Rusty Frantz - President and Chief Executive Officer James Arnold - Chief Financial Officer

Sean Wieland - Piper Jaffray Companies Mohan Naidu - Oppenheimer & Co. Jeff Garro - William Blair & Company LLC David Larsen - Leerink Partners LLC Jamie Stockton - Wells Fargo Securities, LLC Michael Cherny - UBS Mark Rosenblum - Morgan Stanley Stephanie Davis - JPMorgan Chase & Co. Don Hooker - KeyBanc Capital Markets Sean Dodge - Jefferies LLC Nicholas Jansen - Raymond James & Associates Matthew Gillmor - Robert W. Baird & Co.

Welcome to the Quality Systems Incorporated Fiscal Fourth Quarter and Full-Year 2017 Conference Call. Hosting the call today from Quality Systems' NextGen are Rusty Frantz, President and Chief Executive Officer; and Jamie Arnold, Chief Financial Officer. Today's call is being recorded. All lines have been placed on listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] Before we start, I'd like to remind everyone that the comments made on this call may include statements that are forward-looking within the meaning of the federal securities laws, including and without limitation, statements relating to anticipated industry trends, the company's plans, future performance, products, perspectives and strategies. Risk and uncertainties exist that may cause results to differ materially from those expressed in these forward-looking statements, including, among others, those risks set forth in the company's public filings with the U.S. 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 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 contains certain non-GAAP financial measures. For our earnings results, the GAAP financial measures most directly comparable to each non-GAAP financial measures 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 third quarter 2017 earnings press release, that was filed with the SEC and is posted to the Investors section of our website. This release also provides qualitative descriptions of how we have calculated non-GAAP financial measures contained in our guidance. At this time, I would like to turn the call over to Mr. Rusty Frantz, President and CEO of QSI NextGen. Rusty?

Thank you, operator. And thank you to everyone on the call for joining us this morning to discuss NextGen's fiscal fourth quarter and full-year 2017. I'll start the call this morning with a high-level overview of our fourth quarter and full-year results, which Jamie will discuss in more detail. I'll then discuss our emerging Platform-as-a-Service strategy, the strategic rationale around our acquisition of Entrada, an overview of the new capabilities we've recently launched. Then I'll conclude the call today with some context around our initial outlook for fiscal 2018. To kick things off, we rounded out fiscal 2017 with another solid quarter. Our fourth quarter revenue came in at $132 million compared to $128 million a year ago. And our non-GAAP EPS of $0.21 compared to $0.19 in the fourth quarter of fiscal 2016. Our full-year revenue of $510 million compares to $491 million in fiscal 2016. And our non-GAAP EPS of $0.82 compares to $0.72 last year. As we discussed on last quarter's call, we expected to see relatively flat - we expect to see relatively flat organic revenue in FY 2018. But expect to see bookings growth show up in the back half of the year, leading to accelerating revenue growth in FY 2019. Stepping back from the numbers for a moment, we continue to execute on our strategic plan during the fourth quarter, and I wanted to spend sometime today discussing our emerging Platform-as-a-Service strategy, which is the natural next step in our strategic evolution. We feel the strategy builds on the work we have done today on our technology platform and release of our new API built around the emerging FHIR standard as well as our continued build out of our commercial capabilities. We are now in a position to build, acquire or partner for new capabilities. And we also have the infrastructure and track record to integrate them quickly into our broader solution set. We've organized our commercial infrastructure to capitalize on these opportunities and deliver them to our clients. Our recent acquisition of Entrada is a great early example of our strategy being brought to life. With our cloud-based Entrada platform, we are now delivering the power of our solutions right into the hand of the provider, the most valuable real estate and healthcare. This is not just next logical step for us, but it also showcases our commitment to investing in the provider experience to drive one of the primary metrics of our industry, physician efficiency. Entrada enables our providers to focus on the patient, while capturing all the information they need, accessing the patients' information on the palm of their hand, enabling both automated and remote transcription capabilities to reduce their time in front of the computer and reduced hassle as they seek to improve patient care. And on top of that, enabling them to securely collaborate with other members of their care team, or even other care teams, to ensure the broadest possible view of the patient's longitudinal record and ensure great care. These capabilities are increasingly essential in a value-based healthcare world, where profitability is truly driven by provider effectiveness and efficiency. Another example of our Platform-as-a-Service strategy is the expansion of our RCM offering. It is our belief that revenue cycle management must evolve to meet the expanding needs of the industry. We continue to extend our solution to cover our clients with higher revenue cycle process and receivables portfolio. For example, through partnership, we've launched a capability that ensures, as charges come through our system they are cleaned and checked for accuracy prior to claims submission to the payer. This upstream rules engine not only automates a process that is costly and manual today, but at the same time effectively reduces many of the causes of claims denial and subsequently reduces the cost associate with rework and resubmitting claims. In addition, through another partnership on the platform, we can now deliver comparative analytics and peer-to-peer benchmarking capabilities that target claims denials, reimbursement delays and other metrics that affect an organization's bottom line. Both of these solutions represent our drive to not only broaden our solution, but to leverage automation to improve our margins in this part of the business. Naturally, these capabilities and others we will be introducing takes some time to curate, but we expect these expanded capabilities to drive growth in our RCM bookings number by the back half of fiscal 2018. Over the past year, we've made significant progress evolving the company into a more nimble client-focused organization. We simplified our usability, broadened our solution set, and increased visibility of our platform. As a result, our full-year Voice of the Client survey shows a score of 7.0, an increase of 11% over the prior year. Our maintenance attrition rate, which as a reminder, we calculate on a trailing 12 month basis, stands at 7% today compared to 10% a year ago. Additionally, we have continued to show strong cash generation capabilities throughout FY 2017. We are an organization that can take on debt for inorganic activities and retire that debt quickly. We have a strong balance sheet and experienced management team and a robust strategy. As we enter fiscal 2018, we plan to accelerate investment in both R&D and sales, as we move towards bookings growth in the back half of the financial year and accelerating revenue growth in FY 2019 and beyond. While, naturally these investments go through the P&L, we will continue to generate strong cash flow and support further organic activities as well. With that, I'll turn the call over to Jamie for an in-depth review of the numbers, and I'll be back with you right after. Jamie?

