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

Michael Cherny - Evercore ISI Mike Newshel - JP Morgan Sean Dodge - Jefferies Greg Bolan - Avondale Partners Sean Wieland - Piper Jaffray David Larsen - Leerink Donald Hooker - KeyBanc George Hill - Deutsche Bank Garen Sarafian - Citi Research Gene Mannheimer - Topeka Capital Zack Sopcak - Morgan Stanley

Welcome to the Quality Systems Incorporated Fiscal 2016 Third 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 Dan Morefield, Chief Operating Officer. Dan?

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 federal security laws including without limitation statements related to anticipated industry trends, the company’s plans, future performance, products, perspective and strategies. Risks and uncertainties exist that may cause results to different materially from those expressed in these forward looking statements, including those risks set forth in the company’s public filings with the US Securities and Exchange Commission including discussions under the heading Risk factors in the company’s most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q. The company expressly disclaims any intent or obligations to update these forward looking statements. These remarks may also contain non-GAAP financial measures. The GAAP financial measure most directly comparable to each non-GAAP financial used or discussed and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP measures can be found within our third quarter 2016 earnings press release in the Investor section of our website. Rusty?

Thank you, Dan. And thank you all for being on the call today. I am excited to share our results and progress with you on my third quarterly call as CEO of Quality Systems. As I’ve mentioned to many of you over the past several months, we are at the beginning of what we believe will be a very positive and transformational journey for QSI NextGen, a journey that started with the board’s conviction and decision to hire a new CEO approximately six months ago. Our third quarter results underscore the emphasis we are placing on bottom line discipline even as we work diligently to reignite solid top line growth through improved and expanded solutions for our clients. Since joining the company, I have endeavored to gain a full understanding of our strengths and challenges while challenging myself and the team to think about how we continue to enhance the experience with our solutions for our over 90,000 users and in turn of course we are focused on uplifting the value for investors of our remarkable ambulatory client base which includes more than 7,000 clients. Specifically while we understand our core software market as highly penetrated with conventional EHR and EPM solutions, leading to a macro slowing and therefore more variability in the timing of conventional system sales we feel confident that the transformational changes in the healthcare industry and continued advancements in information technology creates significant opportunities for future growth. Therefore, we are taking very firm intangible steps that we believe over time will initially provide disciplined earnings growth followed by faster growth in profitable revenue. Since my arrival, our team has made progress on a number of dimensions. Going forward we will talk about the business across five areas of strategic focus. Cloud transition; reducing our clients’ total cost of ownership as well giving them continuous access to new capabilities. Second is focus on the ambulatory market; delivering a great client experience, investing in new ambulatory capabilities and divesting non-core assets as exemplified by our sale of our hospital solutions division. Cross-selling, as we move through FY17, ensuring that we are selling and delivering the breadth of our solution to our clients through better commercial structure, sales processes and a compensation plan that incents cross-selling. The fourth is better use of capital. Continued and increased focus on the margin and cost line to both grow earnings and create dry powder for future investment, both organic and inorganic. And, finally, population health software and services; developing solutions that enable our clients to thrive in the emerging value-based healthcare economy. We will be working through FY17 to build out the capabilities that will drive meaningful revenue growth as we move into FY18. Today I'll mention a few of the areas of progress across these strategic dimensions. Within cloud transition, I would like to highlight our recent close of the HealthFusion acquisition, our largest to-date. This transaction opens up a new market for us, the small physician segment while over time creating a pathway to the cloud for our larger clients. HealthFusion had their best bookings performance to-date in their last quarter prior to close giving us confidence that they are on track to hit their $43 million revenue target for calendar year 2016. With our focus on the ambulatory market, we see meaningful increase in our client satisfaction scores as measured by our Voice of the Client program. We remain very focused on the client experience and Dan will share more on this – in this area later in the call. We are also continuing in our drive to make better use of capital. The beginning of our cost reduction program is starting to be reflected marginally in this quarter's result. An example of this program is the closing of our Austin office. We expect this focus on the earnings line to continue and accelerate into FY17. However, no strategy is achievable without the necessary personnel and capabilities. We are continuing to build out both our management team and key roles throughout the company. To that end, I would like to discuss the hire of our new Chief Technology Officer, David Metcalfe. Prior to joining QSI NextGen, David served as Vice President of Product Development at CareFusion from 2012 to 2015. CareFusion was acquired in 2015 by Becton, Dickinson and David continued with BD in a position of increased responsibility through January of 2016. Prior to CareFusion, David served as Vice President of Research and Development at Allscripts from 2004 through 2008 and as Director of Software Development for Hill-Rom IT Solutions from 2004 to 2008. Correction; at Allscripts from 2008 through 2012. We're excited to bring David on to the team and feel his contributions will be essential as we increase both the quality and velocity of our client focused innovation activities. We continue to make great progress as we move towards FY17, a year that we call building a platform for future growth. Our focus during this year will be on creating a nimble capable organization structured to efficiently deliver on emerging strategy as well as continuing to deliver increasing performance on the EPS line as we build the capabilities that will drive meaningful revenue growth as we move into FY18. Now I'll turn it over to John to talk numbers.

