Mark Davis - Head of Investor Relations Rusty Frantz - President and Chief Executive Officer James Arnlod - Chief Financial Officer

Mohan Naidu - Oppenheimer Elizabeth Anderson - Evercore ISI Jeff Garro - William Blair & Company David Larsen - Leerink Garen Sarafian - Citigroup George Hill - Deutsche Bank Nicholas Jansen - Raymond James Sean Wieland - Piper Jaffray

Welcome to the Quality Systems Incorporated Fiscal 2016 Fourth Quarter and Year-End Results Conference Call. Hosting the call today from Quality Systems is Rusty Frantz, President and Chief Executive Officer, Jamie Arnold, Chief Financial Officer, and Mark Davis, Head of Investor Relations. 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 hand the program over to Mark Davis, Head of Investor Relations. Please go ahead.

Thank you, Christine and welcome to the call. Before getting into the substance of our discussion, I would like to remind everyone that the comments made on this call may include statements that are forward-looking within the meaning of federal security laws including and without limitation statements relating to anticipated industry trends, the Company’s plans, future performance, products, perspectives and strategies. Risks and uncertainties exist that may cause results to different materially from those expressed in these forward-looking statements, including among others those risks set forth in the Company’s public filings with the US Securities and Exchange Commission including the discussion under the heading Risk factors in the Company’s most recent Annual Report on Form 10-K and any subsequent quarterly reports on Form 10-Q. Any forward-looking statements speak only as of today. The company expressly disclaims any intent or obligation to update these forward looking statements. Our remarks on today’s call include both our earnings results and guidance which contain certain non-GAAP financial measures. For earnings results, the GAAP financial measures most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found within our fourth quarter and full fiscal year 2016 earnings press release that was filed with the SEC and it’s posted in the Investor section of our website. This release also provides qualitative description of how we have calculated non-GAAP financial measures contained in our guidance. At this time, I’d like to turn the call over to Rusty Frantz, President and CEO of QSI NextGen.

Thank you, Mark, and good morning everyone and thank you for joining today’s call or good afternoon, pardon me. As previously mentioned, I am joined today by Jamie Arnold, our Chief Financial Officer. On April 27, we disclosed the results of our business strategy review, as well as the preliminary results for Q4 and FY 2016, as well as guidance for FY 2017. During that call, we discussed that going forward, we will continue to invest in our next flagship NextGen platform as a key element of our focus on ambulatory care market while continuing to evolve our newly acquired MediTouch platform across new specialties and the clients of increasing size and complexity. Finally, we talked about our realignment into a single, functional-based organizational structure focused on delivering a consolidated solution on integrated simplified and excellent client experience and a focus on overall corporate strategy, all while ensuring that we get maximum value from every dollar we spend. The financial results announced in today’s press release confirms the Q4 and the fiscal year 2016 are inline with the preliminary results we announced on April 28 and that we reiterate our FY 2017 guidance of $508 million to $522 million in revenue and $0.78 to $0.86 in non-GAAP EPS. As stated in our opening remarks, our FY 2017 guidance is a forward-looking statement, risks and uncertainties both known and unknown including but not limited to those contained in our filings with the SEC may cause results to differ materially from those expressed in our forward-looking statements. Since we will be providing a more in-depth review into certain components of both our progress to-date and our strategy going forward, at our Analyst Day on June 7, we will forego extended prepared remarks today. In summary, I want to reiterate our commitment to strategy we’ve shared and to increasing the value of QSI NextGen for all of its stakeholders. And with that, I’d like to open it up for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Mohan Naidu with Oppenheimer.

All right, thank you very much for taking my questions. Maybe, Jamie, a quick one for you on the HealthFusion. Can you talk about the contribution from HealthFusion in the quarter?

We are not going to break out HealthFusion, what I can say that HealthFusion is that, it is performing consistent with our expectations as they were developed it part of the due diligence.

Okay, and just a quick question around SaaS clients and how you recognize the revenues between software/hardware and subscription service? Does it all SaaS clients’ revenue go into the software subscription line?

I am sorry, can you ask the question again?

I am sorry. So – how do you guys recognize the software service client revenue? Does it split up anyway in the software line or does it all go into the subscription segment line?

For this purposes, it all goes into subscription line item.

All right. Thank you very much.

Our next question comes from Ross Muken with Evercore ISI.

