Dan Morefield - COO Rusty Frantz - President and CEO John Stumpf - Interim CFO

Jamie Stockton - Wells Fargo Mike Cherny - Evercore ISI Charles Rhyee - Cowen & Co. Greg Bolan - Avondale Partners Dave Francis - RBC Capital Markets David Larsen - Leerink Zack Sopcak - Morgan Stanley Jeff Garro - William Blair & Company Donald Hooker - KeyBanc Mike Ott - Oppenheimer Gene Mannheimer - Topeka Capital George Hill - Deutsche Bank Garen Sarafian - Citi Research

Welcome to the Quality Systems Incorporated Fiscal 2016 Second Quarter Results Conference Call. Hosting the call today from Quality Systems is Dan Morefield, Chief Operating Officer and 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 Dan Morefield, Chief Operating Officer.

Good afternoon and welcome. Before turning things over to Rusty, I'll remind everyone that the comments made on this call may include statements that are forward-looking within the meaning of security laws including without limitation statements related to anticipated industry trends, the Company’s plans, products, perspective and strategies preliminarily and projected, and capital equity initiatives to the implementation of potential impacts of legal regulatory or accounting principles.

Good afternoon everyone, Rusty Frantz here. And thank you for joining us today for Quality Systems fiscal year 2016 second quarter results conference call. To begin, I'm going to provide you with an overview of our focus during the quarter as well as our emerging business strategy. And then I'll turn the call over to John Stumpf, Interim CFO to review the financial results and performance for the second quarter. Following the financial overview, our Chief Operating Officer Dan Morefield will update you on our business operations. I want to start today by emphasizing the fact that we are further positioning the Company to centre around our strong core market, our ambulatory client base. The strength of our Company lies in our large installed client base. Our platform is very solid and we are confident in our ability to average the existing leadership position we have built over the years and use it as a springboard for future growth. This focus on our ambulatory core competency is reflected in the just announced divestiture of acute care hospital solution divisions, which we sold to QuadraMed Affinity Corporation, part of the Harris Operating Group. Constellation Software, Inc. We believe this will be a great addition to their organization. We thank our inpatient team for their great efforts and wish all parties the best as they move forward with the transition process. This transaction helps to clear the path to allow us to focus on our ambulatory clients. I would also like to briefly address our focus on capital management. As we move forward through the remainder of the year, we will be focused on cost containment initiatives. The benefits of these initiatives will manifest themselves late in the financial year and accelerate into next year. To this end, some of these initiatives include the aforementioned investiture of the hospital solution division, focused on expense control across the organization, and continued simplification and restructuring of the organization to enable more aligned and efficient performance. We’re pleased with the efforts made so far as we concentrate on these tighter cost controls and simplification to streamline expenses. We see these efforts as key to ensuring our ability to invest in both organic and inorganic initiatives as we continue to evolve our strategy. The next priority here and success of the business going forward is the client experience that I've been referring to since joining. As I mentioned previously on the call last quarter, ensuring auto a top-notch experience for every QSI NextGen client relationship is absolutely essential. We are committed to providing client’s a low cost of ownership in terms of product and services as well as a great support experience. To this end, we continue to assist our clients to achieve both a lower total cost of ownership of our solutions as well as the services necessary to enable a seamless migration to value-based healthcare and the provision of tools to help them operate amid changing and new reimbursement models. For example, our commitment to a total low cost of ownership will be a low total cost of ownership will be expanded when we outline the expansion of our managed service and hosting capabilities at our user group meeting in November. By offloading many of the management and upgrade tasks from our clients, we can insure the best experience possible as well as reducing their labor and technology cost structure when using our flagship NextGen Ambulatory platform. Our continuing investment and a great support experience can be evidenced by a recent proactive service and support in client shift and transition to ICD 10. Dan Morefield will cover this in more detail later in the call. Also during the quarter, we continued to leverage our best-in-class revenue cycle management expertise to continue to drive growth. This is certainly an area in which we expect to see an increasing demand for the type of competitive advantage and expertise we bring to the table as ICD 10 and value-based reimbursement takes further hold. I want to turn now into way to -- I want to turn now to ways in which we are listening to our clients and directly incorporating their feedback. Since we implemented our Voice of Client initiative back in 2013, a program whereby we continuously monitor our client feedback and take action accordingly based on their input. We have seen significant benefit from this program. It continues to bring invaluable real-time insights into how we can improve the client experience. Based on client feedback, this quarter we made additional headway in enhancing that experience. We’ve been investing and improving our quality assurance processes and software, bolstering account management, ramping targeted development within our flagship NextGen Ambulatory platform to enhance provider efficiency as well as reorganizing and refining our customer base support function. Turning to solution development. On the heels of the announcement of the transition in technology leadership early in the quarter. I've been evaluating our current progress both in our flagship NextGen Ambulatory solution as well as our NG Now platform. During Dan Morefield's interim leadership of our technology and product organizations, he has done a great job of increasing investment alignment and focus on the flagship platform to better serving the needs of our existing client base. In addition, subsequent to the resignation of our prior CTO, Dan and I have deeply inspected the NG Now program. Based on that inspection, we see the initial delivery of a cloud-based EHR EPM on our NG Now platform happening in calendar 2017. I'm certainly not satisfied with this time line and aggressively evaluating ways to accelerate delivery of this capability to market. In addition, I'm moving quickly through our CTO search as I see that role as key to our future. In summary, we continue to align and focus this organization by capitalizing on the previous successes we've achieved in the ambulatory space to ensure that infrastructure is built to support both organic growth as well as the integration of future acquisition opportunities. In addition, we remain nimble in developing tools that aid our clients in their approach to navigating new reimbursement models and succeeding in today's rapidly changing healthcare landscape. I will now turn the call over to John to provide some color on the quarter.

