Rusty Frantz - President & CEO John Stumpf - Interim CFO Dan Morefield - COO Monte Sandler - EVP, RCM Services Gary Voydanoff - EVP, Sales & Marketing

Jeff Garo - William Blair David Larsen - Leerink David Francis - RBC Capital Markets Charles Rhyee - Cowen & Co. Jamie Stockton - Wells Fargo Michael Cherny - Evercore ISI Steven Halper - FBR Capital Markets Gene Mannheimer - Topeka Capital Sandy Draper - SunTrust Zack Sopcak - Morgan Stanley Garen Sarafian - Citigroup

Welcome to Quality Systems Incorporated Fiscal 2016 First Quarter Results Conference Call. Hosting the call today from Quality Systems is Rusty Frantz, President and Chief Executive Officer. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for your questions following the presentation. [Operator Instructions]. It is now my pleasure to turn the floor over to Mr. Frantz. You may begin.

Thank you, Laurie. Good morning, everyone. Welcome to the Quality Systems' fiscal 2016 first quarter results call, my first earnings call since joining the company as President and Chief Executive Officer just a few weeks ago. With me this morning are John Stumpf, our Interim CFO; Dan Morefield, our Chief Operating Officer; Monte Sandler, our Executive Vice President of RCM Services; and Gary Voydanoff, our Executive Vice President of Sales and Marketing. First, I will briefly read the forward-looking disclaimer, and then after my formal opening remarks, I will turn the call over to the team to provide you updates in their respective areas. Then we'll open the call up to Q&A. Please note that the comments made on this call may constitute forward-looking statements within the meaning of the federal securities laws. Statements regarding future events, developments, the company's future performance, changes in the economic, political and regulatory influences and framework applicable to our industry and business as well as management's expectations, beliefs, intentions, plans, estimates, or projections relating to the future, including, without limitation, statements concerning revenue and net income are forward-looking statements within the meaning of these laws and involve a number of risks and uncertainties. Management believes that these forward-looking statements are reasonable and are based on reasonable assumptions and forecasts. However, undue reliance should not be placed on such statements that speak only as of the date hereof. As most of you know, I'm just beginning to settle into my new role here. In fact, when I met many of you at New York City in the company's Analyst Day last month that was about three weeks prior to my start date. Today, we are three weeks into my employment here. I'm pleased to report that I've started executing on the priorities I previously shared with you, those being an immediate focus of attention on our clients and our employees. I believe this is a vital first step in helping drive our business forward and creating a nimble platform to move into the future. During the past few weeks I spent the majority of my time meeting with some of our larger clients, introducing myself to them, and gaining detailed insight about our relationships with them. First and foremost, I want to ensure that we're continuing to deliver an increasingly positive client experience and that this is our standard of practice and something we as an organization focus on every day. We want to provide clients with the capabilities necessary for them to stay relevant in this evolving healthcare market and arm them with the tools that they need to thrive as they move from fee-for-service towards value-based reimbursement. I've also had the opportunity to visit with many of our employees at QSI NextGen's offices across the country. This has afforded me a chance to meet with folks personally to obtain a clear understanding of the culture, communication, and processes of the organization. I'm fast learning about our nearly 3,000 person organization and the talents of our very expensive team. All of these efforts are very helpful in helping me to quickly get up to speed on our business and culture, as well as the solutions and services we bring to the table, and our performance in delivering a great experience and value to our clients. We've an extensive portfolio of solutions both technology and services that aid providers as they adapt to the constant changes in demands of today's healthcare landscape and we continue to strive to prove that to the marketplace. I'm quite pleased that we are making progress in our efforts to drive continually improving client satisfaction, both through a focus on the quality of our software, and the quality of the client experience. As we continue to see improvements in client satisfaction, we'll grow our opportunity to enhance and expand our solutions footprint amongst core customers by continuing to cross-sell our portfolio of solutions and services to our existing client base of 4,400 which spans more than 85,000 providers. Benefiting over the longer-term from the fast approaching introduction and adoption of ICD-10 and helping our clients navigate that transition. Continuing to gain more traction in the RCM business where we again saw double-digit growth this quarter. Our expertise and leadership in revenue cycle management services will afford a significant opportunity in the future within our large installed base as we're only serving today about 10% of our clients. For any future business to be successful clients must have a great experience. I believe this is critical for the future of our company and why this is my first biggest priority with the team as we look forward. Now, I would like to turn the call over to John Stumpf, our Chief Financial Officer, to provide you with an overview of the financial results for the quarter.