Thanks, Rusty, and hello everyone. I am pleased to present to you QSI's third quarter and year-to-date fiscal 2016 financial performance on today's call. Our revenue for the quarter reflects the disposition of our hospital business unit prospectively from the mid-October sale date. Previously reported quarters have not been retrospectively adjusted. Reported revenues for the current quarter were $117.0 million compared with $123.4 million reported in the year-ago quarter and $125.4 million for our second quarter of fiscal 2016. On a pro forma basis, excluding the hospital business unit, revenues for the current quarter were $116.4 million versus $118.4 million for the year ago period and $122.2 million for our second quarter of fiscal 2016. The overall downtrend in quarterly revenue both on a sequential and year-over-year basis principally reflects the hospital unit sales as well as choppiness of the ambulatory software license sales and the impact on related professional service revenues and maintenance. Software revenue for this quarter also reflects the deferment of approximately $1.6 million associated with a significant customer order due to accounting requirements related to custom software enhancements. Our Q3 period has also historically reflected impacts to our professional services revenues specifically holidays and our annual user group meeting, an event focused on the client experience. Revenue cycle management and EDI related revenues have continued to represent a source of growth both sequentially and as compared to the year-ago period. Our revenue streams continue to be roughly 80% recurring in nature. On a year-to-date basis total revenues are $364.6 million, up 1% from $361.8 million for the comparable period in fiscal 2015. Excluding revenues of our disposed hospital business unit pro forma year-to-date revenues are $357.1 million versus $348.5 million for the year ago period, an increase of 2.5%. Total contract bookings for the quarter were $52 million reflecting a sequential decline from the $60 million reported in Q2. This decline is attributable mostly to a drop in RCM contracts signed in the quarter. As we have mentioned on prior earnings calls, our RCM bookings are a significant source of volatility in our quarter-to-quarter bookings metric due to the varying lengths of such contracts. We believe that given the volatility of our current metric and the growing impact of recurring revenue streams, it would be more beneficial for us to provide the expected value of the current bookings on a 12-month basis rather than the multi-year expected contract value that we have used in the past. The expected value of the current quarter bookings on our new basis of reporting is $36 million, nearly flat with $37 million generated for the second quarter of fiscal 2015, but down from $42 million for the year-ago quarter. The decrease from the Q3 2015 book reflects a combination of lower system sales and RCM transactions. Gross profit for the current quarter is down sequentially and as compared to prior year due to the relatively low revenue we posted for Q3. On a year-to-date basis, however, gross profit increased by $3.7 million or 2% due to the growth in revenues for the nine month period. Gross margin for the current quarter was 54% which compares to 55% for Q2 and 56% for the year ago quarter. These margin declines principally reflect the relatively low license sales in the current quarter and a mix shift toward RCM and EDI revenue. On a year-to-date basis, our gross margin is 54%, flat with the year-ago period. SG&A, excluding amortization of intangible assets, decreased 5% from the year-ago period inclusive of $1.8 million loss on the disposition of the hospital business unit in the current quarter. Excluding the current quarter loss on disposal, SG&A would have decreased 9% versus the year-ago period with cost reductions spanning a variety of categories reflecting our focus on expense control. Though SG&A did grow sequentially Q2 benefited from favorable timing of costs as we mentioned in our earnings call last quarter. Total gross R&D investment for the quarter decreased sequentially and from the year-ago period mostly due to the disposition of our hospital business unit and a reduction in third-party consulting costs. We capitalized $4.9 million in development cost this quarter representing a 25% capitalization rate. By comparison, our capitalization rate was 15% for both Q2 of this year and Q3 of last year. The current quarter capitalization rate benefited from the timing of project development efforts. Net R&D operating expense decreased to $14.5 million this quarter or 12% of revenues, reflecting the decrease in gross investment and the relatively high capitalization rate. Our GAAP effective tax rate for the current quarter was 13.5% compared to 17.9% a year ago. The exceptionally low GAAP tax rate in both periods reflects the timing of expiration and congressional reinstatement of the federal R&D tax credit. Our non-GAAP effective tax rate for the current quarter is 30.5% as compared to 24% in the year-ago period. As previously announced, we commenced 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. For fiscal 2015 we have not yet adopted a static rate which accounts for the volatility in our quarterly non-GAAP effective tax rate for fiscal 2015. On a GAAP basis, fully diluted earnings per share for the current quarter, was $0.12 as compared to $0.11 per share reported in the year-ago quarter. On a non-GAAP basis, fully diluted earnings per share for the current quarter, was $0.16 flat with the year-ago quarter. On a GAAP basis, the reduction in operating expenses mitigated the impact of lower revenues. On a non-GAAP basis, adjusted pre-tax income grew as adjusted operating expenses declined, partially offset by the low non-GAAP tax rate a year ago. On a GAAP basis year-to-date fully diluted earnings per share was $0.36 as compared to $0.27 for the year-ago period. On a non-GAAP basis year-to-date fully diluted earnings per share was $0.53 as compared to $0.41 last year. On both the GAAP and non-GAAP basis, the increase in year-to-date earnings per share is due to the higher level of revenue, the result of increase in gross profit and the reduction in total operating expenses. With regard to the balance sheet, total liquidity remained strong with cash and investments totaling $105 million. This balance reflects a sequential decline attributable to our dividend payment. Our turnover of receivables was flat sequentially with both quarters at 72 days. Moving on to revenue trends by business unit, our ambulatory unit posted $88.7 million this quarter as compared $92.1 million a year ago, that’s a decrease of $3.4 million or 4%. Our dental business unit posted $4.7 million in revenue this quarter as compared $4.5 million a year ago, an increase of $0.2 million or 5%. The hospital business unit posted $0.6 million for the partial quarter, this quarter, as compared to $5 million for the full quarter a year ago, a decrease of 4.4 million or 88%. Our RCM business unit posted $23.0 million in revenue this year versus $21.9 million a year ago, an increase of $1.1 million or 5%. Our consolidated revenue again $117.0 million versus $123.4 million a year ago, a decrease of $6.4 million or 5%. I'll now move on to a recap of select non-cash expenses for the quarter as follows. Amortization of capitalized software $2.5 million, amortization of intangible assets $1.8 million, depreciation expense $2.1 million, stock compensation expense $0.7 million, bad debt expense $1.1 million. Our investing activities for the quarter were as follows; internally generated capitalized software $4.9 million and investments in fixed assets $3.9 million. This concludes my review of our financial performance for the quarter. With respect to our outlook for the fourth quarter, I'm limiting my comments primarily to qualitative considerations. As of now we are not prepared to issue formal guidance. We are, however, internally addressing the predictability of key business drivers as a pre-requisite for meaningful guidance. We will provide updates on our progress in this area on our next quarterly earnings call. Similar to our experience in the first three quarters of the current year, we anticipate continued short term choppiness in quarterly revenues. In light of our near-term revenue environment, we will continue to monitor and manage our expenses proactively to help ensure we achieve a robust bottom line result. Our revenue and earnings for Q4 will reflect the acquisition of HealthFusion as of January 4, 2016. I want to thank you all for being on the call and for your continued interest in our company. I'll now turn things over to Dan Morefield, EVP and COO of Quality Systems.