Hi, this is Elizabeth Anderson in for Ross. My question is sort of broad in scope and I was wondering if you could sort of talk a little bit more about have you finished your strategic review, sort of the opportunities that you are most excited about and then sort of what do you consider to be the company’s biggest challenges at this point?

Yes, this is Rusty. I’ll talk a little bit about that. Certainly, we see the transition to value-based healthcare and the opportunity it presents for our client base as something that is also an opportunity for our organization. When we look at the newly released macro regulations which are certainly a tailwind for the transition from fee-for-service to fee-for-value the client base, and for the industry, we see that is creating opportunity for us to help our clients be financially successful in this transition to value. In addition, we’ve talked as our five core strategies about a transition to the cloud both on the NextGen ambulatory and MediTouch platform, we see that lower TCO, total cost of ownership as being a great opportunity to drive more value for our clients and then, as we’ve talked about, we are starting to move gently into the value-based healthcare and population health environment through some strong development partnerships. But that’s something that we will start to expose more of as we move through time and make progress down that dimension.

Sure, and then, just as a follow-up, as you think about sort of adding on capabilities, how you sort of weigh the decision to buy versus sell?

Certainly, it’s a great question. Certainly, as you can see, we – as an organization now, actually explore both strategies. We are building in some areas where we feel like it’s significantly in our wheelhouse, but certainly, we, as a company, do not have a monopoly on great ideas. And therefore, as we look forward, understanding, first of all, what are the solutions that are going to drive value for our clients and then going to the analysis, is that something that is best built by us or do we think there is somebody out there who has got a great solution set that we can leverage our increasing store house of dry powder on our balance sheet to go out and acquire. So it’s a continuous discussion within the organization, but make no mistake, we are absolutely committed to either pathway if it chooses to be the right one for the clients and the shareholders.

Great. Thank you very much.

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

Yes, good afternoon guys and thanks for taking the questions. First, I wanted to follow-up on Mohan’s question a little bit. If you could just clarify whether all of HealthFusion’s revenue is flowing through that subscription services line or if any of it is coming through any of the other revenue lines?

Okay, I think, I may have misunderstood your question, but the answer is, the majority of it flows through subscription. There is a small amount of HealthFusion that flows through the EDI line, as well as – about a similar amount of it flows through professional services. But each of the EDI and professional services, think of it is approximately 10% of the revenue.

Got it. That’s very helpful. And then another question would be if you could provide us the bookings number for the quarter?

Sure, the bookings for the quarter was $44 million and that’s the estimated annual value.

Got it. Thank you. And then, maybe one bigger picture question for me. On the last call, you guys discussed why you were choosing the MediTouch platform over NextGen now for cloud-based EHR and practice management, but you didn’t really go into a lot of detail on the advantages of Mirth over NextGen now as a Population Health Management offering. So, not do dwell on NextGen now too much, but curious what the advantages are going forward to develop the Mirth offering for Population Health Management and how that Mirth offering can integrate both with MediTouch and with the existing NextGen EHR offerings?

Yes, great question. First of all, let me just clarify, we are leveraging the capabilities on the Mirth stack and the development capabilities of the team that works on that stack to deliver the NextGen population health capabilities. But certainly, as we look at Population Health and frankly, the supporting software to enable our clients to be successful in value-based reimbursements, I have seen a lot of great looking reports and a lot of great looking applications. The question about those reports and ability to solve problems for clients really comes back to the cleanliness, completeness and accuracy of the underlying data. When we look at what the capabilities of the Mirth stack are best at, it is bringing in data from many different data sources, and bringing that together into a single clinical data repository and not just clinical data, but operational data, financial data and claims data. And so, the Mirth stack is, by the way, not an answer, it is a capability that is part of the answer as we move forward and continue to deliver enterprise capabilities around that stack. Now, from a NextGen ambulatory platform, our flagship platform and a MediTouch platform standpoint from an EHR standpoint, both of those are the directions that we feel are best for the client base. Number one for our large complex plans that want to work the way they want to work. We feel like the NextGen ambulatory platform provides both the flexibility and the enterprise capability necessary. MediTouch being a cloud-based platform with a low total cost of ownership and the quickability to deploy out to clients today is a great solution for our smaller client base, but as we said, we will continue to bring that market while we continue to expand the capabilities of the NextGen ambulatory platform. The nice part about it is, is that, with the capabilities of our Mirth platform, we are able to interoperate with both of those electronic medical records and bring them across. In fact, we are already starting to develop the capability to – if some of our smaller clients want to migrate from NextGen ambulatory across the MediTouch leveraging Mirth to bring that data across to make that onboarding seamless and efficient. Does that help answer the question?