Thanks, Rusty, and hello everyone. This is John Stumpf. I'm pleased to present to you QSI's first quarter of fiscal 2016 financial performance on today's call. Our total revenue for the quarter of $122.2 million reflects a 4% growth rate over the year ago quarter led by our largest recurring revenue streams comprised of software related subscription services, support and maintenance, revenue cycle management, and electronic data interchange related services. Together these revenue sources grew by $10.9 million or 13% from the year ago period. Mitigating our growth was an 18% decline in software license and hardware revenues and a 24% decline in related professional services consisting principally of implementation, training, and consulting revenues. The software related revenue trend reflects the fact that we're not yet seeing a robust replacement market for the core ambulatory electronic health record and practice management solutions. Our total bookings this quarter were $37.5 million, representing a sequential decline of 43% and a 26% decrease from the reported Q1 2015 bookings. The current quarter bookings are consistent with a relatively low level of new system sales that we experienced in this period, as well as light activity in RCM. As Gary will address later in the call, the pace of RCM bookings has been impacted by customers electing to differ commitment until after the adoption of ICD-10. Gross profit grew by $4.5 million or 7% versus the year ago period. Our consolidated gross profit margin this quarter came in at 54% versus 52% a year ago. This improvement principally reflects growth in our main recurring revenues, which streams collectively contributed a 58% gross margin in both the current quarter and the year ago period. Also beneficiating the year-over-year gross margin was improved profitability from the delivery of professional services reflecting our focus on cost management. Mitigating these improvements was a decline in the margin from software license and hardware revenue as certain costs are absorbed over a lower revenue base. On a sequential basis, consolidated gross margin trended downward, reflecting the higher level of revenue in our fourth quarter. SG&A, excluding amortization of intangible assets, decreased 5% sequentially to $39.2 million from $41.3 million in the fourth quarter of fiscal 2015. This decrease is largely due to a reduction in professional service fees and variable compensation costs. From the year ago quarter, SG&A increased by $2.4 million or 6.7%, principally reflecting the recording of a net credit or bad debt expense of over $1 million in the first quarter of fiscal 2015, and the incurrence of approximately $900,000 in CEO transition related costs in the first quarter of fiscal 2016. The net credit and bad debt expense a year ago was a function of the dramatic decline in DSO we were achieving at the time. So we continue to make progress with DSO. The rate of improvement has lessened in recent quarters. Total gross R&D investment for the quarter increased to $20.7 million or 17% of total revenue, as compared to $19.1 million or 16% of total revenue a year ago. We capitalized $3.6 million in development cost this quarter, representing an 18% capitalization rate. By comparison, we capitalized $2.9 million in the year ago period, representing a 15% capitalization rate. Net R&D operating expense increased to $17.1 million this quarter versus $16.2 million a year ago, reflecting the higher level of gross investment, mitigated by the modest increase in the capitalization rate. Our net R&D expense as a percentage of total revenue for the quarter was 14% flat with the year ago period. As we have previously communicated, our level of R&D expenditures both in absolute terms and as a percentage of revenue reflects our continued commitment to concurrently enhancing our legacy product portfolio, developing a new technology platform, and our intent to remain at the forefront of market demands for product offerings that support the migration to value-based healthcare, including interoperability, analytics, and tools in support of population health management. We continue to project the net cost of our internally developed R&D for the 2016 fiscal year as 15% or more of total revenues. Our GAAP effective tax rate for the current quarter was 31.5%, compared to 34.0% a year ago. This decrease in rate is primarily due to certain deductions that benefited from year-over-year growth in our taxable income. Our non-GAAP effective tax rate for the current quarter is 30.5%, as compared to 34.3% in the year ago period. This decline in the non-GAAP tax rate largely mirrors the decline in the GAAP rate. As noted in today's earnings release, we currently anticipate utilizing a static non-GAAP tax rate of 30.5% for each of the quarters in the fiscal 2016 period to provide increased consistency of our inter-quarter results. On a GAAP basis, fully diluted earnings per share for the first quarter of fiscal 2016 was $0.10, an increase from $0.08 per share reported in the year ago quarter. On a non-GAAP basis, fully diluted earnings per share for the first quarter of fiscal 2016 was $0.16, compared to $0.13 for the first quarter of fiscal 2015. Our year-over-year increase in both the GAAP and the non-GAAP earnings per share was primarily driven by increased revenue and margins, both gross and operating, and the favorable trend in our tax rate relative to year ago period. With regard to the balance sheet, we are continuing to focus on working capital management. Our turnover of receivables decreased to 75 days this quarter, representing a slight decline sequentially, and a substantial decline from prior year. Our cash and cash equivalents plus marketable securities ended the quarter at $117 million. The decline of $14 million from the start of the fiscal year reflects particularly large disbursement relating to obligations as of the March 31 balance sheet date that became due in the June quarter. Specifically, we remitted $10 million related to the remaining fiscal 2015 federal taxes due and another $9 million in incentive compensation payment related to the fiscal 2015 period. Nominally offsetting the impact of these large disbursements was the decline in the DSO during the quarter. Moving on to revenue trends by business unit. In our ambulatory business unit Q1 '16 revenues were $91.6 million, this is flat with $9.17 million in the year ago quarter. Dental business unit, we had revenue $4.4 million that represents a 4% increase from $4.2 million in the year ago period. Hospital business unit recorded $3.7 million in the current quarter, that's a 12% decrease or $0.02 million a year ago. RCM business unit recorded $22.5 million in the current quarter, that's a 26% jump from the $17.8 million reported a year ago. Again the fully consolidated $122 million, that's 4% up from $117.9 million in the year ago period. The flat level of ambulatory revenues from the year ago period reflects the impact of lower system sales offsetting growth in recurring revenue streams. The hospital decline from the year ago period is due to lower revenue in software, hardware, and related category of revenue stream, mitigated by higher support and maintenance. I will now move on to a recap of select non-cash expenses for the quarter as follows: amortization of capitalized software $2.4 million, amortization of intangible assets $1.8 million, depreciation expense $2.3 million, stock-compensation expense $0.7 million and bad debt expense $0.6 million. Our investing activities for the quarter were as follows: internally generated capitalized software $3.6 million and investment in fixed assets were $3.3 million. This concludes my review of our financial performance for the quarter. Consistent with prior quarter we will not be providing formal guidance. I will, however, reiterate previous commentary regarding the relative strength of our various revenue streams. For fiscal 2016, our organic growth opportunities derive from our recurring revenue streams. As noted in our Q4 earnings call, fiscal 2016 will reflect very limited system sales revenue within our hospital business unit. Further, we feel that current market conditions will continue to weigh on sales trends for the traditional ambulatory EHR and EPM markets, such trends in our consolidated software and hardware license revenues continue to suggest a lower overall growth rate for fiscal 2016 relative to fiscal 2015. I want to thank all of you for being on the call and for your interest in our company. I will now turn things over to Dan Morefield, EVP and COO of Quality Systems.