Thank you, John. Our annual User Group meeting in November was highly successful as we had thousands attend the three-day event with over 250 educational sessions. One of the noticeable changes was around our clients’ positive sentiment on the work we're doing to improve client satisfaction. All of our internal client satisfaction metrics reflect a steady four quarter increase. The overall voice of the client satisfaction score increased 15% just in the last quarter. These results could be attributed to increasing quality and usability of our latest KBM release, the ICD-10 upgrade experience and an overall increase in satisfaction with our client services teams. Our clients are experiencing quicker responses to their inquiries with materially higher same-day resolution to issues and questions. I expect these near term indicators of client satisfaction will show up later in lagging indicator report such as class. RCM services had a record quarter and is on track for another year of double-digit revenue growth. We typically see our collections impacted in our fiscal year fourth quarter impacts due to the reset of patient deductibles and the unpredictable nature of winter storms. Our client satisfaction in our best-of-class RCM services remain high as we help our clients successfully navigate this complex payment environment. We've continued to be disciplined in the use of our resources. We closed our Austin office while retaining much of the research and development talent. We have reduced our reliance on third-party R&D consultants as we have enhanced our internal ambulatory development capabilities. Finally, we have reduced our professional services team to be better aligned with the current market demand for training and implementation services. Core ambulatory sales benefited from a number of enterprise clients, such as Gateway Foundation and ADCS Clinics, LLC. ADCS also known as Advanced Dermatology and Cosmetic Surgery has been a NextGen EPM client since 2005. ADCS is implementing our EHR patient portal and population health management across our 130 plus practices. Gateway will increase our overall user base by over 600 as they implement our full suite of products, including EDI services and hosting. As we enter our third year post the Mirth acquisition, we enjoyed record Mirth bookings in Q3. Wrapping up the call this morning, we had 70 new arrangements on a consolidated basis versus 61 in the prior quarter. 56% of the arrangements were Greenfield and 44% were replacements. Discounting did not materially change in the quarter. Thank you for your continued interest. Paulie, I'd like to turn it over to you for questions. Thank you.