Yes, absolutely, that’s great. I’ll hop back in the queue.

Thank you.

Our next question comes from David Larsen with Leerink.

Hi, longer-term, would you hope to convert NextGen clients over to the MediTouch platform? And how have those conversation sort of been so far with your existing NextGen base?

I think, where appropriate, we will convert clients across where the capabilities of the MediTouch platform meet their needs. We are already seeing some larger clients and some single specialties express interest and coming across, now naturally those are much longer cycles and so, we are seeing some strong initial interest in some certain areas where it’s appropriate. But many of our clients are very wedded to the capabilities both the NextGen ambulatory EHR, but also the NextGen practice management solution, which is one of the most robust enterprise-ready practice management solutions in the industry. So, I guess, what, I guess, the answer to your question, David, would be that, we are going to create the opportunity for people to switch at a time of their choosing. But we are also going to make sure that the platform that they are on, continues to be robust and evolves into the future. And so, it’s a little bit of allowing the client base to show us the way based on their appetite as we show them the capabilities we continue to deliver on MediTouch.

Okay. It’s very helpful. Thank you. And then, Rusty, any thoughts on like the hospital in-patient market. Do you feel like you need a presence there or not? Just any general thoughts on your longer-term strategy as of now?

Well, I’d say, it’s interesting. I guess, our evaluation of MACRA is, MACRA is the government basically saying to the industry, we are going to fee-for-value whether you are ready or not and interestingly enough, the way to manage a value-based episode of care is to have seamless interoperability between the ambulatory base and the hospital base. That can be accomplished in one of two ways, everybody can switch EMRs to one of two platforms or which is much more likely, we will all figure out a way to seamlessly interoperate which actually creates the data infrastructure necessary for our healthcare economy to transition to value. I believe that this acceleration of the fee-for-value dynamic is going to force the necessity for interoperability. When I look at our Mirth platform, and not just the Mirth platform we sell commercially, but the Mirth platform, the Mirth project which we provide is an open source connectivity stack to enable interoperability broadly across the marketplace. I feel like, NextGen is doing the things necessary to help our healthcare economy get to that kind of interoperability and we are going to continue to accelerate that. Is there a point in time, when we will need a critical care strategy at this point in time, we feel pretty comfortable in the strategy we are going down.

Okay. That’s great. Thanks very much. In that $44 million in bookings that’s relative to $36 million last quarter, is that correct, so up about $8 million sequentially?

That’s correct.

Okay. Thanks very much.

Thank you.

Our next question comes from Garen Sarafian with Citigroup.

Good afternoon, Rusty and Jamie. So, on the MediTouch platform, could you elaborate on what needs to take place to get MediTouch to scale to larger end? Just, I guess, any more clarity on what that entails would be helpful?

Yes, I mean, certainly, as you move into organizations increasing size and complexity, the ability to manage what I’d call is practices that are comprised of practices, that more complex organizational structure that you see in large clients is certainly one of the areas that right now we are aggressively moving forward in. In addition, continuing to broaden out the specialty footprint. I think, those are really the two dimensions that we are primarily looking at right now, and we will update the investor community on progress on that, quite frankly, after we’ve made the progress, because we are not going to necessarily tip our hand on exactly what we are going to deliver next on our platform in a public forum.

Got it, but I guess, more from a technical perspective, were there any, I mean, it sounded more organizational and just more outwardly focused, but just internally, are there sort of –are there any major technical things that need to be solved that you are going towards?

I guess, if I was to characterize it, I’d say that we feel like we’ve brought a strong house and now it’s time to add rooms on to it, but the foundation supports the addition of rooms. And so from a technical architecture, from a scalability standpoint, from the ability to implement capabilities in a systematic well done way, we feel like the platform architecture has absolutely been what we thought it was before we acquired it. But now it’s really a question of what capabilities do we add at what point in time, that’s really based on our market segmentation on our demand and on our forward-looking strategy.

Okay, and then, if I may, for the follow-up, I know on the last call, you didn’t really want to get to provide too much on the operational perspective of the Phase II build out, but could you, at least qualitatively maybe discuss the slope of that growth, so, of course revenues won’t grow in a perfectly linear fashion, but just wondering, how to conceptually think about it. Would it be, for example, completely back-end weighted or would it be in a handful of spikes as you release that same handful of products and equal increments or any other conceptual color you can provide would be appreciated?