Thanks, John, and hello everybody. As John mentioned in Q1, the ambulatory division saw growth in multiple revenue categories. Support maintenance in ambulatory grew just under 7% year-over-year and 2% over the last quarter. In addition, EDI grew by over 10% when compared to last year. We also experienced growth in consulting revenue as well as continued positive increases in the overall size of our client base. One of the highlights from the quarter was the signing of the Reno Sparks Tribal Health Center. Reno Sparks will deploy NextGen Ambulatory EHR, NextGen Practice Management, and NextGen Electronic Dental record. They are replacing a legacy system which they had outgrown. In addition to core functions, Reno Sparks will leverage NextGen solutions to transition its dental and behavioral health services to electronic health records and will look to the company to help prepare for Meaningful Use Stage 2 in the fast approaching ICD-10 transition. Gary Voydanoff will have more sales highlights during his remarks. During the quarter we made two important partnership announcements. In April, we entered into agreement with Milliman Incorporated, a premier global consulting and actuarial firm to license risk analysis and predictive modeling tools for population health and collaborative care management. Milliman will provide patient risk scoring, stratification, an analysis of patients and facilitate the exchange of patient data among those providers using NextGen care. In May we announced that we would integrate Wolters Kluwer ProVation Clinic Note and ProVation Order Sets, as the foundational clinical content in NextGen now. Through this partnership our clients will have access to industry leading content and order set templates developed with the editors up to-date. The clinical decision support resource a choice for more than 1 million users worldwide. These solutions not only provide the end user with a better experience but they will also help accelerate our development efforts in this platform. Also these new partnerships represent our commitment to enhancing the experience of our clinical partners by providing more efficient and effective solutions. We continue to work forward to the initial release of the NextGen now EHR. We are currently evaluating its overall performance and functional design. We expect to be in Beta testing later this year and release it to the market based upon those test results. As previously indicated, we will only release the product when we feel it has met our high standards for quality and functionality. Moving on to Hospital Solutions. The first quarter of fiscal year '16 continue that trend of stable revenue and cost reductions. These actions resulted in the best quarterly performance of the product line in the past year. We have stabilized our based of hospital customers and we have seen an uptick in service revenue as we implement ICD-10 solutions. Increased cash collections, as well as a small growth in the pipeline for add-on modules demonstrate a rebounding level of customer confidence. Operating losses continue to decline as part of the ongoing strategy to aggressively manage the overall SG&A expenses, while still supporting our existing installed base. With that, I will turn it over to Monte Sandler.

Thanks, Dan. Good morning everyone. RCM services revenue for the first quarter was up 3% over last quarter at $22.5 million and 26% better than the same quarter a year ago. Now, that's the end of July, we're focused on the ICD-10 implementation on October 1. It seems that the joint announcement between CMS and the AMA on July 6 has created some confusion among the provider community of what the new flexibility policy really means for claim submission. The guidance is clear that a valid ICD-10 code will still be required on all claims beginning October 1, and this is not a delay of ICD-10 or the institution of a grace period where dual coding will be permitted. So we are concentrating our efforts on making sure our technology is ready, training our staff, and educating and supporting our customers for their ICD-10 readiness with tools, training, and webinars. I'm very pleased to report that we've successfully launched our new and expanded provider credentialing services, focused on helping providers properly enroll and reenroll with government and third-party payors. We got out of the gate quickly by signing a 136 provider group, representing a total contract value over $300,000. We are building our pipeline for this service offering and expect to grow this part of the business as a standalone offering and to be another lead generator for our full service RCM services. I remain excited about the direction of RCM services business and continue to feel confident that our tailored RCM services, driven by people, process, and technology, make us a great solution to help our customers successfully navigate the complex and ever-changing healthcare environment. I'll now turn it over to Gary for his comments.