Thanks Rusty and hello everyone, this is John Stumpf. I'm pleased to present to you QSI's second quarter of fiscal 2016 financial performance on today's call. Our total revenue for the quarter of $125.4 million reflects a 4% growth rate over the year ago quarter led by gains of 28% in recurring subscription services, 19% in revenue cycle management business, and 9% in our electronic data interchange services. Dampening the overall growth rate were relatively flat software license sales and maintenance revenue, and a decline in professional services revenues, the latter mostly reflecting the fact that the year ago quarter was very robust for such services. On a sequential basis, total revenues increased 3% benefiting from a substantial rebound from the particularly low level of system sales that we experienced in our first quarter. As we mentioned in our first quarter earnings call, Q1 appears to have been impacted by the timing of bookings, in light of our strong fiscal 2015 end of the year performance as well as overall choppiness in the end market. Our sequential growth also derives from incremental gains in RCM, subscriptions, EDI and professional services revenues, mitigating our sequential growth rate as a decline in reported maintenance revenue. The sequential decline reflects a reduction in certain revenues that are recognized on a cash collection basis and unfavorable impact due to changes in sales returns reserves and the timing of sales credit. Normalizing the current and prior quarters for such items, maintenance revenues are flat on a sequential basis and continue to reflect an uptrend over the prior year period. Total contract bookings for the quarter were $60 million, reflecting a sequential improvement of over 55%. The substantial growth in sequential bookings derives from a higher volume of both add-on and new customer arrangement principally relating to software license sales and RCM deals. As mentioned on our first quarter earnings call, the low bookings number for Q1 was believed to be somewhat anomalous reflecting a decline of over 40% from the fourth quarter of fiscal 2015, due mostly to the timing of deal closures. Gross profit grew a solid 8% or $5 million versus a year ago period. Our consolidated gross profit margin this quarter expanded to 55% versus 53% a year ago. This improvement both in dollars and in margin expansion was broad based. Limiting the overall margin improvement was an increase in maintenance and support personnel costs relating to initiative and an increasing customer satisfaction. Though such expenditures weight on near-term profitability, we continue to believe our various Voice of Client initiative will yield longer term benefits. On a sequential basis, gross profit grew by 4% reflecting the significantly higher level of system sales in Q2 and the resulting mix shift in favor of software related revenue. Similar to the year over year gross margin trend, our growth in maintenance and support costs slowed the overall rate of margin expansion. We anticipate continuing to add targeted resources in support of the customer facing initiatives. SG&A, excluding amortization of intangible assets decreased over 3% from the year ago period, a portion of this trend reflect our ongoing effort to manage our expenses but we also did derive some benefit from the normal inter-quarter timing of costs. On a sequential basis, SG&A decreased due to the incurrence of $900,000 in Q1 for a CEO transition related costs and a favorable timing across a number of other expense categories. Total gross R&D investment for the quarter increased 2% sequentially and 3% from the year-ago period, we capitalized $3.1 million in development cost this quarter representing a 15% capitalization rate. By comparison, our capitalization rate was 18% for Q1 of this year and 17% a year ago. Net R&D operating expense increased to $18 million this quarter versus $16.9 million a year ago, reflecting the higher level of gross investment and slightly lower capitalization rate. Our net R&D expense as a percentage of total revenue for the quarter was 14% flat with the year-ago period and sequentially. Our GAAP effective tax rate for the current quarter was 33% compared to 35% a year ago. This decrease in rate is primarily due to certain deductions that benefited from year-over-year growth in our taxable income. The current quarter GAAP rate would have been even lower absent certain discreet items recorded during the period. Our non-GAAP effective tax rate for the current quarter is 30.5% as compared to 35% in the year ago period. As noted in our first-quarter 2016 earnings release, we 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 and to better reflect our longer-term normalized outlook. On a GAAP basis, fully diluted earnings per share for the second quarter of fiscal 2016 was $0.14, 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 second quarter of fiscal 2016 was $0.21 compared to $0.13 for the second quarter of fiscal 2015. Our year over year increase in both GAAP and non-GAAP earnings per share was driven by increased revenue and expanded margins both growth and operating and a favorable trend in our tax rate relative to the year-ago period. Sequentially, fully diluted earnings per share on a GAAP and non-GAAP basis each increased largely from growth in revenue and the related expansion of gross profit as well as the reduction in total operating expenses. With regard to the balance sheet, we made further progress on our DSO improvement initiative. Our turnover of receivables decreased to 72 days this quarter, an improvement of three days sequentially and nine days from the year ago period. Our cash and cash equivalents plus marketable securities ended the quarter at $111 million. This balance represents a net decline of $6 million from the start of the current quarter principally due to the timing of tax installment payments, specifically our second quarter cash flows reflect required installment payments totaling approximately 50% of all federal and state taxes due for the full fiscal year. Moving on to revenue trends by business units. Our Ambulatory unit for the second quarter had revenues of $95.0 million, a 2% increase from $93.1 million a year ago. Our Dental business unit had revenues of $4.7 million, a 0% change year over year. Our hospital business unit had revenues of $3.2 million, a 23% decline from $4.2 million a year ago. And RCM business unit had revenues of $22.5 million, a 21% increase over $18.6 million a year ago. And again, on a consolidated basis, our revenues for the quarter $125.4 million, a 4% increase over $120.5 million a year ago. I will now move on to a recap of select non-expenses for the quarter as follows. Amortization of capitalized software $2.5 million, amortization of intangible assets $1.8 million, depreciation expense $2.2 million, soft compensation expense $0.9 million and bad debt expense $0.4 million. Our investing activities for the quarter were as follows. Internally generated capitalized software $3.1 million and investment in fixed assets $2.7 million. This concludes my review of our financial performance for the quarter. With respect to our outlook for the second half of our fiscal 2016 year, I'm limiting my comments primarily to directional and qualitative measures. Before consideration of the divestiture of our inpatient business unit which was reported this afternoon, we anticipate our second half organic revenues to reflect continued but limited growth over our first half of 2016. In light of our record performance in Q4 of fiscal 2015 however, our year over year growth rate in the second half of fiscal 2016 is likely to be more muted than the 4% year over year growth rate we achieved in the first of this year. Based upon the divestiture date of our inpatient business unit, we expect the sale to impact revenue by $4 million to $6 million in the second half of his fiscal year. We will not be recasting previously reported numbers relating to our inpatient business unit and are published financial. From an earnings standpoint, I want to reiterate a couple of comments that I made in context of our Q2 performance. Specifically, we derived a timing benefit, a favorable SG&A expenses in the current quarter, we feel that a normalized rate of 32% of revenue reflect reasonable basis for near-term expectations. Further, we continue to anticipate our net R&D expense to grow to as much as 15% of revenue consistent with what we communicated at the onset of fiscal 2016. After normalizing our SG&A run rate and factoring in our intent to ramp our investment in R&D, we would expect somewhat lower non-GAAP EPS margin in our second half before consideration of our divestiture of our inpatient business unit. For the second half of 2016, we anticipate this divestiture would add $0.02 to $0.04 to our non-GAAP EPS. 