[Operator Instructions] Thank you. Our first question is coming from Michael Cherny with Evercore ISI.

So, I want to focus on...

Michael, I think we missed the first part of your question. Could you start again?

No, no. I just wanted to send my greetings. So first I guess the positive question and then I will have one of the more challenging questions. Clearly, a lot of operating expense leverage over the course of the quarter, if you think about where the cuts came both on the SG&A line, &D line, how much of that do you think was tied to essentially the precuts related to bringing on HealthFusion. As we think about the leverage into next year, obviously not providing guidance, but just much more conceptually, are those two areas where there is more room for optimization as you combine the two businesses, is SG&A an area where we need to reinvest as you go out to small physician market, just trying to get a sense for directionally how we should see those progressing.

Yes. Michael, I would say -- first of all, I’d say that while some of it was certainly tied to HealthFusion, our view on HealthFusion is that it provides a great complimentary value for the organization and actually see that more as we move forward as an area where we will invest, but we will invest prudently based on growing -- looking into 2018, and how do we really truly grow the revenue footprint of that organization or FY18 excuse me. I think as you look forward, I think, to a large extent, we as an organization have been built through acquisition over the years and as I've discussed, we’re really renewing and pivoting a little bit our strategic focus. Part of what the job will be as we really truly bring that strategy to life is building an organizational structure that is optimized to achieve that strategy. As we take this organization to some degree has been built through acquisition and turn it into a very tight structure focused on achieving the strategy, we feel that there will be cost following out of that transition. Does that help?

It does, Rusty. And then if you think about, this is the challenging question I promise both. If you think about the moving pieces of the P&L, and I guess if you could rank order them by line item, as you see the business as it stands right now, where are the ones on a revenue base where we have the most degree of confidence versus where are the ones where you think you’ll see overtime the most volatility?

Well, I mean I think as we said in our comments, especially in the largest part of the market, it’s really transitioning to a replacement market, which means new system sales and new placements are by nature volatile at this point in time, and I think the last couple of quarters have shown that. I expect that to continue. That being said, as we’ve talked about, we’re an 80% recurring revenue company and so that base we feel is solid today and will become increasingly solid as we continue to expand our efforts on the voice of the client. And so I would say that, and from a positive volatility -- well, from a positive trajectory standpoint, as I said, HealthFusion had their best bookings quarter in their history and we feel confident that they’re well set up to deliver on the growth number that gets them up to the 43 million in next year.

Thanks, Rusty. I'll let some other guys hop in.

Great. Thanks, Michael.

Your next question will come from the line of Mike Newshel with JP Morgan.

Hey, good evening, everybody. Now that you've named a new CTO, how long do you think it will take to get them in there and be able to evaluate the NextGen Now development and determine if there is any potential to accelerate the launch time on there?

Yeah. So let me answer that in a couple of different ways. First of all, the new CTO will be starting on Monday. So not very long from now, but naturally, it will take him some time to come up to speed. Now, he does have experience in the EHR EPM market with from his four years at Allscripts and so I expect him to get through the evaluation of where we are on the NextGen Now program quickly, but just to refresh your understanding, as we look forward, we are looking at what capabilities from the platform development that made up NG Now can we leverage as we move into population health software whereas more -- on the HER EPM side, we're really looking at how do we expand our development efforts in both HealthFusion and our NextGen ambulatory platform to be able to overtime bring those together into a good solid EHR EPM platform. Good scales all the way from enterprise customers down to small clients. Is that helpful?

Very much, thank you. And how about, is there any update on the timing for the CFO search as well?

I continue to be very aggressively moving forward on that search, but naturally, given the materiality of the nature of the hire, it’s something that I really won’t discuss until the date that I announce.

Great, thank you.

Your next question will come from the line of Sean Dodge with Jefferies.