Thank you, Monte. Good morning everyone. We kicked off our fiscal year with a focus on the core themes we outlined at our Analyst Day in June. Continue our successful multi-product cross-selling in our client base, licensed sales into our large clients focused on rapid growth, introduce and gain traction in the market with our new population health management and analytics platform, powered by the core Mirth stack, drive RCM sales in our client base and in the non-NextGen marketplace. Through our core Mirth HIE and interoperability business and ramp up new aggressive marketing campaigns into the replacement market. ICD-10 has been a bit of mixed bag at this point with a combination of prospect delaying purchases on until we've implemented ICD-10 and those moving ahead, because they're confident they're prepared for the change, the new technology will only enhance their operations in patient care. A recent article on Health IT outcome stated that with less than three months to go until the ICD-10 coding system becomes a reality, 26% of the respondents indicated they are not ready at all, while another 33% said they are not very close, but have started making preparations. We remain optimistic there will a pent-up demand for both replacement sales for our core enterprise practice management EHR technology, as well as RCM services after the implementation of ICD-10. Despite our lower than expected sales in our first quarter we are confident in our prospects for the balance of the year and beyond. Lead traffic remains high as NextGen remains a thought leader in top of mind as people consider a replacement EHR and RCM services vendor, interoperability solutions in a population management and analytics platform. The market continues to have a high level of interest in our flagship enterprise practice management EHR product. But what is particularly exciting is the lead traffic around population heath and analytics. Population heath management activity is high, in the field is high in both the base and then opportunities outside our base. There is no question that the market is looking for a population heath vendor that can provide advanced analytics, as well as solving the interoperability problem that is plaguing the industry. Many are finding that early generation population health vendors can only provide a limited data set, part of the picture, because they can't effectively connect to other systems, aggregate data, and normalize data across the care continuum. Fortunately, our solutions leveraged the Mirth HIE stack and other Gennius analytics engine and we can solve this problem. Our first quarter was not up to our expectations; we had several successes which should be noted. In a unique partnering arrangement we are deploying a significant number of licenses to USMD, as they aggressively grow their footprint, serving a Dallas Fort Worth Metropolitan Area with two hospitals, four cancer treatment centers, more than 50 primary care and specialty clinics, with over 250 providers, USMD Health System is kind of world class healthcare provider that NextGen is very proud to serve. Also expanding is comprehensive health services, the industry leader in employee based onsite healthcare services. We are excited to be part of their long-term growth plans and very happy that they continue their investment for NextGen Technology in the first quarter. Behavioral Health continues to be a growth market for QSI NextGen. Lifewell Behavioral Wellness provides a broad array of exceptional behavioral health service to adults in the surrounding communities in the metro Phoenix area. As Lifewell continues to expand, they've also invested in additional core NextGen technology, and we look to continue to provide them with high quality technology and service to support their mission. On the Mirth sales front, we had a very notable win as HEALTHeLINK RHIO and Buffalo New York made the decision to implement the full Mirth interoperability HIE stack moving forward with a five-year agreement. Agreement should also result in additional hosting and services revenue during the five-year term. We are very excited that HEALTHeLINK is going 100% Mirth. Our other successes from Mirth include a private HIE sales that's even longevity at current NextGen Ambulatory client and Wilbur [ph] software and Mirth Connect OEM partner. We're excited about the Mirth pipeline and the growth, both NextGen cross-sell and non-NextGen prospects. RCM services continue to gain additional NextGen Ambulatory clients in the first quarter and we expect that growth to continue as we have substantial Greenfield in the base. Notable contracts in the first quarter included HeartWell, a leader in cardiovascular care in the Miami, South Florida area, along with here in Gastro and Ann Arbor, Michigan, a premier Trinity Health Affiliate. As Monte mentioned in his comments, we also signed our first credential and services contract, which should also lead an upsell of our full RCM services shortly. Credentialing, population, health, clinical as well as value-based contracting of some of the new services that Monte and his team continue to work to provide as we look to expand and differentiate NextGen RCM services to the market this fiscal year. Wrapping up our call this morning, I'd like to report that our combined division pipeline remain solid since today at $157.8 million. The company executed 68% new arrangements on a consolidated basis versus 66% last quarter. 67% of the arrangements were Greenfield, 33% are replacements. Discounting did not materially change in the quarter. And as of June 30, 2015, there are 119 quota carrying sales and management positions. And with that, I'd like to thank you for your time and continued interest. Laurie, I'd like to turn it over to you now for questions now.

The floor is now open for questions. [Operator Instructions]. Your first question comes from the line of Jeff Garo of William Blair.

First I want to ask you about your thoughts, on signing new business relative to the rest of the market. I'm curious whether purchase activity was up or down and whether your win rate fluctuated at all?

This is Gary Voydanoff, Jeff. I think our win rate remains about the same. We haven't seen a lot of fluctuation in that. I think we had a couple of things influencing the quarter, we talked about some of what I think right now are a little bit of a headwins from ICD-10 that I think influenced the quarter, as well as we push a lot of business probably from Q1 into Q4. We did an exceptional job and while we always kind of see that hockey stick trend, I think we did a little bit more of that than usual. But other than that, I don't -- we haven’t really had any difference in from a competitive standpoint in terms of our win rate.

Great. And as a follow-up, I was curious whether your customers are really aware of the development work on NextGen now and NG7 and near with the extend timeline there; and we get closer to releases there. Is there are any concern about pushing out demand for your core EHR and Practice Management products?

I don't think there is any real concern there. I mean, we have an incredibly strong EPM and EHR product and in fact we're seeing a lot of interest from new organizations frankly that may not want to change their EHR but they want an enterprise Practice Management platform that's really solid, and so we're going to leverage that more and more and through some different partnering arrangements, we're having some success there as well. Our clients are really focused on just getting through ICD-10 right now, making sure that everything is stable and that they can get through that period without any interruption in their business and so they've been heavily focused on that. And I think there are many of us --most of our clients still view that platform very strong as part of their long-term growth plans and is not going anywhere anytime soon.

