Operator:]

Your next question comes from the line of Jeff Smith from Sidoti & Company.

[Jeff Smith:]

Hi guys, most of my questions have really been answered. But just out of curiosity, are you seeing any, as far as the [stock lower] effects, are you seeing that on any particular size of the market, at the larger or the smaller ends?

[Pat Cline:]

The high-end.

[Jeff Smith:]

It's mostly the high-end?

[Pat Cline:]

Yes. We see an uptick in interests from the hospital customer base and those types of organizations that will come to a company like ours for their medical practice for the ambulatory side and make a purchase and help the turnaround and provide the software to their associated physician base, taking advantage of the stock exemption. They can fund, I believe, it's up to 85% of the purchase price in electronic health record systems at this point. So, they help to a great extent these practices that may not otherwise choose to afford an electronic medical record system to acquire one.

[Jeff Smith:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Frank Sparacino from First Analysis.

[Frank Sparacino:]

Hi. This is a question for Pat. Pat, in terms of some of the drivers you were outlining, I don't want to put words in your mouth, but I interpret from our comments that there is interest in different deployment options whether it beyond premise or some type of an on-demand model, but if you could just comment on that?

[Pat Cline:]

Well, I think we can't ignore that as a trend. There is a trend or an uptick in interest over a broad period of time in on-demand, or a subscription-based, or ASP-based offerings. As I've mentioned in the past, we have such offerings, hosted offerings in subscription models, but it's not our primary model. Our primary model is selling licenses and executing an ongoing maintenance agreement with our customer. While again I've said that we've seen enough uptick over a broad period of time, it's one of those things that isn't going to have any material change in my opinion, a quarter-to-quarter base is split over a long period of years. And the gentleman that asked the question was looking for drivers relative to multiple years in the future.

[Frank Sparacino:]

If I could ask just one follow-up there, Pat, is on the sales rep and selling NextGen. Is my commission at all predicated on how I sell the software, whether it's on-premise or whether it's hosted? Am I going to be commissioned differently?

[Pat Cline:]

It is more attractive for the sales rep to sell the licenses and the maintenance agreement, than it is to do at an ASP or subscription-based model.

[Frank Sparacino:]

Thank you very much.

[Operator:]

(Operator Instructions). Your next question is a follow-up question from Richard Close of Jefferies.

[Richard Close:]

Hi, yeah. With respect to the expansion under the sales force, getting, I guess from 58 to 70 by year end. Would you expect more activity on that ramp in the first half, or that's evenly spread out or tilted towards the second half of fiscal '08.

[Pat Cline:]

I think its going to be not completely tilted towards the second half of the fiscal year. At this point what we are trying very hard to do is make sure that our sales force is firing on all cylinders, so to speak. We are investing lot in training and we are doing, as I mentioned, what we think is trading up in a couple of areas to make sure we've got a solid foundation. And we haven't stopped recruiting or stopped hiring, this is just the way it worked out quarter-over-quarter. But I think with the concrete drying on that foundation over the next couple of months, we'll try to ramp the hiring if things go according to plan towards the end of the year. The number 70 is also not a number that I take too seriously or I think that you should take too seriously, because again our focus is on, and is going to remain on getting the right people not just hitting the number for that sake. So I would, say that's pretty loose guidance that 70 number by the end of the year.

[Richard Close:]

Okay. And then may be, you've being growing at a nice clip on a NextGen side over the last several years. Would it be your characterization of the market that is robust enough to achieve similar type of growth rates; I guess on the top line, considering you are adding people closer or more so in the second half of the year?

[Pat Cline:]

Well I'm going to stop short of giving you guidance, but I'm going to compliment you on the way you crafted your question, because you crafted it more towards the market. You talked about our growth but then, it sort of shifted to the market. So staying with the market theme, I believe that the market will continue to grow at or above the pace that we've seen over the last couple of years.

[Richard Close:]

Okay. Thank you very much.

[Pat Cline:]

Thank you.

[Operator:]

Your next question comes from the line of George Hill from Leerink Swann

[George Hill:]

Hey thanks, just two quick follow-ups. Number one, is are the sales reps incented from a revenue perspective and from a profitability perspective? Or are there goals or are their targets just around revenue?

[Pat Cline:]

Both.

[George Hill:]

Okay. And the second one, is just a last question on Stark . I don't know if you've had any recent conversations with the customers. But the tax issue seem to [benign now] stripping the IRS in the hospitals. Is anybody at all discussing the tax impacts for that receiving physicians? And are they at all worried about if they're not going to get their 299 form? Has that gotten any a more got that's been subsidized by the hospital?

[Pat Cline:]

I wouldn't call myself an expert in that area. But I have not heard any medical practice pushing back in that regard.

[George Hill:]

It's okay. Alright thank you.

[Operator:]

Your next question comes from the line of Len Podolsky with Piper Jaffray.

[Len Podolsky:]

Hey guys thanks for taking the follow-up. You executed a sales force realignment, I guess towards the back half of last year. Are you comfortable with where the reps are located and how the accounts are stratified and how the geographies are generally laid out?

[Pat Cline:]

Yes I am reasonably comfortable though I think are some areas for improvement and we are constantly talking about ways of structuring things and ways of tweaking things to reach our ultimate goal, which is to make sure that we are applying the right resource to the right opportunity.

[Len Podolsky:]

Thanks.

[Operator:]

At this time there are no further question. Mr. Silverman, I would turn the call back to you.

[Louis Silverman:]

Yes I would like to thank everyone for their interest in the company and participation on this call. And we'll look forward to joining you in a short while. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.