Hi, good afternoon. Thanks for taking the questions. Maybe a little bit of a spin on what Michael had asked earlier, but back before the HealthFusion acquisition and the dividend cut you guys talked about, net R&D spend at around 15% of revenue, with all the projects you've got going on now, has that view changed at all, and I guess what I am asking is, is R&D going to be one of the primary buckets where you are planning to redeploy some of the capital from the dividend cut?

I would say that first of all, I feel like 15% is probably an appropriate number until we make sure that we have the return on invested capital of that 15% to make it an effective deployment. And so if we show that we can spend 15% of our R&D dollars and generate great value for the clients which generates value for the investors, then perhaps we will look at that as a source of increasing leverage as we go forward, but today, we’re committed to that 15% number and last maybe transitionally as we start to continue to build out the strategy I would say that the dividend cut is much more focused on two things. Number one, on making sure that we’re reinvesting money and driving client value, but most notably in building dry powder on the balance sheet to help us also be able to leverage inorganic opportunities to drive value for the client base, as well as the organic opportunities that that 15% is driving.

Okay, thank you. And then John had mentioned the quarter was a little bit weak in terms of RCM bookings, realizing we are only about a quarter beyond the ICD-10 transition, is it still the view or the hope that that market is really going to begin to open up here over the next few quarters and we will see demand for RCM search.

Hi, let me answer that. As I said earlier, we still think that RCM is a growth opportunity for us. We still, as I mentioned in my prepared notes, believe that we will have a double-digit growth in revenue this year, and while we’re continuing to study the market and don't have a specific answer to your question, it is still an area where we believe there is a growth opportunity and one that we will continue to focus on.

Yeah. Let me just carry that just a little bit further. I think classically, the bread-and-butter of this organization has been in software sales. The RCM sale is a different somewhat more complex sale than software sales, and so as I stated in my opening remarks, focusing not just on cross-selling is something we need to do, but cross-selling is something we have both enabled and incented and are expecting throughout the organization. I think those are affirmative steps that you will see us making as we move into FY17 and as we move through FY17, I would expect to see those results start to show up on the revenue line.

Understood. Thanks again.

Thank you.

Your next question will come from the line of Greg Bolan with Avondale Partners.

Hi, guys, good afternoon. So Rusty, can you go back or Dan, can you go back and explain again this new contract value that you were looking to initiate I guess in replacement of the revenue cycle, bookings metric?

Let me just touch on this really quick and then I will pass it over to John. One of my intents is always to make sure to continue to migrate to providing numbers that are helping our investors truly understand what's going on. And so when we have numbers that are maybe a mix and not as actionable as they could be, we’re looking to provide an apples to apples, as well as a new set of oranges to help you better understand the business and so, John, I’ll turn that over to you.

Yeah. Let me clarify, the old booking statistics and the new booking statistics still include all revenue sources. The only difference is the new statistic is measuring the predicted economic value over a 12 month period, as opposed to counting the multi-year tale that some of our RCM contracts have, it’s that multi-year tale in the old method that created the excessive volatility in the quarter to quarter numbers. The new method as you’ve seen is creating less volatility and he seem to be more representative of what you can expect in near term results.

Okay, I got it. That’s guys. That's very helpful. And last question, I think, Dan you had mentioned record Mirth bookings. So can we just maybe delve into Mirth for a bit, it just seems like this is really the bridge, the HIE highway that's going to enable NextGen to really kind of connect to those evolving health systems and potentially kind of keep your seat at the table as well as maybe even displacing others at the table as some of these physician practices grow within these health systems. Is that kind of what you’re seeing play out like is, this Mirth has come up as a vehicle by which you are maybe kind of speeding past some of your other competitors and displacing some of the, maybe even the integrated acute ambulatory vendors, but probably more so my question would be related to the kind of sole ambulatory players that are out there?

The Mirth product line, both currently and the future has a number of critical values stores. First of all, in just the HIE space, there is no question that Mirth is one of the best HIE products on the market and we continue to see our ability to displace other HIE vendors in the replacement HIE market. So that's part of a stand-alone piece. Then the whole issue of interconnectivity and interoperability being the future of overall health care, HIT healthcare becomes an important part and Mirth is playing a central role in that. It plays a central role and NextGen share, and our ability to connect not only among all of our NextGen users, but with significantly other networks as well, to be able to begin to bridge this gap away from specific vendor networks. The third piece that Mirth really provides to us is we have a number of critical components, including the HIE and Mirth Care that are critical for our future population health management offerings. So it's a combination of specific products, products that augment NextGen Ambulatory products and experience, as well as products and services that are a critical part of the future population health management.