Your next question comes from the line of David Larsen of Leerink.

Can you talk a little bit about how you define bookings? Does that include RCM services as well? And then just may be talk a little bit about the trend on a year-over-year basis, please. Thanks.

This is John Stumpf. Yes, the bookings is full contract value. We moved to that metric about three quarters ago, I believe. So for, something at RCM, it could be out three, four or five years. We don't disaggregate that statistic and disclose that. However, as I mentioned earlier, the bookings number for the current quarter does reflect the relatively low level of new system sales. It also reflects low relative RCM bookings, and Gary and I both suggested we feel that has to do in part with the deferment of purchase commitments on the part of perspective customers in light of the upcoming ICD-10 adoption.

Okay. So do you think that bookings number is going to reaccelerate as we progress through the year may be was an unusual quarter in your view?

David, I think one of things we've said is that when we started announcing the issue of bookings that we would expect it to be choppy. That's the one. We have seen fluctuations about in the past up and down, not linear; and we would expect to see similar in the future.

Okay. Great. Thanks a lot. And then, can you just talk a little bit about Mirth and the expansion of the Mirth platform to become more of a pop health solution? Thanks a lot.

Yes, David, this is Gary. So we continue to work on that platform very aggressively. I think you remember it, ends are really kind of had the coming out party for the Mirth population healthy analytic solution. You know, as I mentioned in my comments, the underpinnings of the Mirth HIE stack interoperability capabilities are really the key to what people are asking for in this market right now. And that we've seen in a lot of activity around both analytics and but driven a lot by the fact that organizations are having difficulty connecting all the various in disparate systems that they have. So we're continuing to build off that. We think over the course of the year, we're going to have a lot of new things it will bring to the market there and it will be a very, very strong solution.

Your next question comes from the line of David Francis of RBC Capital Markets.

Wanted to follow-on the Mirth questions a bit. A lot of the new business you guys have been announcing in the last several weeks and months has been along the lines of Mirth, but a lot of that has been or seems to have been anyway HIE related. Can you talk a little bit about a) kind of the bracket the size of these transactions for us, so that we got a sense as to how big an HIE opportunity is for the company on either an annual or a full contract basis. And then also, Gary, to the extent or anyone to extent you could talk about what you see in the pipeline outside of HIE firmer relative to both near-term and long-term opportunities then I have a follow-up. Thanks.

Thanks. This is Dan. I'll answer a little bit of the question as I understood it for the HIE sizing and then I'll let Gary talk a little bit about the pipeline, having to do with population, health management, also the Mirth stack. You know Mirth has principally been an HIE company for the last four or five years, and have had great success in both private and public HIE -- in the private and public HIE market. They tend to play in the relatively high size, meaning if you look at the some of the ones we've announced both from a statewide perspective as well private HIE, they tend to be larger in scale and tend to be much more enterprise basis. We tend to be in a replacement market already in the HIE world and the bulk of our HIE sales tend to be replacement of existing HIEs or first generation HIEs. Gary, on the population health management side.

Yes. So, Dave, there is a few different components or areas that we're playing in there. So obviously there is the public HIE sector and much of that or a lot of that is either been an expansion of current clients or there has been a replacement market out there that Mirth has been successful in over the last couple of years and we see that in particular kind of continuing. The other part that have a lot of success in is the kind of the private HIE side. So those health systems that need that technology to again tie together all of their core systems, that may be have an affiliated physician strategy that they also want to tie in several different EHR platforms, we continue to do well there. And so both inside the NextGen base there are opportunities for those private HIEs and then externally that we're playing in. And the next part is the population health management analytics, the Mirth care enterprise platform. So and there is a variety of different opportunities there. So there [indiscernible] market, there is the ACO market, there is the hospital market, the large physician community. It's really a large market segment that we can go after and I would say right now we are focused on the higher end of that particular market segment. Our clients that are heavily engaged in ACO activity, hospitals and other. So it's a platform that while has been HIE and interoperability at its core and that remained strong and that will be the bulk of the revenue generation this year, the growing pipeline is been on the care management population health side.

And again to close the circle there can you try and bracket for us the size of an HIE transaction for you guys from a revenue perspective which is just a tip, I'm not asking for any kind of state secrets here, just trying to get a sense as to you sign a typical HIE contract, kind of length of term and revenue impact for the company?

Yes. I mean the general HIE contract and they do fluctuate significantly but these would tend to be ones that would in the set-low 7 figures and generally would be a three to five year kind of a term.

Okay that's helpful. As a quick follow-up on the demand side and pointing toward ICD-10 as a short-term kind of bump in the road there is that specifically from your perspective on the revenue cycle services portion of your business or is that impacting technology purchase decisions as well. Thanks for the color.

Dave, this is Gary again. I think it will have a little bit of impact on both. And as I mentioned and I would just echo Dan's comment about choppiness, there are system sales that I will say that are being accelerated because of -- because folks need to get to some new technology in a hurry. And there are RCM sales that people are very confident that Monte and his team can help them in that regard. So but again we've seen both technology and RCM opportunities that have decelerated for the same reason. People want to make sure they are prepared first and if said, we're just going to put the plans on hold for a little bit, but we seriously want to consider you right after.