Thank you, Rusty. And thank you all for joining us on the call this morning. I am very pleased with the progress we've made over the past year. Rusty covered some operational success stories of last year, and I'd like to add several financial accomplishments as well. We streamlined our operations by shifting to a functional organization structure, which had the byproduct of reducing operating expenses via linear organization. We substantially completed integration of previous acquisitions, which allows us to take a more holistic approach to our clients and prospects. We expanded our gross margin profile by 200 basis points. We increased our percentage of recurring revenue by 400 basis points and we strengthen the balance sheet by paying down a significant portion of our line of credit. Now, I'd like to spend the rest of the time reviewing the fourth quarter results in more detail. Total revenue for the quarter - for the fourth quarter was $132.4 million, a 3.5% increase compared to a year-ago. Recurring service revenue was 82% of total revenue comparing favorably to 78% a year ago. Revenue from software license and hardware of $16.6 million decreased approximately 10% compared to a year ago and this was expected. Subscription revenue of $23.1 million increased 22%, it was driven by growth in HealthFusion and organic growth in Patient Portal. Support and maintenance revenue of $41.9 million increased just over 5% from a year ago. This revenue line item benefitted from the effect of CPI increases as well as approximately $1 million of one-time items including a customer reinstatement and a sales return reserve reversal. Revenue cycle management generated $20.5 million in the quarter, and was relatively flat, compared to a year ago. Revenue from electronic data interchange and data services of $23.4 million, increased 12% year-over-year. During the quarter, we saw additional volume from existing customers and we also benefitted from one-time catch-up from a significant customer. Lastly, professional service revenue of $6.8 million, was down 27% to a year ago, which included a large customer go-live and represented a tough comparison. Turning to bookings, we ended the quarter with $33.8 million compared to $39.9 million in the fourth quarter of fiscal 2016. We continue to experience favorable trends in gross profit. Our $76.4 million of gross profit in the quarter, increased 11% from $68.7 million a year ago. Gross margin also continued to improve and came in at 57.7%. Taking a look at operating expenses, SG&A of $42.7 million, increased $6.1 million year over year. On a percentage of total revenue basis, SG&A was 32.3% of revenue in this quarter, up slightly when compared to last year's 31.5%. R&D increased in the quarter to $22.1 million from $16.1 million in the fourth quarter of FY 2016. Our capitalized software development cost of $1.9 million or 8% of gross R&D expenditures compared to $3.1 million or 16% of total R&D expenditures last year. Our GAAP tax rate for fiscal 2017 is 24%, and our non-GAAP tax rate remains 30.5% for the quarter and the year. Finally, I'll conclude my review of the income statement with EPS. Our GAAP EPS for the quarter was $0.07 compared to a loss of $0.27 last year. Our non-GAAP EPS in the fourth quarter was $0.21 compared to $0.19 a year ago. Turning to the balance sheet, we've made continued progress on several fronts. We ended the quarter with $38 million in cash and cash equivalents, an increase of $14 million from last quarter. We continue to reduce our debt levels, ending the quarter with just $15 million, owing down $25 million - sorry, from the last quarter and $105 million a year ago - down from - sorry, it's down from $25 million, so we paid down $10 million. DSOs of 57 days, seems to have settled in our desired range of the high-50s and low-60s, and decreased 10 days compared to last year, and increased 3 days sequentially. To close the call today, I'll provide our initial outlook for fiscal 2018. We expect revenue to be between $512 million to $530 million. And we expect non-GAAP EPS to be between $0.66 and $0.74. To provide a little additional color on the legacy NextGen revenue for fiscal year 2018, we previously talked about headwinds facing software license maintenance in RCM. This will be offset by growth in subscription and to a lesser extent EDI and professional services. Our EPS guidance includes the incremental investments Rusty discussed earlier in the call, in both our R&D and commercial operations as well as the Entrada enhancements. Now I'll turn the call back over to Rusty for his closing comments. Rusty?