Okay, that's helpful. Just a real quick follow-up. So would you say that your physician hospital organization footprint has improved since the acquisition of Mirth and do you feel like that that's been a big driver of that, if it has improved, I suppose?

I believe that our position within the large hospital footprint is better today with Mirth than it would have been without Mirth. The very specific details and metrics, I don't have off the top of my head.

That’s great. Thanks.

What I would say is, I think Mirth is a key part of our going forward strategy that that interoperability and that ability to deliver the longitudinal view of the patients is the foundation of a future strategy of delivering the applications and analytics to help our clients truly manage a their covered life.

Thanks guys.

The next question will come from the line of Sean Wieland with Piper Jaffray.

Thank you very much. What kind of interests have you gotten among your NextGen base to migrate over – begin thinking about migrating over to HealthFusion?

Thanks, John. Appreciate the question. Interesting enough, we've had a number of enquiries across various different sizes, scopes and specialties, but at this point, it's really with the exception of a couple of very specialized cases early. And so the answer to your question is, is that we’ve got enquiries and people are considering a different component, but it’s very, very different based upon the unique needs of the specific client that we had and not in any way a general trend.

Yes, Sean, let me just add a little more color to that. We're three weeks in now into the deal, CTO joins on Monday next week. Fielding those questions to a large degree is a function of the roadmap of capabilities as we expand the capabilities of HealthFusion as we move through this calendar year and next calendar year. And so I would expect us, as we – certainly as we get towards our June Analyst Day to have a much crisper roadmap and a much crisper answer to how do we look at our client base and how do we see that client base footprint evolving between NextGen Ambulatory and HealthFusion as we move through the next two years.

All right. And you talked about some pro forma numbers, excluding the hospital divisions, can you talk about maybe a pro forma bookings number including HealthFusion, basically what was HealthFusion’s bookings?

Well, this is John. So we didn’t own them in the quarter, so I don’t want to go over what their bookings were, but the quarter ended December. But as Rusty pointed out, their bookings and their revenue were highly correlated since their month-to-month SaaS arrangement, and he has indicated that we believe they are going to be on track to hit their $43 million next year in revenue and that would equate to a bookings number for them for next year.

Okay. Just if I can slide a couple more in here, your new bookings expected value, could you fill in some of the blank spots on my model on what that was on a historical basis or provide that off-line, just that [indiscernible]?

I understand. A few data points for you. So as it cited the number for Q3 ’15, Q3 of fiscal ’15 was $42 million, Q4 fiscal ‘15 was $45 million, Q1 of fiscal ’16, $29 million, and that actually corresponds as you will all recall with a weaker quarter for us. Q2 rebounded to $37 million and Q3 is $36 million.

Oh, I think I got those wrong. And so hang on a second, sorry, I think we’re all catching this. And then – and so what was Q3 of ‘15?

$42 million.

42, I got those backwards. Okay. And are you running maintenance through that?

Yes.

So you’re running everything through that.

Yes.

Okay. Were you running maintenance through your old bookings number?

Yes.

Okay. One last one, if I could, you mentioned in the release about, we’re restructuring the sales organization, and I didn't really hear many comments around that, could you give us some detail around the salesforce reorganization?

I guess, I’ll talk qualitatively. As we move into our placement market from a Greenfield market especially at the larger end of client size. I think it's important to change our approach to be much more client focused on a consistent basis and constantly looking at how is their strategy evolving, how do we make sure they’re having a great experience. And then how do we also position the right evolutions with our system at the right time. And so it's really starting to migrate to more of a higher touch sales effort at the larger, while still hunting in the middle tier of the market and still selling from the inside in the small side of the market. With that different structure as well folks will be much more accountable to carrying the entire solution not simply the software piece or the RCM piece. So it creates a more consistent and intimate relationship with our clients that’s what I believe will be an overall favorable cost structure.

All right, did you layoff reps?

We have not.

Your next question will come from the line of David Larsen with Leerink.

I think you mentioned that HealthFusion that their best bookings quarter ever. Can you give a little bit more bit color around that like any sense for who they are winning share from, is it primarily the EMR practice management solutions for physician practices any sense for the size of those practices, are there other products that HealthFusion has that are selling well, thanks?