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 everyone. As John said, for the second quarter, the ambulatory division’s revenue increased roughly 2% when compared to the same period in fiscal 2015. One highlight of the year over year increase is the performance of EDI which was up 9% over the prior year. When compared to Q1 of this fiscal year, total revenue is up roughly 4%. Software, hardware and related revenue increased 13% quarter over quarter. Consulting revenue was a highlight in the service line item as this category increased 25% over the prior quarter. I will highlight some of the sales that drove the software increase later in the commentary. As the transition date for ICD-10 loomed, our service teams were highly engaged with our clients to assist with preparations. I'm pleased to report that our ICD-10 transition went very well. We believe it was a successful outcome due to the combined effort of our clients and our teams working together. The services that we offered as part of the ICD-10 transition are examples of a move toward a more proactive service approach that we believe will lead to increased client satisfaction. A strategic highlight for the quarter was the announcement of the partnership with Mass Highway. Through this particular partnership, providers utilizing NextGen Share can now exchange crucial patient information with over 350 organizations connected to the Mass Highway. The statewide health information exchange that facilitates the transmission of healthcare data and health information amongst providers, hospitals and other healthcare entities throughout Massachusetts. This is just one example of our strength and interoperability, and connecting practices in meaningful ways. We remain committed to creating ways that our clients can connect within their communities. Sales nicely rebounded in Q2 as expected when we spoke in July. It was evident that the success of the quarter was a result of a very balanced performance across all of our major revenue drivers; Mirth, RCM Services, EDI, professional consulting services, hosting and system sales. Industry conversations around interoperability continue to grow and as a result our Mirth product sales continue to grow. We posted another solid quarter with a mix of revenue from both NextGen client base and non-NextGen clients. Our teams continue to work well on cross-selling opportunities educating our client base on the value that the Mirth products can bring and the problems that the Mirth products can solve. The near-term opportunity remains a solid mix of public and private HIE core interoperability products, new population health and analytics. Of particular note in Q2, we landed the third regional HIE in Southern California with the Los Angeles area HIE. Promise Health a long time NextGen client and progressive provider of worksite health care purchased the Mirth HIE stack to service the backbone for their interoperability and data aggregation across their diverse nationwide enterprise. Sonic Labs purchased an HIE enterprise license to serve as a patient population over -- to serve a patient population of over 15 million lives which demonstrates the scale and scope of the Mirth stack in this lab-specific use case. Blackstone Valley Community Health Center, a premiere New England area Federally Qualified Health Center and longtime NextGen client purchased Mirth as part of their private HIE interoperability strategy. We drove a solid mix in RCM services, net new system sales and sales into the existing client base. A number of NextGen Ambulatory enterprise clients continue to consolidate practices in their market space excuse me, as the number of NextGen Ambulatory enterprise clients continue to consolidate, we benefit greatly from their growth and continue to benefit. Clients just as Accelerated Rehab, AmSurg, Jackson Community Medical Record, Dermatology Associates of Wisconsin to name a few all contributed to the growth story within the NextGen client base. We believe that this a trend that will continue as these type of organizations continue to acquire providers and drive consolidation. Also worth noting in Q2 was the success of our professional consulting services and managed cloud services sales. Our clients are seeing the value of moving the NextGen application to our hosting offering for a number of reasons. Including a significant ROI over on-premise solutions, excellent performance and to allow NextGen to manage the maintenance of their applications to provide a much improved support experience. RCM service revenue for the first [ph] quarter was up slightly over last quarter at $22.5 million and 21% better than the same quarter a year ago. A large portion of the quarter was spent preparing for ICD-10 – the ICD-10 implementation on October 1, so we contracted our efforts or we concentrated our efforts on making sure our technology was ready, training our staff and educating and support our customers for their ICD0-10 readiness with tools, training and webinars. RCM services had solid sales last quarter that included Family Care Services, Whatley Health Services and in University Orthopedic Center. We also successfully began the rollout of our credentialing services offering that we believe will provide additional value and further differentiate us as the high touch leader in the space. We look forward to aggressively expanding our RCM service model in the coming quarters with many unique products and services to aid our clients in the transition from a volume-based – from a volume to a value based marketplace. Up next is our annual user group meeting at Las Vegas, where once again thousands of our clients along with industry experts dozens of NextGen partner firms and prospects will gather together for an extraordinary learning experience and quite honestly, it’s just a lot of fun. Rusty and the team will be hosting our general session to talk about a strategic focus, product updates and what’s in store for the future. We are currently in the process of modifying our overall sales process and looking at the various predictive analytics we used to forecast sales. While we will not be providing pipeline information this quarter, we believe that the future sales and revenue opportunities would remain materially the same as those represented in last quarter’s pipeline number. We will provide a greater degree of insights in our perspectives into our sales prospects in future calls. Wrapping up our call this morning, I like to report that the company executed 61 new arrangements on consolidated databases versus 68 in the prior quarter. 57% of the arrangements were greenfield, 43% were replacements. Discounting did not materially change in the quarter and as of September 30, there were 114 quota-clearing sales and management positions. There was no material increase in sales staff over Q1 of fiscal 2016. And with that I’d like to thank you for your time and continued interest. Operator, I would like to turn it over to you for questions at this point.