Thanks, Jamie. In closing, as we move into FY 2018, we are confident in our ability to lean forward into this year with increased investment, both organically and potentially inorganically as we bring our Platform-as-a-Service strategy to life. We expect to see the signs of increased revenue growth show up in the form of bookings growth in the back half of this year, leading to sustained revenue growth, as we move through FY 2019 and beyond. It's our goal to get high-single-digit to low-double-digit revenue growth in FY 2020. And we feel like we are on a good path to get there. Finally, I'd like to thank our team members, who have been so pivotal in getting this organization to this point in our transformation; and our clients, whose mission of healthcare keep us inspired to do well by doing good. Thank you. We'll now open the call up for questions. Operator?

The floor is now open for your questions. [Operator Instructions] Your first question comes from Sean Wieland of Piper Jaffray.

Hey, good morning. Thanks. So I'd like to hear you on the Entrada acquisition. Just wanted to understand more strategically how it fits into your growth strategy. What does the customer base of Entrada look like today? What's the overlap on to the NextGen base? And how does that cross-sell strategy work? And then, also what do you think that's going to contribute in the - what portion of the guidance does that contribute?

Great. Hey, thanks, Sean, so - lot to the question. So let me start first of all by saying we just gotten out of our sales meeting, our annual sales meeting, and just spent time training the entire sales force on the Entrada solution. And frankly, the feedback from those folks, who are closest to our client, says this is a great win for the client base. Now, this really represents - one of the things we've talked about is getting to the cloud and creating a great provider experience. By bringing Entrada into the portfolio, we now have the capability to really enable that provider to engage with the patients' information simply when walking from one room to the next, and then within the room to be able to have a great intimate experience with the patient, looking at them rather than the computer, while the Entrada application continues to pick up the context of the conversation, whether through automated transcription, whether through having a transcriptionist on the backend, listening to the audio after the fact or even having a remote scribe who can launch orders and potentially prescriptions based on the conversation between the provider and the patients. As we bring this forward, we really - Entrada came to us frankly, because they've made some great inroads and really delivered a great experience to some of our large and complex clients, especially in the orthopedics space. And so, we saw that client value being delivered and really thought that that would make a great addition into our platform as we really do seek to drive provider efficiency especially as we move into a more value-based care. The footprint within our client base was not that significant. It's probably about half of their revenue and their revenue was $12 million as we brought them in. But they also have footprint within other EHR client bases. Being able to bring in this capability, being able to have this really leverage the API work as we release our really first FHIR based RESTFul API into the marketplace was a great opportunity for us, simply because we've done this foundation of work to be able to quickly integrate these solutions into our client's EHR and EPM footprint. And so we were - we really feel very bullish about being able to bring the capability in. As far as contributions to guidance, I'll turn that over to Jamie.

Thanks, Rusty. Sean, let me first say that we're not going to be breaking out Entrada revenue and reporting on it separately over the course of the coming year. But with that said, and playing off of some of Rusty's comments, he - if you take Rusty's comment that we expect the organic to be relatively flat, it will give you a pretty good idea then as to what we're expecting to get out of Entrada in the coming year. And part of that is just caution around what will happen with the Entrada install base that is on non-NextGen EHR.

Okay. Thanks for that.

Yes.

Your next question comes from Mohan Naidu of Oppenheimer.

Thanks for taking my questions. Rusty, you made comments around expecting booking strength in the second half of this year. Can you talk to us about what you're seeing in the market and what your potential customers are talking about or what's driving their - I guess, what's driving them to change products?

So when I talk about revenue growth in the back half of the year, I don't talk about specifically what the drivers for that are. And so changing products is an assumption. Let me re-characterize it for you. As we look at bookings growth in the back half of the year, this is simply us continuing our strategy of penetrating our clients, our existing clients with the great solutions that we are making more robust and great solutions that we're bringing into the organization. And so, much like we've talked about over the last two years, we're now at the point where we build out the commercial capabilities. We are in the process of launching the programs that enable our clients - I mean, our sales folks to go to increasingly satisfied clients with robust solutions that can help them. Not just in the fee-for-service world, but also in the pivot to the fee-for-value world. And so, this really is the solution-sell or the cross-sell opportunity coming to life. As I've said in the last couple of calls, we were a little behind where we wanted to be in launching the solutions. As we've just got out of the sales meeting in fact last night. We've trained our teams on really how to bring an enhanced revenue cycle management offering to the table for our client base, we brought Entrada into the platform, and we continue to make progress on organic development and partnerships as well. And so all of that is really giving our sales team, a much more fulsome solution to be able to bring for the client base that builds on top of the electronic health record and practice management footprint. Does that help to clarify?

Yes, yes. That is very helpful. And maybe just a quick follow-up around the enhanced RCM solution set. In your prepared comments, you talked about leveraging automation. Right now, in your RCM services, can you talk about what portion of your RCM is really automated versus resources driven, and any near-term goalpost that you can share to us about, how you can drive automation here?