I think it mostly; I mean it mostly comes from their core offering. And it’s actually interesting that is spans clients of a number of sizes. We don't want to get too deep into it because as John stated, a lot of this is from a company we acquired and frankly before we talk too much about it, we need to validate and verify the numbers and make sure that they meet our standard as a private company gets acquired into a public company. But I would say is, is that they saw more large larger size deals for them then they have in the past. Some are running up to the multi-hundred thousand dollar level. And so I think that what we’re seeing is we’re seeing them continue to leverage having a great user experience, a great touch-enabled product that is very much set up for that part of the market and continuing to sell against some solutions that are giveaways and yet still generate great progress. Their consistent performance exemplified by having their largest bookings quarter. It's not necessarily that this was an outlier; it just shows steady and consistent performance as they continue to grow. We are very gratified to see that like I said it gives us great confidence in both their ability to hit our numbers now as well as it gives us great confidence once again in validating the user acceptance of their solution.

Okay. And then with Mirth, do you now have sort of the financial piece of population health management sort of terms built into Mirth. So if a group wants to accept actuarial risk from a plan, can Mirth help them manage through that and look at you know budget for the lives and reconcile the claims of the budget is that something Mirth can do now or is that something you’re going to create or implement with Mirth?

I talked about this a little bit in some remarks at JP Morgan conference. And what I said was, we right now have established some very strong development partnerships with some large physician led ACOs that are today engaged in shared risk contracts. And we are bringing that data together and helping them build out the analytics necessary to make sure that they are not just finding out how they did at the end of the year but are able to actually control those results as we move through. But what I would say is, it is early days in that part of the market. We have a number of population health capabilities including our emerging outreach capability that are helping clients today but as we step back and really understand the solutions that are going to win during this migration, the value based reimbursement, we’re really stepping back and taking a look at where our clients are building those data platforms and then working with them tightly to understand the capabilities necessary to truly drive value for them and revenue for us as we move into FY18.

Your next question will come from the line of Donald Hooker with KeyBanc.

Good afternoon, thanks for taking a couple of questions. So I just you know with the hospital business coming out and HealthFusion coming in, I just want to make sure I get some of the dynamics between some of the line items if you don't mind. So the software subscription services, [indiscernible] so I'm sorry if you mentioned this. It looks like it was kind of down sequentially, I would -- it surprised me a little bit. Can you elaborate on I assume that a lot of that is Mirth but can you elaborate on some of the trends in that revenue line and the subscription services?

So this is John. So that subscription line includes a number of things, a good amount of Mirth is in that line, our hosting, our dental PDW product, patient portal product and the majority of that decline was the disposition of our hospital business unit in the current quarter. As many of the lines were in our P&L from Q2 and Q3 were largely impacted by the hospital business unit. We also in the past couple of quarters had some significant customers on cash basis revenue recognition, so we have less of that this time.

Okay, I got you. Okay that makes sense, I didn't think of that being in that line. I apologize and I guess that's probably true for the support and maintenance as well.

Most of the drop hospital again.

Yes, yes, got you. And then, I guess maybe one last question I'll jump off. In, I guess over time you talk about I guess ultimately migrating sort of legacy next gen users to I guess division is to sort of a HealthFusion like cloud platform. I mean what is the revenue generation from you for that service, that migration I mean do you sell them, I guess is there an extra fee associated with that or do you get revenue as they migrate potentially over time, and I guess this will be a longer term question but how should I think about that?

I mean, I would think about it as a long-term questing. Certainly we are -- right now we are simply focused on the blocking and tackling of integration and then starting to have conversations with the HealthFusion team about how we can be intelligently augment their R&D capabilities but that certainly some that we will be working through and addressing as we move through this year.

Our next question comes from the line of George Hill with Deutsche Bank.

Hey, good afternoon guys and thanks for taking the question and Don stole my question about maintenance revenue. So I guess I'll follow that up with, can you talk about what have happened in the maintenance revenue ex the hospital's business would that have been up or down sequentially this quarter?

This is John, excluding hospital, it still would have been down in the sense that our new system sales which have been lower this year than last year have added less maintenance revenue to the pool then we’ve seen in the past. So it still would have been down. We also in a given quarter do have sales return adjustments and credits and other accounting adjustments that tingle up or down. This quarter happen to be a net down and that put pressure on the number as well.

I guess can you, what drives a negative sales adjustment in the maintenance line other than clients churn?

The negative accounting adjustment or negative directional movement?

A negative churn would obviously be a negative directional move or would drive negative accounting adjustment.