Your next question comes from the line of Charles Rhyee of Cowen & Co.

Yes, thanks for think a taking question here. And I think earlier you mentioned that as we saw some declines here in the, on the software side, as you not see much in the returns of our robust replacement cycle. I think in previous quarters, management had talked about, thing that there would be an opportunity there. Is that something that you still anticipate happening either, soon or may be after this headwind related to ICD-10?

Yes. This is Gary again. We're confident that's going to happen as I think other vendors in our space are as well. I think, as I mentioned a lot of folks have to get through this ICD-10 period. They want to make sure they're stable well. They want to impact cash flow, and but they certainly have decisions to make shortly thereafter. And we think that will happen. There are an awful lot of our vendors in our space. There is still lot of M&A in activity and there are others, we see wanting to get out of the space. So that's going to impact the market.

As it relates to ICD-10, it was delayed from last year and I feel like at that time a lot of talk around that that people had or made purchases and all the vendors had sort of being compliant with ICD-10. And what is it exactly that they're really working on here? Theoretically, they have their ICD-10 certainly in place just -- is it something that they can. They don't want to start entertaining thoughts here until after it just goes live or are you still able to at least have discussions and talk with clients about sort of plans afterwards, if they don't necessarily execute today? In other words, in the earlier pipeline activity than may be getting close to real decision.

We -- to your point, we do continue to have discussions. And so we are -- they are active discussions; that continue with these folks, they're in the pipeline either for RCM opportunities or system sales opportunity. So that's a positive sign and we're encouraged by that. In terms of just what, why and things around the workflow and the preparations Monte can probably take that a little bit and say what's on the minds of the clients on the shares back.

Yes. Thanks Gary. I think we talked about this last quarter. Providers in this space tend to be very reactionary. And I think there is an expectation that the date was going to push again. And so I think the reality has set in, over the last 45 days that that's not happening. And so all the procrastinators out there are now scrambling to be ready. So we have a lot of activity around training and education, making sure that the technology is ready that workflow is good, and also that the payers are ready. We're doing a lot of testing with payers. So I think it’s a just a factor of procrastination which is typical in the physician market and people are realizing that this is happening and spending a lot of time and energy getting ready for it.

Your next question comes from Jamie Stockton of Wells Fargo.

I guess maybe the first one on the professional services line that has been bouncing around a fair amount, I think you guys have now folded the implementation work in with the consulting work in that category, but specifically, I guess on the implementation piece of it. Can you give us any sense for how the rest of this year may trend? Do you have any feel for that at this point just, so we can model it a little more appropriately?

Jamie, this is Dan Morefield and thanks for the question. It's not something that we're going to provide guidance on, but we will reemphasize some of the piece it's tied to. The opportunities around both the current upgrade, the 5.8 UD2A.3.10 remain good. Opportunities around providing training and implementation around the issues of ICD-10 remain good. We have announced a number of good size acquisitions or not acquisitions, but wins that were Greenfield to us that have training implementation opportunities going forward, so all of that is sort of on the tailwind side. On the headwind side, we announced lower software sales than we would have liked and lower bookings than we would have liked and those will also have some impact on that number. So, as we said before, it's a little bit choppy. Our focus is to really make sure that we can handle the variability in demand and to better manage the expense base associated with a line of business that has variable demand.

I guess may be my other question just to get back on this ICD-10 topic that everybody's asking about, and I don't know if this for Gary or Monte, but for practices that aren't really doing anything, they're not changing their software, they're not looking to you for RCM services. What is the message that you're giving them as far as how they could be impacted by ICD-10? Is there a hey, your days in accounts receivable may go up by 40% or is there it's going to take your coders 40% longer. What is that guess on your end as to the impact on the practices that really don't do anything and just kind of get hit by this?

Yes, Jamie, this is Monte. Yes, I think there are various places in the workflow that will be and are likely to be impacted. One is around just the coding of services and what needs to be done to get claims off the door. We're going from 16,000 codes to 84,000 codes. So the challenge for providers and coders will be significant, if they're not prepared. Specificity requirements are much greater and there will absolutely be a tool on that part of the workflow. With around the transition date, you're going to have services prior to and subsequent to the date and so there is a tight road to walk to make sure that claims are coded the right way and claims get through the system appropriately. And then the last piece is really around pair preparedness. And that's the thing that nobody really knows and we're talking to customers about as making sure that we have really robust exception management processes in place so that we can respond to how the payers react to ICD-10. It's likely that there will be significant exceptions in the way of rejections and denial, and making sure that we have good workflow, good process, and good training to navigate through that, because if you don't navigate it cash flow will be interrupted. So those are the discussions that we're having with both current customers as well as prospects. And the folks that don't do anything, I think are at significant risk to take a cash flow hit, if they're not prepared.

Are you expecting any cash flow hit for your existing RCM customers? Just even if it's like just a temporary, hey, for a few months we're going to see AR days go up and it's going to stabilize in the fourth quarter?

Look, it's certainly likely, those become timing issues. And that's where we are spending our time preparing for. Again, work flow, system readiness, and training and education. The one unknown, that we have no control over are the pairs. And how well the pairs are ready and how well they process claims and give us feedback. And so, we are certainly recommending the practices you will be prepared whether the new lines of credit or other plans to whether any kind of cash flow hick up. But I think this is what we focus on every day and so we're focused on helping our customers be ready for it. Those customers that aren't doing anything I think put themselves at higher risk.