[Operator Instructions] Your first question comes from the line of Jamie Stockton with Wells Fargo.

Hi, good evening and thanks for taking my question. I guess, maybe the first one, I don’t know if this is for Rusty or John, but I think in rest of your comments you guys talked about some cost containment initiatives obviously getting the hospital business of the books is going to help from a profitability standpoint. Is there any way that you can quantify for us where you think the opportunity is within the rest of the cost base, maybe over the next year as far as some of the initiatives you are looking at?

Hey, Jamie, I appreciate the question. This is Rusty, I am going to pass it over to John. I’d say, we are pretty early in the journey on that. Certainly, we have brought in some external help to help us better understand the structure of the organization as well as some of the areas where we can become more efficient. Certainly as we move forward through the next couple of quarters, we’ll be a little more crisp on identifying those, but at this point, we are really on the front-end of that journey. Today, really mainly focus is just making sure that the network grab stuffs [ph] like making sure that we are only travelling when we really need and that we continuing to just be careful stewards of the operating expense line. John, anything you would add to that.

I agree with Rusty’s comments. It would be premature to get quantitative, but I can tell you we are taking very holistic approach. We are looking at benchmarking, best practices and those types of things about organizational efficiency, and that’s about as far as we can go on today’s call.

Okay, and that’s great. And then maybe one other question. On ICD-10, obviously a big focus on it during the quarter. Can you give us any sense for whether that had an impact on deal flow, I think Dan said that a number of deals was down maybe 10% roughly sequentially, even though maybe you did see a nice improvement in average deal size. Just any color around what impact ICD-10 might have had during the quarter and what you expect over the next quarter or two if there was an impact?

Thanks, this is Dan. The impact of ICD-10, I think we’ve talked about that a little bit in the past. We started talking that ICD-10 maybe a little bit of a headwind and the current sales environment. And I think we saw a little bit of that. With that being said, our expectation with ICD-10 mostly behind, that’s although we still have a couple of cycles to go through payment reimbursements to make sure that we are seeing greater opportunities in the marketplace based upon clients and prospects beginning to take away focus away from their internal operations. I don’t think there is any way to quantify that, but I think from a trend line, we certainly would like what we see.

Okay, thank you.

Thanks, Jamie.

Our next question comes from the line of Mike Cherny with Evercore ISI.

Afternoon guys and nice job on the bottom line performance for sure here. So I want to dive in a little bit relative to the refocusing. Obviously, by divesting the hospital business, it clearly has a much of expectations that appears set when you bought the business, now that you’re – gave away [ph] that distraction, are you thinking about refocusing? Are there any areas in terms of the R&D development that you really want to refocus around, are you taking some of those resources that were working on hospital division, clearly meant [ph] something else, is it in areas around RCM services or analytics. I guess, as you refocus, where will the priorities shift relative to those resources?

Hi, thanks. This is Dan again. Let me give you a little bit of color associated with that. The resources and it’s not just the resources specifically from hospital, but as we take a look at the overall resource pool, it really applies to everything. All right, clearly we said that the current satisfaction level of our clients is imminence important and being able to focus on improve that, things like providing better hosting solutions, better upgrade experiences, better bug fixes and enhancements, while continuing to invest in the core premier ambulatory platform. And so it’s the combination of focus and redirection of resources, while at the same time continuing to invest in our future and provide us or make sure that we are in the – have the ability to not only continue to grow aggressively organically, but also have the ability to grow inorganically as we see potential opportunities.

Got it. I apologize, if I missed this before, do you have any updates especially in some of the – in the transition on attrition rates or any feedback in terms of guys that may have been questioning long-term strategy and now with Rusty in place say, hey, I like this guy and we give him another shot?

We have really no statistical or not have reported in past any of the – any metrics surrounding our overall attrition and we continue to see growth in our overall ambulatory portfolio and continue to take the efforts to make sure that not only we can retain our existing clients, but have the ability to aggressively compete in the marketplace as it is today and as is being developed in the future.

