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

Sean Wieland - Piper Jaffray, Inc. Matthew Gillmor - Robert W. Baird & Co. Mohan Naidu - Oppenheimer & Co. Jeff Garro - William Blair & Company Rose Lauricella - Morgan Stanley Sean Dodge - Jefferies LLC Nicholas Jansen - Raymond James & Associates Gene Mannheimer - Dougherty & Company LLC Steve Halper - Cantor Fitzgerald David Larsen - Leerink Partners LLC George Hill - RBC Capital Markets

Welcome to the Quality Systems Incorporated Fiscal Second Quarter 2018 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, and all lines have been placed on a listen-only mode. The floor will be opened for your questions following the presentation. [Operator Instructions]. Before we start, I would like to remind everyone that comments made on this call may include statements that are forward-looking within the meanings 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. Risks and uncertainties exist that may cause actual 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 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 contains certain non-GAAP financial measures. For our 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, non-GAAP within our fourth 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?

Thanks, operator, and thank you to everyone, for joining the call this morning to review QSI NextGen’s second quarter results, which are in line with and in some areas slightly better than our expectations. On the call today, first, I’ll touch on some unexpected short-term challenges we experienced in our sales forces this quarter and explain what we’ve done to address them. Second, I’ll review some continued positive momentum in our client base and solution set. And third, I’ll share some of the enthusiasm we’re seeing for our new solutions, Entrada and EagleDream, as well as for our platforms of service offering. Before diving in, let me start by reviewing some financial highlights from our 2018 second fiscal quarter. Revenue of $132.6 million in the quarter compared to $127.2 million in the second quarter of fiscal 2017. And non-GAAP EPS of $0.22, was down $0.01 from $0.23 a year ago. Turning to my first topic. I want to touch on those challenges from the quarter that I mentioned at the opening of the call. During the latter part of the second fiscal quarter, we experienced a high level of turnover in our sales team, concentrated on the longer tenured part of the team. We did expect and plan for some sales force transition as we shifted from selling point products as perpetual licenses in a meaningful use driven-environment to the new world of selling complete solutions as a subscription model in our ROI-driven environment. However, this quarter, that pressure from sales force attrition outpaced our expectations as a number of legacy sales resources and managers elected to move on. This did impact our bookings in the second quarter. Quarterly bookings of $26 million, while 10% up sequentially decreased 24% year-over-year on a pro forma basis where we assume Entrada and EagleDream were under our umbrella in fiscal 2017. While our subscription bookings continued to be a steady contributor, we’ve seen some headwinds in the perpetual license bookings and associated maintenance in professional services. In terms of deal sizes, we saw a notable decrease in closing larger deals in the quarter compared to a year ago. We believe this is tied to the loss of some legacy relationships with departing salespeople. With that said, I’m pleased to report that at this point, we have filled nearly all the open sales positions. And in fact, as we lead off third quarter, we have slightly more reps on board than we did at the end of the first quarter this year. Coming away from our sales meeting earlier this month, I could feel the energy and invigoration amongst the team members. We spent time continuing their education on new aspects of our solutions, such as EagleDream, as well as ensuring that our new resources are coming up to speed quickly on the entirety of our solution. I firmly believe the sales team left meeting ready to do battle out in the field, a thesis supported by the fact that nearly all come with ambulatory and HCIT experience, as well as a solution selling backgrounds. Second, I want to touch on continued positive momentum across our client base and solution. During the quarter, we saw a continuation of many of the positive trends we’ve been tracking over the past couple of quarters, including further improvement in our attrition rates; on a trailing 12-month basis, attrition stands at 5.5%, which we believe is within the natural range. And in client satisfaction, which based on our own Voice of the Client survey has improved significantly, reaching 7.3% off of lows of 5.3% from when we started our transformation two years ago. In addition, we’re gratified to be featured prominently in the class Practice Management report as the only major vendor that is significantly improving client satisfaction and the class of interoperability report where we are leading the pack in improving our interoperability capabilities and possibly impacting care through interoperability, as seen by the client base. We feel like we are continuing to separate ourselves from much of the competition as a result of our work, dedication and focus. Additionally, we continue to make great strides in the technology side. We successfully released 5984, our fully certified EHR Practice Management solution on time, on quality and with full scope. This is the release that satisfies the MIPS and MACRA acquirements. We are live in more than 10 clients and in test with quite a few others. This release is accompanied by our certified fire-based API, which supports seamless integration with our growing library of platform components. Delivering these great capabilities successfully to our client base is a significant part of the improvements in client satisfaction and the receptivity to further conversations. Finally, we are getting great initial feedback and interest from our clients around our newest solutions, Entrada and EagleDream. Entrada’s pipeline is up significantly from just last quarter, as next runs – NextGen sales reps are identifying opportunities and including the combined offering in new deals. Furthermore, in just six weeks into close the acquisition of EagleDream, we’ve already shown, it’s over 100 existing clients through executive dinners and webinars. On Monday, we have 50 more clients scheduled. We’ve also closed our first NextGen deal for our EagleDream solution. This initial activity is great and we look forward to seeing how this activity converts into growing bookings, as we move through the next couple of quarters. As we prepare for our annual User Group Meeting in Las Vegas in early November, where we’ll have more than 2,500 client representatives in attendance, we’re very excited to broadly display our expanded breadth of capabilities to an increasingly receptive client base. We’ll be able to walk our clients through how our core platforms can be significantly enhanced with the addition of components like Entrada, EagleDream and Mirth, as well as how they can increase both revenue and profit by leveraging our expanded financial service capabilities, including capabilities such as revenue cycle management. This year, we’ve also expended on our past agenda to include a C-Suite session for our clients. We are gratified to have over 200 C-Suite leaders registered, a sign that we are starting to successfully sell wide and high in our organizations rather than simply to IT. A few weeks into the quarter, we are already seeing early signs of growth in our pipeline, but the sales attrition in the second quarter leads us to believe, we will be about a quarter or two behind our previously stated bookings goals. That being said, the great performance on client attrition and the continued progress on subscription bookings have both allowed us to tighten this year’s revenue guidance to the upper part of the range, as well as remaining committed and confident in revenue growth next year, leading to high single-digit growth in the year after. With that, I’ll turn the call over to Jamie to take a deeper dive into the numbers. Jamie?