If sales returns reserves that are applied to different line items in the P&L and they are a function of, the concept sales return reserve, you think it pertains only sales revenue line item, it does not they can affect all of our revenues line items. And sales credit sometimes maintenance as you'd imagine can be currency related to addressing matter of client satisfaction because it's convenient to use that sometimes a month of free maintenance let’s say to address concern pertaining implementation from six months ago. So in the sense it would be used as a form of currency, it can be go up or down in a given quarter depending upon the extent to which you’re resolving client matters and part of the thing reduced our DSO is you know to unlock cash balances that have been held up in the past, we may end up revolving an old item with regard to client satisfaction through the maintenance line item that’s an example.

And then just lastly, on the new bookings metric, so we know that there is a combination of kind of software services and maintenance services that are rolled up into that number. I guess I just want to ask if we look at the numbers for the five quarters that you gave us has that mix historically been stagnant or [indiscernible] normally been fixed or does the software component to maintenance component bounce around the line and if that's the case will you provide any more color on that?

We're not going disaggregate it and the software bounces around just like it does in the face of our P&L and there is not much I can do about that part.

I think George, I think we're kind of at their lowest level that we plan to provide there but yeah, it is, I mean you see the volatility in the top line with the choppy topline revenue and that choppy topline revenue also shows up in that booking number.

Your next question will come from the line of Garen Sarafian with Citi Research.

Good afternoon guys, thanks for taking my questions. Just a couple of clarification questions actually. You sort of touched on next gen in terms of still having meetings to figure out where you guys are going with HealthFusion. But has there been any decision as to portions of the next gen components that you've invested in no longer being required or is it able to be repurposed or what you do with those portions, is it I mean can you solve that to a willing buyer or you can clarify that if any decisions have been made?

Yes, I mean I think as we’ve said in prior calls, we’re evaluating the applicability of the work done on NG now to future strategies. The hiring of the CTO is a material event in that evaluation and so once the CTO comes on board, I will expect that -- one of the first roles of the CTO is to understand the applicability of that software to future strategy and based on that we'll make decisions in coordination with our orders.

Got it, fair enough. And just to follow up. So, John and may be Rusty, you guys sort of touched on, yet I wanted to just clarify, you mentioned some commentary about more formal guidance. So, are you contemplating issuing formal guidance or just what metrics will provide or if you could just clarify as to how you guys are thinking through it?

So certainly from my standpoint, my preference is to provide guidance to our investors. However, I will only provide guidance when I feel like I'm providing a number that our investors can make decisions based on and that has credibility. So to that end as John stated, we are now looking to really get our hands on those input levers and as I bring in a new CFO, and my expectation is that when the CFO says I am ready we will be providing guidance.

The next question will come from the line of Gene Mannheimer with Topeka Capital.

Thanks good afternoon. What else can you tell us about HealthFusion? I realized it's a SaaS model. How is that revenue stack up with your traditional next gen line item say across EDI and services? And then how should we view the organic growth of HealthFusion?

This is John, I mean, almost all of their revenues are subscription and that would flow into our revenue line item on our P&L where Mirth flows and I mentioned earlier in the call that’s on the subscriptions row. And the little bit they have that’s EDI would flow into our EDI line item. They don't have software sales, they don't have maintenance, they don't have RCM currently. So they would show up in any of those line items.

And how do we look at the organic growth of HealthFusion?

I mean, I guess I'm going to kind of wind all the way back to what I said at the announcement which is HealthFusion is generating meaningful double-digit revenue growth. We acquired them, we said it was number north of 30, our expectation is, is that they are going to hit 43 or in the neighborhood of that this year. And by the neighborhood, my hope is a neighborhood above it. And so, I think you can extrapolate from there a number somewhere north of 30 turns into a number of 43. But we really haven't talked beyond that from a standpoint of growth percentages. Now what I will add the fact that they do deliver meaningful SaaS based EBITDA and we absolutely expect HealthFusion to represent an accretive ad of $0.11 to $0.13 of EPS as we move into FY17.

Your next question we come from the line of Zack Sopcak with Morgan Stanley.

Thank you for the question. And just piggybacking on your last comment, is there any accretion expected in the fourth fiscal quarter of FY16 or should we just think about the $0.11 to $0.13 for next year?

This is John, we are not giving any guidance for our fourth quarter and only guidance we’ve given with regard to HealthFusion is our fiscal ‘17 year which starts in April.

What I would say is, is that you can assume that they are a growing business that we have a full quarter of contribution in Q4.

Got it, that’s helpful thanks. And then could I just ask on the RCM revenue line, the year-over-year growth, is that -- so in the first half of your fiscal year, close to 20% growth in the third quarter mid-single digits. Is hospital related to that changing growth at all and I know you reiterated 10% or at least double digits for the full year?

We had very little if any impact from the hospital sale on the RCM line item. So I don't think those two are related.

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