Yes, I don't think we're going to comment deep into the solutions set, what I would say is, just we've got a solutions set that provides an incredible value for our client base as reflected in the great feedback from the clients. When you think about some of the things we are talking about here, one of them is making sure that as clinic information passes from the electronic health record into the practice management solution that rather than waiting all the way until it comes back as a denial for the payer. We are actually scrubbing that claim ahead of time, and making sure that that claim has the right information, so that that claim is actually accepted on the back end. Think about the cost and rework that that avoids. And that is not done by people, that's done through automation. When we look at comparative analytics and benchmarking, this is really about providing our clients kind of the guidepost and the roadmap to significantly improving their own operations. Now all of this by the way, it's also a proxy for cost. And so as we continue to provide more and more information, and today really in the revenue cycle, but as we continue to move forward extending more to the front end of the revenue cycle, which much more involves the patient. We feel like we can bring both a great broad solution to the table. But that we can also, as I said continued to show leverage on that revenue by automating more and more of the process. I think, we've made statements that we think there is margin upside, where we really focused on first is making sure we have the broad solution for our clients, automating along the way. And I think you'll see continued improvement as we pivot from FY 2017 to FY 2018, and into the growth year of FY 2019.

Got it. Thanks a lot, Rusty, Jamie. On the bookings number, can you give me that number again?

One second. Let me turn to the page.

Actually, while Jamie is getting to the page, Mohan, let me just characterize a little more of what's going on within the revenue cycle management business. In addition, we've also brought in - we've brought in some new talent that really has deep expertise in the RCM space, we recently hired a gentleman named Allen Plunk, who comes in to run our RCM organization. We've also within our commercial teams really invested in folks that truly understand the revenue cycle process, and can help us. And these are - all of these things are why we feel confident that we could deliver the bookings growth in the back half of this year. Naturally, that doesn't turn into revenue growth immediately, because there's an implementation phase, and that's really why revenue growth starts in FY 2019. Got it, Jamie?

Yes. The bookings for the quarter were $33.8 million compared to $39.9 million last year.

Got it. Thank you very much.

You're welcome.

Your next question comes from Jeff Garro of William Blair & Company.

Yes. Good morning, guys, and thanks for taking the questions. First, I want to ask Jamie a little bit more about fiscal 2018 guidance and the profitability outlook. And maybe you could help us understand, it sounds like more investments are coming out of operating expenses or into operating expenses versus the cost of goods sold line, where you've seen some nice momentum throughout the course of fiscal 2017. So if you could just help us parse out some of that detail between gross margin and operating margin for fiscal 2018?

Yes, before Jamie jumps into that, let me just characterize a little bit, how we view things. As I came into the organization and my first seven quarters here have really been about playing defense and stabilize the foundation. I feel like we've done a great job as an organization in doing that, and now it's really time to pivot to playing offense. And so as we move forward, you're absolutely correct that above the gross margin line, the P&L stays very intact. This is all about driving growth. We feel like we've got great opportunity in front of us. We feel like we have the capabilities to get after that opportunity. And based on that, we feel very comfortable investing. Go ahead, Jamie.

So the answer is that I expect the gross margin percentage to stay relatively where it is, even possibly a very small improvement over the course of the year, as we continue to improve margins in some of the product line. What that said, then the investment is all - I think, all of the change in the - decrease in EPS year-over-year is because of investments in R&D. We are increasing the amount of gross investment in R&D that will raise the amount of capitalized R&D cost, but it doesn't offset the total incremental investment we make there. We're also investing in additional sales and marketing people and marketing programs. And then, I guess, I mentioned one other thing is that, I'm sure you are all aware of the change in the rules and revenue recognition accounting, which is going to require substantial investment on our part, most of which gets expense this year, as we get ready for accounting under rule 606.

Thanks. Very helpful. And maybe dive into some of those operating expense investments a little more, could you give a little more detail on the sales and investments, and how much of that really relates to headcount? And whether there is anything we can look to beyond booking numbers to help evaluate ROI and those investments or overall sales productivity?

I'd say from the sales side, it is almost entirely headcount. As we talked about, we are driving towards bookings and revenue growth. Bookings and revenue growth, to some degree, is a function of the number of folks you have on the street, out there fighting the good fights. And so, as we look out what our expectations are, and back that into a resource model that naturally implies that investment has to precede revenue as it takes time to onboard to both hire and then onboard sales person to the point where they can really drive revenue. Go ahead, Jamie.

I agree, and I think the bookings growth that we've talked about is probably the best metric. And as Rusty's pointed out, this should - it will start appearing in the second half of the year.

Great. Then, one last one and follow-up on the R&D. Can you tell us what your expectations are for the capitalization rate, and changes versus this year? Thanks.

I would expect it to increase, I'm doing the math in my head, but it's - I think, we capitalized about $8 million this year. And I would expect it to go up by $5 million or $6 million next year.