Yeah, let me just add in a little bit of that. Certainly as we come to our user group meeting, my intention is to be front in center in the user group meeting, it is to get the keynote speech to the client base. I have already spent a good bit of time going around the country, meeting with clients, giving them a senses as to who I am to the energy and focus that I bring to the table as I lead this organization. My expectation is at that time in November with our users, it will be a very important opportunity to continue to solidify our clients’ optimism in the future of this organization.

Perfect, thanks guys.

Our next question comes from the line Charles Rhyee with Cowen & Co.

Thanks, guys. Hey, can I – could you guys give a pipeline figure this quarter. Can you go a little bit more why it wasn’t really a useful metric for you to provide this quarter, but it sounds like you plan to give it next quarter, did I kind of understand that correctly?

So as I have come into the organization and I’ve looked at the way we go to market, we have a real opportunity with the breadth of solution we have to truly bring in enterprise message to our client base to much more of a solution oriented message that also is driving a change in the sales process and how we actually got to client. Naturally, as that sales process takes hold, that creates a different optic around what the future looks like and so to that end, as we are changing the sales process, the way that we use to view opportunity will now – to more reflect this new process, this new level of inspection and a new level of enterprise solution messaging to our clients. Does that help?

Yes, it does. You know, the other comments you made was that you thought the number of opportunities et cetera was the same as last quarter, so is that just the way you will report the metric reflects these sales process, but it is not to say that the number of opportunities has materially changed.

This is Dan. That’s absolutely correct. My purpose we are actually stating that directly is I did not want this group to walk away with the understanding that by not providing that particular pipeline information, we were anywhere previewing that we thought our future sales and revenue opportunities had decreased.

Okay, thank you. I appreciate that. And then obviously we are exiting the hospital business, but we are still very much in the population health business. Does that – do you feel that not being as a hospital provider hurts you when you see some of the competitors’ space there also a hospital system vendor plus a population health system in it, is going to sell into an installed base that way? How do you view that market going forward as the hospitals?

First of all, we see that market to be very, very large and segmented in many ways. And so from that perspective, we think there are many ways to work out the opportunities. And while we have said that, the opportunity associated with the combination of our core ambulatory capabilities, where small principally rural hospitals are not as strong as our ability to focus on population health management and the ambulatory solutions centered around the larger doctor practices. And so it’s just an understanding that the market is very large in which areas that we think we can compete at and aggressively compete at, and when.

And I’d also add to that that really that’s where also our Mirth solution set comes in so strongly. I was – I just had the privilege to attend the EHR and – both EHR company and Provider [ph] Conference with the class group in Utah where were specifically talking about interoperability within the industry and how do we as an industry continue to improve the ability to interchange data between various EHRs, because of that – that I see as another tailwind, having that great interoperability capability allows us to meet the needs of the ambulatory client base, but also allow them to interoperate, not just within their own groups, but with all of the critical care facilities that they also serve.

Okay. Thank you.

Our next question comes from Greg Bolan with Avondale Partners.

Good noon, and congrats on the improvement in the topline. I wanted to ask a little bit about the activity within the revenue cycle management area, this has obviously been a very bring spot for you guys for some time and especially if you kind of anniversaried the hospital client, are you seeing – what kind of activity are you seeing? Is it mostly greenfield activity, are you guys displacing maybe some of your peers, maybe if you could give a little bit of characterization of the revenue cycle management backdrop, that would be great.

Thanks, Greg. As we’ve reported previously, the RCM activity is well balanced. We see opportunities and actual successes in replacing existing national RCM vendors. We see replacement of regional players, we see greenfield opportunities and we see them both as the cross-sell within our client base where they have already have our NextGen ambulatory software as well as a combined new sale for new clients that are installing both our software and our RCM services. So what we continue to see is just a number of wins across all the fronts versus specializing in particular area. And then one thing, I would add on top of that is we continue to expand services such as we announced today the credentialing service and as we continue to add more services to drive our ability to support our clients moving toward value-based reimbursements.

Our next question comes from the line of Dave Francis with RBC Capital Markets.

Good afternoon guys. Did you give out any information, any further information on the hospital divestiture in terms of size of the transaction or anticipated closing data?

We did not give out any information size of transaction.

And the closing day was today.

Yeah, it’s simultaneous sign and close.

Okay. Any reason why you’re not talking about the size of the transaction impact on the balance sheet.

It’s a material consideration. This is John.

Okay. Turning – if I could ask, change gears a little bit, the ICD-10 question a little bit differently, you talked about people three weeks into the shift now and then you saw some kind of impact on near-term sales activity in the last quarter. Can you talk a little bit more about how you’ve seen your clients thinking about ICD-10, is it well forwarded or is there a tale to how long they are kind of focusing on the issue as something they need to be worried about relative to cash flow or when do they kind of believe that from your perspective, we are back to kind of operations as usual?

Dave, Dan here. In response to your question, what we are seeing is a very mixed response from our clients, and much of it comes from the size and sophistication of the client and how well prepared the client was for the transition. Some of our clients that really didn’t accept little job in preparation for the ICD-10 transition had hit it really and stride in our reporting much of that is behind them, especially after this team, the first few cycles of reimbursements. Others I think are a little bit more problematic as they had not prepared nearly as well, but again those tend to be different depending on size, sophistication and preparedness of the clients. So I don’t think we’re seeing anything that I could see across all of our client base with the exception of that the overall process seems to be well accepted and well down the path of being behind them.