Your next question comes from the line of Michael Cherny of Evercore ISI.

Just one quick clarification, I apologize for missing this. What was the bookings number a lot going on this morning?

37.5 million.

Okay. And this is on the new definition in terms of comparing it to what was in the mid-60s for last quarter?

Yes, down over 40% sequentially.

Got it, okay. So you're jumping in a little bit then I know there's been a lot of questions about ICD-10 and about the concept of the Greenfield. But I'm just thinking more big picture, how do you Rusty, maybe it's a little early to say this, but how do you build or earliest rebuild or re-architect business to the point where these quarterly fluctuations, the down 40% sequentially, even in the phase of what could be a lot of market related challenges don't happen as often? I look across the board it seems like you had another competitive displacement today from one of your customers in New York. So along those lines, you think about, re-architecting this business, think about your strategic priorities for this organization, you think about potentially creating more visibility. What are some of the key initial focal points, especially when you're dealing with some of these swing factors that can be some macro-driven versus what you can control in the organization?

Absolutely, great question. Certainly, it is early. A lot of my focus right now is understanding how we gain internal visibility and continuing to make sure that we're focused on creating as much predictability as we can in an uncertain environment. Just a note on competitive displacement. Certainly, we don't see a significant competitive displacement, I know the account that you're talking about, that's not a strong footprint for us. But I think as we move forward, it really is, first of all, back to the things that I've said it's making sure that we're driving client satisfaction, which gives us two things, number one, it gives us a better client experience, number two, it gives us a consistent touch point with our client base, so that we can understand how they're evolving, how they're moving forward and making sure that we have a good control over any kind of evolving process within their organizations. I'd say for the rest your question I think those are things that we're really going to be focusing on as we get through the next three months and as we continue to move towards the next time that we have a chance to talk together. I'll have more clarity and more information to you on how we're bringing both predictability, but more than that creating a platform for growth into the future.

And I appreciate that. And I appreciate the fact that your family is trying to believe [ph] your travel schedule and your eye camp here, within five miles. So you're clearly helpful there. But just along those lines on client satisfaction I guess for us doing this call 12 months from now how are you measuring client satisfaction aside from areas like class score, is it retention rate, is it new client wins? I guess in terms of your mind what are the three most important metrics that you care about specifically related to client retention?

Yes, certainly, I spent a good bit of time with class over my career. I value the feedback that that provides, however, class will tell you they're a trailing indicator. For us, things that we've done we've implemented right now are things like our voice of client survey where we're actually actively going out and surveying the client not in the context of a sales deal and not looking at class scores but getting ahead of that with key information about how our clients are both viewing us and how are solutions are performing for them. In addition, 12 months from now, I will be looking at things like our incident metrics, how are we both -- how is our software performing and then how are we handling the times when inevitably there are hiccups. Those are things that I'm already digging into and things that are the basis of which client satisfaction is build on. In addition, 12 months from now, we will continue to have expanded our account management capabilities which are -- which happen in between sales cycles that consistent focus on our client satisfaction is something that we're migrating to, it's something you'll continue to see me accelerate. The key is, are we listening to our clients today, not are we listening to them a year ago. Because most of the indicators that we've seen in the past have really looked backwards at where we were a year ago. My goal is create as quick and effective a feedback linked to the client as possible to enable us to both react quickly but also to enable us to understand the pressure on them from the outside healthcare economy and making sure that our development pipeline is aligned around their needs.

Your next question comes from the line of Steven Halper of FBR Capital Markets.

Hi, just quickly, what was the operating cash flow in the quarter again?

Operating cap -- the Q will be filed later today but operating cash flow is small amount, don't have in front of me, its small positive number. It was down from the comparable period a year ago due to the significant disbursements that we made in this quarter pertaining that tax obligation and the incentives payments its positive but I think it's around $3 million or $4 million positive but that number I think will be out later today in the statement of cash flows.

Your next question comes from the line of Gene Mannheimer of Topeka Capital.

Thank you. Hey Rusty, welcome again. Any thoughts here since you've been on board about how the capital deployment strategy might change going forward? I mean, you got a substantial payout ratio, no debt, any thoughts about levering up the balance sheet to entertain some accretive or strategic acquisitions, I know the board is not a fan of stock repurchase but any thoughts on that would be helpful.

Yes. Hey, Gene, thanks for the question. As we sit here today, we are committed to continuing our current capital strategy. Before we would address that we would address more what our strategic options are for the organization as a whole and any change in the capital strategy would be a result of that. As we sit here today, we are focused, as I said, on client satisfaction and on delivering value from the solutions we have in market and, therefore, have no change to our capital strategy.

Makes sense. And then just going back to the bookings, the light system sales, how much of that reflects seasonality? Following your fiscal year-end versus the norm going forward? And I know you talked about a bit ICD-10 having some impact there.

Gene, this is Gary. I don't know so much seasonality but as I mentioned earlier we typically see that regular hockey stick effect in the organization and I think it's been a little bit more pronounced at the start of this year than previous years. And I think that was impacted as I said by not only really strong finish but again some of the headwinds now that we're seeing with ICD-10. As Dan mentioned, I think things could be choppy but we're really optimistic with what we're seeing in the pipeline trends and things for the rest of the year.