Yes, just, what I am going to say is, I think, at this point in time, we’ve provided actually a good view to the next eleven months as far as EPS and revenue. We have only – the only thing that we’ve talked about within the calendarization of that year is that it will probably be a little bigger in Q4 than it will be in Q1. And so accelerate throughout the year, but we are not providing quarterly specifics as far as past FY 2017, we’ve provided no guidance there at this point in time and we will not until we are ready to.

Got it. And just a quick clarification on bookings, what’s your total bookings number? I know that the $44 million is the expected value, since the total bookings number that you could provide would be appreciated. Thanks.

The $44 million is the number we’ve given and I think that’s what’s been provided historically rather than introduce a new number here.

Well we participate with – we changed, just because Jamie wasn’t here. We changed the bookings number to represent annual value, because we didn’t feel like the larger number was representative and as much of a guide for our investor community. Certainly, we can help at Analyst Day, maybe provide a little more color on how to translate one to the other. But, we are not providing the prior number as we go forward.

Fair enough. Look forward to seeing you then. Thanks.

Yes.

Our next question comes from George Hill with Deutsche Bank.

Yes, good evening guys. I guess, maybe just ask it in other way – I like to ask Mohan’s question in other way is, can you guys give us any indication of what organic growth was in the quarter?

Well, we answered that early, I think as you are basically asking me what it was like without HealthFusion?

Correct.

And we are not breaking that out as part of the ambulatory care number. We are not going to break that out. I think, you could probably arrive at a pretty good number on your own based on what we’ve told you about their business pre-acquisition.

As well as, what we expect the revenue number to be based on the publicly disclosed earn out number.

Okay. All right, we will roll with that. And then maybe a quick follow-up, Rusty, I guess, can you talk about what you are seeing from an end-market demand perspective and basically, if we think about that HealthFusion, MediTouch segment of the market, what’s driving client churn? And then maybe, just a kind of question to be, can you talk a little bit about MACRA? Can you talk about what specific components the functionality that clients are looking for kind of in response to MACRA?

Yes, so, I am going to answer the second one first and then come back and ask you for to repeat the first one, just my memory is not that good. But, certainly, if you look at, let’s take the MediTouch platform and then being the preferred solution for the American Association of Family Practitioners. This is a group that is now responsible for delivering both the quality and performance measures necessary to be able to achieve the – well, if you look in the out years, it’s minus 9% or plus 27% multiplier on their public pay reimbursement. So, the question is – the question for us is, can we bring a comprehensive solution, not just a piece of software to them that allows them to truly be successful within this new capitated reimbursement environment. Same thing with episodes of care, you know, if you look at bundle tips and bundle needs, right, so can we start providing the clients with both the data, but also with the services necessary to be able to deliver the level of quality and performance to make sure they are winners under MACRA rather than on the other side of it.

Okay. That’s helpful. And then, first one is kind of what is driving the end-market demand, I guess, in this smaller practice segment of the market or you know with what is – what is the problem that clients are trying to solve just adding to make new ones right now?

Yes, I’d say it’s a little bit of, first of all, in that part of the market is both making an EMR switch, but it is also actually just bringing one on board, because there is a number of folks who are still on paper in that market, it’s not as penetrated as the larger market space. But the general feedback has been, it is a – because remember, we are also competing against some of the premium solutions that are out there. General feedback is that, is that this helps make – this platform helps make us more money. So, for example, when you look at some of the HCC, the chronic condition coding capabilities in the MediTouch platform this is things that that smaller client base isn’t necessarily as aware of or doesn’t have the same skill set to optimize. So the ability to have that directly embedded within the application and even be making the suggestions during the time of care on how to optimize reimbursement within a chronic condition patient, those are the type of capabilities that are coming to the table that are making people comfortable, frankly walking task free solutions and writing a check to us every month based on the value that they are getting.

Okay. That’s helpful. I appreciate. See you in a couple of weeks.

Thanks, George.

Our next question comes from Nick Jansen with Raymond James.

Hey guys. Just wanted to touch base a little bit on the legacy market share dynamics you are seeing. It looks like your maintenance and support revenue stabilized in the quarter sequentially up slightly first time in several quarters. So, how should we think about that metric as we look at your full year fiscal 2017 guidance? Any thoughts there would be helpful?