Okay. If I could sneak in one more quickie, John, you ramped through very quickly some puts and takes on kind of normalizing the downward shift in the maintenance revenue sequentially, but I didn’t quite track the ups and downs really got you to what you said was a kind of constant basis. Can you run through that real quick again for us?

Sure, so in a given quarter, we could have cash based collections revenues, we can have sales credits to greater or lesser degree, we can have movement on our sales return reserves, so our maintenance is fairly flat, frankly quarter-to-quarter, you get year-over-year changes largely from the software sales bookings, the CPI [ph] increases and the attrition coming to play. Sequentially, there is really not a much movement, so this quarter-to-quarter movement, you are seeing from Q1 to Q2, Q1 benefited a bit from things like sales return reserve movement this quarter like the other way. So you could pretty much normalize Q1 and Q2 together, maybe versus the first half of last year to get a flat or more meaningful trend. We think when we get to our third quarter, all else equally, you would see a more normalized reflective closer to Q1 probably.

Okay, that’s helpful. Thank you guys.

Thank you.

Our next question comes from David Larsen with Leerink.

Hi, can you talk a little bit more about the Mirth solution, it’s also – I think at your Analyst Day, you mentioned that you’re going to be investing into it, so that the sort of financial and capitation oriented capabilities of Mirth would be created or enhanced. Can you maybe just give a little color on that?

David, good to hear from you. So we talked a lot about that Mirth would continue to be integrated into our overall solution architecture and a greater degree within our product. So some of the things that you talked about are examples of the components that we are looking at on things such as the population health management tools that have a number of the Mirth stacks within them. Mirth analytics is a good example about that the next generation of Mirth analytics will come out later this year and the current view on that is it will not only support the Mirth branded stack, but will also be implemented and used within the NextGen ambulatory stack. So it’s everything that continues to be a sort of process, for a lack of better term, but we are comfortable that the interoperability capabilities and the nature of the technology solution will continue to prepare us to be much more aggressive in the population health management world as well as the overall world of value-based reimbursement.

Okay. So if you had a large physician group that wanted to enter into part of the range [ph] going with a commercial plan, would Mirth basically be able to bring them through that process?

Mirth, I believe would be able to bring them through that process, as you know, those are very custom in nature and one of the great values of our Mirth stack and Mirth results are things that we can and do customize those especially on the large end for these kind of opportunities.

Okay, thanks very much.

Our next question comes from Ricky Goldwasser with Morgan Stanley.

Hey, this is Zack Sopcak for Ricky. I just wanted to ask a question on the delay in the cloud-based EHR and ask if any of the increase in R&D ramp is related to that project and also if it had any impact on your discussions with clients?

This is Dan. Thanks for the response. So there is two parts in that question. The first part had to just do with the ramp associated with the technology spend. The most recent ramps associated with our technology spend, I don’t we are related to that. I think they were much more related to issues surrounding putting more investments into our core premium NextGen Ambulatory product line, enhancing client satisfaction, upgrade capabilities, bug fixes and enhancement, all the things that we talked about not only from that perspective, but all the processes around that as well. We have had some conversations with our clients concerning the timing of the EHR coming to market. But quite honestly our clients have expressed less of an interest of a specific product or products and more of an interest in understanding what's your strategy going to the cloud and what do we think and how we are going to that. But those conversations tend to be second to what are you doing for me on the application I am using today. What are you doing to reduce the overall cost of ownership of the application I have today? These are things that first come out and then the long term strategic conversation always centers around, what is your plans for the cloud, talk to us about architecture designs, features like that or things like that and it's much less of a discussion of when will you have a small doctor practice ready to be commercialized and go to market.

Yeah, and this is Rusty, let me just chime in a little bit here. The first commitment to our clients is to make sure that they are getting a great experience of the solution they own today. It is also our commitment is to make sure that as our strategy evolves and as our understanding of where we are evolves that we are transparent to work with our clients. And as I stated in the call right now, that timeline has us delivering a cloud-based capability on the EHR EPM side into calendar year 2017. As I said, I'm not satisfied with that date. Frankly technology development is well within my wheelhouse and is an area that I'm looking to drive very aggressively as I continue to take the reins of the organization. So what I would say is, there is more to come on this conversation as we move through the next couple of quarters. But certainly it's an area we feel it's important, but maybe secondarily important to giving a great experience on the highly capable, highly customizable enterprise solutions that we deliver today.

Great, thank you.

Our next question comes from Jeff Garro with William Blair & Company.

Good afternoon, guys, and thanks for taking the question. Want to ask if you could quantify the opportunity for hosting and we're pushing hosted services help you set up on upgrade path for NextGen Now when that is ready for market.

Jeff, Dan Morefield here. Thanks for your question. You cannot quantify the hosting opportunities. What I can say is, I believe that less than a quarter of our existing clients take advantage of our hosting opportunities. So I think that there is a significant ramp there and as we have focused our time and attention on delivering a much better quality product and as we’ve seen the results associated with that, and our customers and internal surveys reflect that the quality that they're receiving has gone up, we think that opportunity to bring more clients on board is a good size one. So as far as quantifying it other than aligning that I think that we're probably still a long way to go from our existing client base. The discussions we have about the value of our hosting environment is less centered around the ability to migrate them over to some new platform in the future, but the ability to provide significantly better service and significantly better experience with their existing stack that we can help take away some of the complexity of the upgrades. And it is not just the upgrades in the software, but it’s the complexity of the overall HIT stack and the interrelationships between not only our software, but other softwares that the client is using.