And I think just characterize that a little bit, we're really pivoting to an innovation posture. And so as we do that we see the opportunity to bring a broader set of projects to market, which of course creates a larger cap rate. I think, the one thing I'd like the folks to really back on is that we are a company that generates free cash flow and we intend to continue to generate free cash flow as we move through the FY 2018 year.

Great. Thanks again, guys.

Thank you.

Your next question comes from David Larsen of Leerink.

Hi. Can you talk a bit about the improvement in the Voice of Client score, and also a bit about your retention rates, and what's driving that trend?

Absolutely. So it's been quite a year from a client facing standpoint both qualitatively and quantitatively. If you think about through this year, we received Most Improved Award from Class in the practice management space and large client base. We've seen significant increases in the Voice of Client score. We continuously sample our clients. This Voice of Client scores based on over 30,000 client touch points, and it comes back from about 50% of our clients. And so we think it's a very meaningful number. We've invested heavily in fact as we sit here today 82% of our clients have a dedicated account manager, somebody is responsible for their service experience for the robustness and stability of their implementation. That's not a sales exec, that's simply an account manager. Naturally some account managers have a number of clients, but as we move forward we plan to get that number to 100, it's about creating the partnership with our clients that enables them to pivot through this transforming time, both on the account executive side, where we're helping them with their strategic evolution, but also on the account manager side. On top of that the last two releases we put out were very, very robust, and the feedback from clients has been very positive. Naturally, there are still areas where we fall a little short of expectations, but every day we continuously improve and start to close those off. As we move into this year, in addition, we've been able to be very transparent, very communicative with them about how we're going to take them through this pivot into the value-based world, as we move into that calendar year of 2018. And so, with our combined release that will come out in the fall, 5984 [ph] on the NextGen Ambulatory platform, we feel like we're in great shape that release has been on-time and on-scope and on-quality for the last eight months. We feel like, we're in great shape and we communicate with our clients, and make sure that they understand exactly where we are that how we're working with them to make sure that they are successful. And all of these things, all of this proactive communication, all of this better delivery, all of this more intimate experience are adding up to create these increases in client - in the client scores. But more than that a ton of very positive qualitative feedback that's coming back from the clients, I spend a lot of time with clients, I spend a lot of time in the field. And I must say that I'm very gratified by the change in posture of the clients. And frankly, it's what gives me comfort as we bring great capabilities, great cloud-based capabilities like Entrada to the table, it gives me comfort that we've created the relationship with our clients that allows us to bring these great and important capabilities to them, and help them evolve and thrive in a world where efficiency and effectiveness becomes the primary driver of profitability.

That's great. And then just one more quick one, in terms of MIPS, and also alternative payment models, can you maybe just sort of touch on the solutions that you have available to your clients basically meet those requirements?

Well, certainly a number of our clients are actually looking at the 365 day reporting period versus the 90. And so the alternative payment model clients are certainly in that wheelhouse. And we're already actually working with them, we've got a significant percentage of those clients, we're actually testing the 5984 release against their database. We are also working with them on a value-based readiness survey to make sure that they are ready to make this transition. And we are making sure that we're bringing the resources to bear to both educate them, to help them upgrade to help them report, and really starting to proactively work on that transition from vendor to partner, to aspirationally down the road, trusted advisor. Your vendor sells you something, your partner solve your problems, your trusted advisor looks down the road, and helps you find the problems that you may not have seen and then bring solutions for those. We feel like, we're doing a tremendous amount of work with value-based readiness survey with our software, the MediTouch platform, we just released the MACRA MIPS capability. So they are on MediTouch as well as NextGen Ambulatory our clients are well set. And then we also have - we'll get together with our large clients in about three weeks at our large client user group, and certainly continue to educate them, and take their feedback and make sure that everybody is successful as we make this great transition into value-based healthcare.

Thanks very much.

Thank you.

Your next question comes from Jamie Stockton of Wells Fargo.

Yes, good morning. Thanks for taking my question. I guess, maybe two. Rusty, could you talk about where the MediTouch integration stands from a sale standpoint versus the legacy NextGen platform? And then Jamie, if you could give us a sense for where the Entrada revenue is likely to show up on the income statement, that would be great.

Certainly. So we just got back from our sales meeting, and this was a NextGen sales meeting that's not a NextGen Ambulatory sales meeting, that's not a MediTouch sales meeting, that as a one NextGen sales meeting. I'll start with some of the more academic parts of the integration. As we sit here today, we are on a single instance of sales force, a single instance of service cloud across the MediTouch and NextGen Ambulatory portfolios, which means now that we are actually having a full view of the client base, a full view of the service history regardless of which of our industry leading platforms they are on. On top of that, we are continuing to expand the capabilities of the MediTouch platform from our R&D organization, not the MediTouch R&D organization, our entire R&D organization. And so we've already released as I said the MACRA MIPS capabilities, we've already released some great urgent care capabilities. Now we are actually moving on the next step in that strategic pathway, which is really starting to look at specialty expansion for smaller practices across the MediTouch platform. And so, we really feel like now, we are managing a single sales force, we have a single R&D organization strategy, it's being set by a single organization. And that allows both the MediTouch and the NextGen Ambulatory platforms to evolve in a way that creates a great win for the clients. And as we build capabilities like Entrada - as we bring in capabilities like Entrada across the platform, those capabilities are not only going to be applicable to the NextGen Ambulatory base, but also to the MediTouch base.