Your next question comes from the line of Sandy Draper of SunTrust.

Thanks very much. Most of my questions have been asked. I don't think just one little point on the software subscription line; it looks like it was down sequentially. Just trying to understand was there anything that pushed up the March quarter and we would foresee a drop here, I'm just trying to understand that the sequential trend where I would think if it's recurring you're generally flat to up. Thanks.

This is John. Yes, our Q4 period had a bump in it due to completion of a significant project. This quarter also had slight pickup in net sales credits that weighed on it, I would say, operationally when you take those things out of the mix; we're still on track for that recurring revenue stream being one of our growth areas.

That and may be the other question, I don't know you guys aren't giving guidance but the impression I had coming out of the Investor Day as you refocus or repointed out today expecting growth to be lower this year than last year. It felt like it was going to be a little lower and so my interpretation was sort of mid to high single-digits. It seemed like this quarter is a little bit lower. I'm just curious clearly you guys were not pleased with the bookings number but is this sort of a little bit lower quarter than you would have thought, is this quarter consistent with how you would've framed things back in the Investor Day, again not trying to get specific guidance, it just seemed like this was a little bit lower than what I would've thought coming out of the Investor Day. Thanks.

Yes, this is John again. So you're right we're not getting too specific about the implications for the future but, as Gary suggested, we all would have been happier had a couple of more deals landed in the quarter. Some of it is timing, right, deals having flowed into our prior quarter, some deals just don't get executed by quarter-end and as its choppy things that don't happen this quarter and there is a decent chance they fall into the next. And I guess I'll leave it at that. The comments made at the Investor Day about the overall growth rate slowing, those still stand.

Your next question comes from the line of Ricky Goldwasser of Morgan Stanley.

Hey, good morning. This is Zack Sopcak for Ricky. I just wanted to ask on the RCM growth year-over-year sequentially. Are you seeing any growth from current clients in terms of utilization pickup?

This is Monte. Absolutely. Our clients many of them are growing and we continue to grow with them.

And then maybe just a question for Rusty, in terms of anything on your first three weeks that surprised you relative to what you thought coming in?

No. I think the team and employees are highly committed to the things that I have talked about which are client satisfaction and continuing to make sure that our solutions are moving well into the future. I think I do bring a little bit of a different flavor into the organization one that is really currently focused on making sure that we have a strong united culture that is very client focused. And I think I feel I have already made a good deal of progress just in my first three weeks simply by moving around the organization and reaffirming our commitment to our client value as our primary mission as an organization. And so, I would say nothing would surprise me. I have been gratified with the reception of the message. Now it's rolling up our sleeves and getting into of hard works of driving tactical execution and continuing to improve the capability of the organization as we look to do more into the future.

Your next question comes from the line --

Let's take one more question and then we're going to close the call down for today.

Your final question comes from the line of Garen Sarafian of Citigroup.

Good morning, guys. Just a couple of quick questions. On R&D net expenses of 14% was a little bit lower. We might have missed it in the prepared remarks I think you had mentioned something. Are you expecting the net R&D expense percent to be around that rate or was it to get back closer to 15%?

Right, Garen. This is John. In the prepared remarks and at Analyst Day and the Q4 news release, I indicated that given the investment we intend to make in both our existing solutions, the new platform development we have and related areas, we could expect the net R&D expense to move to 15% or higher for the full fiscal year. I do realize that our Q1 period was below that but we're short of providing guidance that is one area where we've been a little more specific.

Got it. Great. And then the quick follow-up was, Dan, I appreciate the update on NextGen now and that unless it's a quality product that it won't be released. I believe at Investor Day the idea was still sometime in the spring for it plan to be released. Is should all things go well -- is that still the plan or is it still on track as of now given all the caveats of the feedback you got?

Well, I think what we wanted to make sure we told the Street is that we're in the process of early testing of the system both its functionality as well as the actual internal workings of the system. So we will deliver it when it is ready. At this point, we've said in the spring of next year. And again, as soon as I am comfortable that I actually have enough information to fully define the actual date I will give it. But at this point we continue to do testing and the one thing I'll say is that we expect to be in beta having been finishing on the Office side later this year and from there we'll make the final decision as to the specific release date.

Thank you. I will now turn the call to Rusty Frantz for any additional or closing remarks.

Thank you, Laurie, and thanks all for joining us today. Appreciate your time and interest in Quality Systems NextGen. As we move forward really forward to continuing this conversation, keeping you appraised of our initiatives, developments, and efforts, as we continue to work towards both driving great client experience and expanding our solution footprint. My goal as we move through the next year is to make sure we're building the cultures and capabilities of our organization, connecting to our clients effectively, and continuing to increase our efficiency and effectiveness in delivering these solutions to the client base. Look forward to continuing this conversation as we navigate our way through this ever changing healthcare information technology market. Thanks again for your time today, and we'll talk to you next time.

Thank you. That does conclude today's teleconference. If you would like to listen to a replay of today's conference please dial (800) 585-8367 and refer to the conference ID number 80827836. A webcast archive of this call can also be found at www.qsii.com. Please disconnect your lines at this time and have a wonderful day.