I think also and as I look at it, we will continue to deliver capabilities in the cloud as we already have and having on-premise hosting versus being able to host the NG Ambulatory, the NextGen Ambulatory footprint, the NextGen Ambulatory footprint in a hosted offering allows us to much more easily migrate piece-wise certain capabilities that are in the NG Ambulatory footprint today but might be, for example, better positioned in a multi-tenant cloud type offering. And so I would say it creates a little more frictionless optionality for us as we continue to release some of these new cloud based capabilities regardless of whether they are EHR, EPM or other population health-oriented capabilities.

That’s great guys. Just as a quick follow-up there trying to fully understanding the value that hosted services are bringing to your clients. Could you talk a little bit more about where the revenue opportunity lies just in terms of kind of average increase of maintenance type revenue or revenue that’s hitting other segment lines?

It's a tough question to answer off the top of our heads. I think that we – the revenue lines is part of the service lines.

I guess let me just chime in here. What I would say is I would say the core value to us is the improvement in client satisfaction and the ability to continue to move clients towards a more consistent footprint, which of course does have a lot of goodness both from a client satisfaction standpoint, but also it helps us better utilize our service resources to continue to provide that better customer experience. We're not really in a position to comment on what that might mean on a per customer basis from a revenue standpoint.

This is John and furthermore I want to say this, because we're in an exploratory phase of this we have not baked those into any of that forward-looking information that I described for the second half of this year.

Great. Thanks for taking the questions, guys.

Thank you.

Thanks, Jeff. Operator?

Our next question comes from Donald Hooker with KeyBanc.

Good afternoon. So interested in the sort of the quite part of your business in my opinion at least, the EDI revenue line which continues to impress with some nice growth. This is always – is there a way for us as we think about this revenue line going forward realizing again you don't provide guidance, but maybe you can help kind of give us some perspective here, kind of think about the components of the EDI business and where your penetration rates are. I assume this is lot of claims management, patient statements, but it sounds like basic things, but it’s been a great performer and how long can we expect this to continue? What are the sort of the greenfields within your client base and outside of your client base?

Donald, thanks for your question. Certainly the areas that you talked about are important areas also things like messaging included. The key way to think about this is, these are auxiliary products that are part of our core set of products that we offer to our ambulatory clients. Now there as a general basis included in the overall workflow of the clients’ operations and with a lot of different touch points. So one of the reasons that we continue to have good success in that line item is that we continue to enhance and increase the number of relatively small but important features and products that are all built within this EDI nomenclature. And they all tend to roll up over time. They are strategic to our clients because they enhance workflow capabilities and increase the overall experience as well as increase the financial viability of a small practice and medium practice and a large practice. So one of the reasons that keeps going is because we do have a lot of greenfield opportunity within our client base and outside of our client base. We're beginning to have much more connections and involvements with payers in this environment as payers have EDI kind of needs and request for data. If we expand EDI to talk about data monetization a little bit and the opportunities are there. So I think that the key is is that it’s a bundle of services that are interrelated and an important part of the operations of almost all of our customers. And it is one that we have with the exception over the last couple of years not have a lot of conversations with them and as we had more conversations, we find that there is more opportunities.

Okay. And then maybe one last one. I guess we are running out of time here, but when I look at the bookings in the quarter, the 60 million, were there any large deals that skewed in out of the quarter or is there anything we can think about there, how does that compare compositionally versus prior quarters?

Yeah, this is John. There is no individually large deals that skewed that number upwards from Q1. Mostly Q1, particularly low as they were relative to prior quarters. And I think that was just timing that last few – for Q1 this quarter it is more normalized.

Thank you.

Our next question comes from Mohan Naidu with Oppenheimer.

This is actually Mike Ott on for Mohan. Wanted to inquire about how the new CMS proposal around MU2 and MU3 earlier this month might impact you guys if at all around 90 attestation periods and that sort of thing.

This is Dan again. We have spent as many others have much of the last couple of weeks studying the reams of paper that came out of that. What I think it does is provide a greater degree of flexibility for our clients and that provides opportunity for us. At the end of the day, it’s a greater degree of opportunity and it also provides in some cases the ability to have more time and more flexibility from our side to provide the right levels of solutions to support it.

Great. Thanks. And if I could just ask a quick follow on, I don’t know if you can obviously [indiscernible] if you could update us on your search for the full-time CFO position.

I continue to both look internally and externally and evaluate our path forward. That is certainly something that I'm focused on, but that's really the only update I have right now.

Okay, thanks.

Our next question comes from Gene Mannheimer with Topeka Capital.

Good afternoon and congrats on the improvements you are making in the business, Rusty. The question came up earlier about the delay in NextGen Now. I just want to drill down because that, as we sit here today, that was running at least a year behind. What was it in your inspection of that business that led you to estimate a timeline of 2017 now and can you talk about how that could get expedited as you drill down on that? Thanks.

Thanks, Gene, I appreciate the question. Certainly for those of you who have heard from me in the past, you are aware of the fact that I do have a good deal of experience in delivering frankly net new solutions for my experience at Pyxis. As I really got in and examined where we were in the software development life cycle, I got a better understanding of where we are from requirements standpoint and then really worked hard between Dan and myself and some external consultants to really help the team come to what we felt was a truly actionable project plan, program plan. That's really where the date came out. Now, my job is to be transparent with my clients and my investors. And so that's where we sit today is 2017. That being said, I am right now, for example, aggressively looking for a CTO who has the ability to really drive this program forward. I am starting to bring in external resources to look at how we can accelerate that timeline and then I'm also looking across the marketplace to make sure that we've got a full exhaustive understanding of the capabilities that might be out there. And so I'd say that there's a number of levers that I am looking to pull more granularity as we move down the path here, but I am a believer in transparent processes, rigorous discipline and client focused execution. So I think you'll see all of those things start to really come to the table as we move forward through the next couple of quarters together.