Okay. So - go ahead, Jamie.

Yes. And to I answer your question about where the Entrada revenue will show up - it will show up in - basically in two line items, it will show up in the software related subscription services, and it will also show up in the services and other line.

Okay. That's great. And just on MediTouch, is that accurate for us to think about, hey, we've been taking this into smaller primary care practices up to this point, and it's the MediTouch EHR plus NextGen PM or MediTouch EHR and NextGen PM, if that's what someone wants. And we are looking to expand into specialties from here?

Yes. I think that's fair. I think, really where are looking at now is expanding first across the smaller practice map with specialties, because that's really creating that broader specialty footprint is number one, it enables MediTouch to approach more of the market. And then maturing and bringing the best of the capabilities of NextGen Ambulatory and MediTouch together, as we move into FY 2019 and beyond. Just start to bring that capability up market. That being said, we really have found that as we've made our NextGen Ambulatory solution much more robust, as we wrap cloud capabilities around it, which really improves the physician experience and creates that efficiency. We expect NextGen Ambulatory, our flagship platform, to have a long and fruitful life, as we continue to bring capabilities to both platforms.

Okay. And then maybe just quickly, is there any difference that you're sensing in the marketplace just as far as activity levels are concerned between larger health system and practices making decisions versus smaller independent practices? I'll stop there.

I would say, it's a pretty chaotic time right now with this transition coming right down the pipe, the MACRA and MIPS and APMs. And so, I'd say that most of my conversations with clients have not been about consolidation have been more about, okay, how are we going to move through this. Now we are seeing - we're definitely seeing consolidation in some key single specialties, where we're seeing managed service organizations, private equity organizations coming in and building out these dermatology, orthopedics, ophthalmology specialties. We haven't seen as much kind of health system driven consolidation in our market recently. Those things tend to show up at odd times. But I would say that, if you look at RCM this year and Jamie has talked about RCM having a little bit of a pull-back this year, that's really some legacy consolidation that happened. And those things will happen. It's one of the reasons why we don't forecast attrition rate. That being said, we feel good about the continued drop in attrition rate, we really feel like we stabilized the business. And we feel like the growth of value within our clients, as well as taking some new clients around the edges are really supportive for our growth plans in FY 2019.

Okay. Thank you.

Thank you.

Your next question comes from Michael Cherny of UBS.

Good morning, guys. Thanks for all the details.

You're welcome.

So just quickly, when thinking about the bookings and the moving pieces there, Rusty, I hear you in terms of talking about a more optimistic outlook for revenue growth. How do we think about the transition in terms of what you're seeing now and the booking side into revenue and particularly as more and more of your business becomes more recurring revenue subscription oriented? Are there any ways to think about the evolution of that bookings metric?

This is something that also we have a lot of conversations about internally. I mean, even this last quarter, we actually saw a good bit of subscription from the booking number and I think if you remember, when is it, five quarters, six quarters ago, I took a bookings number that included everything from seven revenue cycle management deals to single license expansions and turn that into annual contract value, simply because I was trying to get to a clearer metric. It's something that we're taking under advice. I mean, I think if you've all learned anything about me over the last few years, I try to be as transparent as possible and give you a good view to the business. More to come on it as we continue to think about how to best - how to give you the best forward-looking view of the progress we're making. But at this point in time, that's a number we have and we're sticking with it.

Got it. And then just one quick housekeeping item, Jamie. Did you say the bookings number for the last year was $39 million?

Yes.

Okay. Thank you.

Your next question comes from Ricky Goldwasser of Morgan Stanley.

Hey, guys. It's Mark Rosenblum on for Ricky. Just jumping on that last question. As you guys transition from a traditional licensed based software to recurring revenue model how are you thinking about the headwind, given that some of your competitors have faced some headwinds when doing a similar transition?

I think I'll start and then I'll pass it over to Jamie. I mean, one of the things - when I look at the license service run rate and our subscription run rate and our subscription run rate has grown significantly over the last two years. I think we've already made a tremendous amount of progress here. And so, certainly the challenge of going from high margin license revenue to subscription revenue that has a little lower margin but a longer tail on it. And so, I think we've already been managing through a lot of that. And I think we've got a pretty good handle on that, but let me turn it over to Jamie for a little more color.

Yeah, I agree, Rusty, I think part of this is we've been - if you look at license revenue going back three or four years, you can see that it's been in decline. And so, I think we are - in terms - on the license side, we are working our way through that. And we don't expect all of our clients to move to a subscription offering. So I think we're seeing the decline rate slow down a little bit. And so I think we're well into the change curve here.