Sure, I think, this question came up back in April, and what I’ve said is that, we expect it to be very modestly down year-over-year.

Okay, that’s helpful. Perfect. And then, if you look at the revenue cycle growth rate that you are seeing, it looks like the slowest rate of growth in over two years. I just wanted to kind of get your thoughts on what’s going on with that part of the business then, and how we should be thinking about that relative to prior expectations of it’s being more like a double-digit grower? Thank you.

Yes, and on RCM, we are expecting it to look in 2017, we expect to deliver lot like what you are seeing in Q4 as opposed to the previous number of double-digit growth.

And just to put a little color on that, what I’d say is, this is where you should start to see over time our work on client satisfaction and client experience really start to take hold. And one of the first things that I said, when I came into the organization is, I am absolute laser-focused on building a great client experience and great client value not just because that’s our accountability and responsibility to our clients, but also, because that creates opportunity for us to bring a greater breadth of solution to them. We continue to make progress on our voice of client. We had a great meeting with our large client user group just two weeks ago. Certainly, there is ups and downs, but the general trend is actually very positive and we feel like, as we continue to make that progress, it will create a better landing zone, both for our solution selling of RCM, but also for anything else that we bring to the table.

Thanks, and just one quick one. What was the capitalized software in the quarter? Thanks.

Capitalized software was $3.1 million in the quarter.

Our next question comes from Sean Wieland with Piper Jaffray.

In the cycle business, can you talk about any progress if you made and get cost out of that business, so you’d drive margin?

Yes, so, what I would say, Sean is, first of all, it’s driving margin into the business, which means really making the business more scalable rather than necessarily looking at as the cost reduction target. But, yes, we have started to really do the process mapping to make sure that that process continues to be standardized and more efficient. We are starting to bring technology development to the table to continue to automate more, but this is not an instant thing where we are going to wave our magic wand and take cost out. This is making the operation more efficient, while still preserving the great high touch relationship we have with the clients, which has once again put us in a best-in-class position in the RCM market. And so, what I would say is, these aren’t things that will show up immediately, these are things that will show up over time, because we are very cognizant of the fact that our clients depend heavily on our best-in-class service and we want to make sure that as we continue to automate it we don’t lose what it made it great.

Oh, I am asking you. Okay, so, can you – you gave us a little – maybe a hands on what revenue would do in that business, maybe, but can you give us a sense of what margins should progress in that business?

They should start to get higher than they are. I think that’s what we are really willing to talk about at this point. I think, let and then this comes back to credibility, right, when I have a plan in front of me that I know I can execute, not just an idea, but a plan that I know I can execute, I know we are going to deliver on at that point in time, then we will start to let our optimism bleed through into the investor community and tell them, we are going to keep our optimism to ourselves.

Okay, thanks so much.

Thank you.

[Operator Instructions] We have a follow-up question from the line of David Larsen with Leerink.

With the $44 million in bookings, did that include MediTouch?

It does.

Okay, and then, I think, HealthFusion adds about $43 million in revenue per year, which I imagine is around $10 million bucks a quarter, is that the right way to think about bookings for HealthFusion?

No. It wouldn’t be the way to think about bookings. I think, let’s back up, I think they were doing about $35 million for last year, is the number. So it’s not the $43 million that I think is what is required for the earn out and the bookings would only be new contracts, not the renewals of existing contracts. But the number – bookings number is much less than $10 million a quarter.

Okay. So, the sort of the estimated annual growth rate divided by four, okay?

Yes.

Great, thanks very much.

Thank you, David.

Our final question comes from Kim Kerbis [Indiscernible]

I was wondering if you could give operating cash flow. You didn’t give out anything on the cash flow statement. What was operating cash flow for the quarter?

Give a second. I’m going through numbers in my fingers, but that’s one of them. It’s just under $4 million for the quarter.

Okay, thank you.

That concludes today’s Q&A session. It’s now my pleasure to hand our program back over to Rusty Frantz for any closing remarks.

Well, thanks everybody. Appreciate your participation today. It was a short set of announcements, but that’s primarily driven by the fact that we had a long conversation with you less than four weeks ago. We as an organization continue to make a tremendous of progress quickly. We are excited as we move forward to continue to share that progress with you, most notably, at the Analyst Day in June in New York City. And until then, have a great couple of weeks and we will look forward to seeing you all. Thank you.

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may now disconnect your lines.