Our next question comes from George Hill with Deutsche Bank.

Hey, good evening, guys. Thanks for taking the question. I guess if I think about kind of the little bit of guidance that you guys provided, it looks like that you have a nice step up in system sales this quarter, but it looks like it’s going to revert closer to that $16 million run rate in the back half of the year. I guess [01:00:24] kind of asked my question, I am going to ask it another way, was there any revenue concentration in the quarter in the software licenses or hardware line that kind of came through this quarter like was there anything that popped in that was unexpected? And I guess my thinking about the back half of the year right that that $16 million-ish run rate seems to be kind of the right way to think about how the business is trending.

This is John. So with regard to the current quarter, we had good deal flow. There was no single deals that skewed this quarter, particularly high against Q1 was low. With regard to subdividing some of the commentary I made regarding the second half into individual revenue streams, that’s more granular than we're prepared to get on this call.

How about maybe not asking about revenue streams, but how about can you talk about product strength? So is EMR products stronger than practice management, was practice management stronger because ICD-10 much stronger because it's Mirth and exchange functionality is kind of one of the hot topics right now? I guess can you talk about where you are seeing product strength?

Between EHR and EPM we never get that granular what we saw in terms of revenue streams. With regard to Mirth product, that’s one of the components of our subscription revenues. So you can see the trend in that number year-over-year and sequentially.

Fair enough. And then maybe Rusty one quick last one for you. As we think about when the NG Now product comes to market in ’17 will the plan be to try to migrate some of the smaller practices or some of the installed software client people up to NG Now or is the thought there that we are just going to go to new clients with that product and I guess I am trying to think about how much of the strategy is kind of preserve and defend the base versus how much of it is going to be to migrate to the new platform? Thanks.

Yeah, I think that’s going to be a little bit of an evolving discussion as we move forward. I mean certainly today we are delivering great value to our clients through our core flagship platform. But as we bring a cloud-based capability to the table that's more of a multi-tenant cloud based capability, I would think we would be attempting to do both. We feel like first of all that there is a lot of greenfield in the smaller physician practice space and certainly a cloud based product with a lower cost of operation is something that is attractive to that client base and so that would certainly be an area of focus. But we also feel like we can continue to provide more and more value and lower total cost of ownership not just through our hosting operations, but in migrating some of our larger clients to this cloud-based offering. So I guess, George, I’d say it’s kind of -- it’s probably a little bit of both.

Our next question comes from Garen Sarafian with Citi Research.

Thanks for taking the questions. Couple of follow-up quick questions at this point. One was, the last quarter you had indicated you weren’t seeing as robust of a replacement market for the core EMR and practice management solution, but obviously this quarter it was 43% in improvement. So how are you viewing the pipeline mix? Has your view changed or is it still for the next few quarters more likely weighted towards to greenfield opportunity?

This is John. So as I mentioned, our bookings this quarter had greenfield, we had opportunities in system sales, our CM. We also had sales to existing clientele. So it was pretty broad based. I think that the dramatic uptick in bookings again from Q1, Q1 was the anomaly. This quarter was more of what you'd expect. Dan, you want to add anything to that?

Yeah, the only thing I would add to that is that we have seen relatively the same mix quarter-over-quarter, some adjustments that vary by quarter, but again we haven't seen that overall mix change materially in a while.

Okay. And then just as a follow-up. On interoperability, you guys seem pretty comfortable with where you stand on interoperability, but it’s interesting that you are not part of the CommonWell Alliance that some of your peers promote. So I'm just curious, how do you view this alliance and what advantage does not joining give you in the market or maybe in perhaps product development? Just trying to get a better idea of how you are thinking in this area.

Yeah, this is Rusty. Look, I mean I look at interoperability as a great boost not just for us, but for the industry and the provider base and the patient base as a whole. There's a number of different standards out there. There is different organizations go after it. Honestly I think the work that we did with all the other EHR vendors as well as the provider community out in Utah, where we are really looking rather than looking at any individual body really stepping back and saying how do we as a community work to create interoperability not just to exchange data, but interoperability is actually used in patient care and how do we measure that as an industry and make sure that we're challenging each other and our provider partners to effectively bring that information frictionlessly across into a provider patient interaction. So we will continue to look at different bodies and different standards. As we sit there today, we are comfortable that certainly through our vendor agnostic open-source Mirth capabilities that we are already significantly contributing to the conversation and the realities of interoperability.

This concludes the Q&A portion of our conference. I will now hand it back over to Rusty for any closing comments or remarks.

Thank you and we really appreciate both the attendance and the questions today. As we look forward to continuing our journey on this path of further aligning our employees and our culture with the company's future goals and objectives, we will continue to deliver increased value to our ambulatory clients. We will continue to bring solutions to the market that allow these clients to quickly and easily adapt to evolving healthcare models. With healthcare continually changing at such a rapid pace, our employee culture is an incredibly important boost to our ability to remain flexible and to enable our clients to thrive. I'm grateful to our employee base who has been very receptive of me as the CEO and really excited about some of the cohesive culture that I am seeing emerging in the organization. I look forward to continuing the conversation with you, our investors, with our clients and with our employees. So thank you for your participation today. We look forward to keeping you appraised of our developments as we move forward in this exciting time. Bye now.

This concludes 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 58999378. 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.