Okay. Got you. And any color around kind of what you're assuming in the FY 2018 guide in terms of that headwind?

I mean, I said - well, if you really unpack it, I mean, on the gross margin line we're talking about gross margin being flat, possibly slightly up. And so, like I said, I think we continue to maintain margin as we make this pivot and we've show already a significant increase in subscription line, while still growing margins during that time. So I think we're doing a nice job of managing the gross margin line during this pivot and I expect that to continue through this year.

Okay. Thanks, very helpful.

Thank you.

Your next question comes from Garen Sarafian of Citi Research. Garen, your line is open. Okay. Your next question comes from Stephanie Davis of JPMorgan

Hey, Jamie. Hey, Rusty. Thank you for taking my question.

Thank you, Stephanie.

Given the new Platform-as-a-Service strategy, is there anything structurally either in the competitive dynamics or maybe your client base, will prevent you guys from meeting the 20% op margins that are typical in most Platform-as-a-Service company in longer term?

I'm sorry, Stephanie, you broke up a little bit. Can you just repeat the question, I apologize?

The question is just that, with most Platform-as-a-Service companies, it's typical to have a 20% plus operating margins. I was trying to see if there is anything that would prevent you guys from reaching that longer-term?

We don't see anything that prevents us from reaching that longer term. Certainly - as you see this here, we are expanding investments, but we expect to continue to show leverage as we start to drive through revenue growth. In addition, I think if you look, Stephanie, we've talked a good bit about expanding margins in our revenue cycle management business. We've now brought in the expertise and established the roadmap to doing that. And we've also started to begin the process of doing that. And so, when I think about - when I think about the margin pools that are out there across the business, and I think about our - the ability we've shown to maintain operational effectiveness while bringing cost down, I definitely have in my sights, as we move forward through the out-years, getting to that level of operating margin and leverage.

All right, thank you. That's helpful. And then a follow up for me on the 2018 EPS, could you help a little bit, how to think about the cadence, just given planned investments and maybe variable comp and the second-half weighting bookings expectation?

You're talking about quarterly seasonality?

More calendarization?

Yes, just if there's any kind of planned investments in the first half of the year versus second half or anything like that?

Give me a second to - we spent some time thinking about it. I'm just not sure I got that at my fingertips. Right now, I'm struggling [ph].

Let me just - I'll proceed with a little bit. Part of the investment has actually - we've been operating on the same strategic plan for quite a while in the organization. And part of the investment has already occurred from the standpoint of, we started to expand R&D as we moved through the back half of last year. And so, part of that is the calendarization of that. We expanded some of the sales investments last year. And that rolls out over a full year as we go through this. On top of that though we will continue to march down that road of investment as we move quarter by quarter. But I'm not as sure that it's a big bolus as much as it's just continued evolution as we expand our capabilities. But I'll pass it over to Jamie. I think he's got a little more color there.

I would agree. I mean, if I think of it from a revenue standpoint, typically Q1 is the weakest quarter and Q4 is going to be the strongest quarter. We've started obviously - if you look at the R&D expense in Q4 of fiscal 2017, you can see that we've started making those investments. So there will be a slight ramping of expenses. But - over the course of the year. But you do have Q4 as your highest point of revenue. So I think that may help you color the quarters, Q1 will be - should be our - a weaker revenue quarter for us than the other quarters.

All right. That's super helpful. Thank you, guys.

Thank you, Stephanie.

Thanks, Stephanie.

Your next question comes from Don Hooker of KeyBanc.

Great and good morning. I was curious, within the revenue cycle business if you noticed any sort of anomalies among physicians around collection trends and sort of payer mix or anything like that, because that's kind of been cited by other vendors. And I was curious if you noticed anything with your clients on that front.

I think the thing we noticed in most of our clients is the impact of high-deductible health plans on them. AR portfolios continue to shift more and more to the patients. And that is less around payer collection and much more around making sure that people understand what their deductible is, what their progress is on that deductible, what they're going to pay at the frontend of the process. And so, as I look at that I'd say that's probably the single biggest shift that we see. And that's one of the areas that we continue to look at as we start to expand our financial services platform.

Is it fair to think that might have been a headwind in the quarter for you guys financially on revenues in revenue cycle management?

Actually, I would say, our experience this year was it wasn't the headwind that we've experienced in prior years. And that may have been a commentary on our Q3 number, but we didn't - we typically do have a falloff in the first quarter as you move into new deductible years. And we didn't see as big a falloff in Q4 as had certainly last year at the same time.

Okay. And then, see if I have anything else. I think I'm okay, so thanks for all the detail.

Appreciate it.

Thank you.

Your next question comes from Sean Dodge of Jefferies.

Hi, good afternoon - good morning, sorry. Thanks. Maybe just a couple on Entrada. Rusty, you mentioned the improving customer satisfaction scores. Is Entrada, or improving the way adoption are faced with the EHR, is that one of the bigger pain-points that remain for providers? And then the motivation behind the acquisition, is that something we should think of as helping to further improve the satisfaction and curb attrition? Or is this something that can really drive a lot of incremental revenue growth from here?

So I'd say - to the back end of the question, I'd say yes. Okay. So look I think one of the biggest challenges really for all of the vendors across the space is how do you enable care to happen efficiently, effectively; how do you reduce the hassle on the provider, on the physician; and how do you make sure that they get to do the things that brought them into the industry in the first place, which is care and interact - care for and interact with patients. And so, from that standpoint, Entrada is really a capability that goes right at the heart of one of the biggest problems in our industry today, which is provider fatigue. And so as we look at that, we're very excited to be able to bring this capability. Now, the capability drives a ton of incremental value. It's not just about the efficient experience. It's about enabling people to operate at the top of their license. It's about making sure that when a provider is in front of a patient or has a patient coming in and they see it on their schedule they can interact with other providers both within their organization, but also across town in a secure way to make sure that they have the best information going into that episode. In addition, it really enables them to work the way they want to work and to be able to do all of that simply from the palm of their hand. And so, when we look at that, we think that number one it does a great job provider satisfaction, which is one of those key go-gets as we really look to energize and enable our clients. But more than that, it also creates a ton of incremental value, which naturally as we create value for our clients we expect to sharing that value.

So what - it is being used by providers that are on other EHR platforms. Does this provide a good, maybe kind of a way to back in or cross-sell the NextGen or MediTouch platform into other parts or is it really just about selling - or the Entrada on top of other EHR platforms that you're not going to replace?

I mean, I think when we talk - when we think about it today, what we think about is, how do we really create - I think the biggest opportunity in front of us is just to create value within our own client base today. As far as where we go in the future, we're not going to comment on that at this point in time. I think we're really on our Platform-as-a-Service strategy. We got a tremendous amount of whitespace within our own clients, as we seek to round out the solutions necessary to make them successful. And that right now is primary focus as an organization.

All right. Thank you.

Thank you.

Your next question comes from Nicholas Jansen of Raymond James.

Hey, most of my questions have been answered. But just one on free cash flow with a little bit of an earnings reset in fiscal 2018, and higher cap R&D, and less opportunity on AR days, with DSOs kind of stabilizing here. Jamie, I just wondering here if you could give us a little bit more hard numbers on how you think free cash flow should develop in fiscal 2018? Thanks.

Well, it's clearly going to be down year-over-year, because you're right, we have made substantial improvements in the DSO. And as I pointed out in my comments, I think we're probably right at about where I would expect us to be in that high 50s, low 60s DSO range, so not expecting to see a lot of improvement there. This year, we did get a big benefit of several tax refunds. And that will not occur next year. And in fact, I would expect we'll have outflows, so that's going to further bring it down. And then from a CapEx, whether you talk - whether it's capital expenditure for property, plant and equipment, and then the capitalized R&D, it's going to be slightly higher next year than it was this year because our capitalized R&D is up, although I'd expect our capital expenditures on furniture and fixtures and things like that will be down slightly so. But it will still be in the $20 million to $25 million range. So I hope that will help you work through the free cash flow calculation.

Absolutely.

It is going to change significantly. And it's a very good question.

Great. I'll leave it that.

Thank you.

Let's take one more call, if we've got one on the line. And then we'll close it up off for the day.

Okay. Your final question comes from Matthew Gillmor of Robert Baird.

Hey, thanks for squeezing me in. Just one question on the acquisition front. The tone seems a little more aggressive on that. And I guess that's based on the API capabilities with the macro addition upgrades. But I know you may not want to tip your hand too much. But can you give us a flavor for what types of acquisitions would be attractive? Is it more focused on delivering enhanced productivity for physicians like Entrada or maybe more on other capabilities like popHealth [ph] and revenue cycle? Thanks.

Thank. Yes, we are we are certainly leaning forward. And I think we've shown that we have the capability to do that and deliver great returns to the shareholders. But also, we - that are still in the capability to integrate the acquisitions that built this organization prior to my coming here as well. And the API certainly opens up the opportunity to quickly integrate those new capabilities in. I think we're going to follow the needs of the client base. And so, certainly, as we look at this transition and this true transformation, I mean, we've been talking about the transition for value for years. It looks like the government is pretty darn serious this time. And so we expect, as we get to January of 2019, that you're going to see a lot of patients on value-based contracts. And so based on that, I think - I mean, I think you can impute that there is demand and need for our clients to be able to manage those populations of patients in a risk-based arrangement. And make sure that they are doing the right thing for those patients to drive wellness in that population. And so that's certainly an area that we will look at as both organically and inorganically, as we move forward through this next 12 to 18 months.

Got it. Thanks, Rusty, appreciate it.

Thank you. All right. Well, hey, I want to say thanks to everybody. Certainly, we're excited as we look towards this year. We feel like we've worked hard to gain the right to be able to truly accelerate with our clients. And certainly, we're looking forward to continuing the conversation with the investor community as we move forward through the year and look forward to the next call. So thanks, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's call. You may now disconnect.