Thank you, Rusty, and thank you all for joining us this morning to review our fiscal second quarter 2018 operating results. Rusty discussed some of the trends we saw in the quarter, so I’d like to use my time on the call to provide a more comprehensive look at our second quarter financial results. Total revenue for the quarter of $132.6 million represents 4% increase from a year ago. Revenue from software license and hardware of $14.3 million decreased 17% year-over-year. This revenue line was impacted by the sales staff turnover that Rusty discussed, and the low demand for on-premise perpetual license model. Consistent with what we’ve seen – what we said in previous quarters, software license and hardware revenue will remain under pressure for the rest of fiscal 2018. Subscription revenue of $25 million increased 16% from the $21.5 million in the second quarter of 2017. This increase is attributable to strong performance across a number of offerings, including MediTouch and Mirth and the contribution from the two recent acquisitions. Support and maintenance revenue of $41.7 million increased 7% year-over-year. The increase from last year is primarily attributable to a one-time maintenance true-up and the impact of annual price increases. We also experienced lower return reserves this year than we experienced last year. As in prior quarters, we continue to stress the importance of client satisfaction. And that has led to another quarter of positive trends in our maintenance attrition, which is at 5.5% on a trailing 12-month basis. For the second quarter, low attrition came in at approximately 4%. Revenue cycle management and related services generated $21 million, which was relatively flat versus the year-ago quarter. Note that in Q2, we expect the downward pressure on RCM due to the multiple hurricanes, and in Q4, we generally faced headwinds due to resetting deductibles on health insurance. On a separate note, we have previously mentioned that we had exposure to expected attrition related to one large client. At this point, we are having ongoing discussions with the client that are not expecting new experience to decline in Q3. Revenue from electronic data interchange and data services increased to $23 million in the quarter, up 6% from the second quarter of 2017. EDI benefited this quarter from fewer concessionary credits than last year. Finally, our professional services revenue of $7.7 million increased 10% year-over-year. The increase is due to transfusion [ph] services for Entrada offset by a decline in professional service revenue associated with the legacy software product. Before moving on from revenue, I want to mention that our recurring revenue remained nearly unchanged from last quarter’s record level, coming in at 83% of total revenue compared to 81% in the second quarter of fiscal 2017. As a reminder, for this purpose of calculating recurring revenue, it is made up of subscription, support and maintenance, RCM and EDI. As Rusty discussed, the turnover in our sales force this quarter has impacted our booking. We ended the quarter with $26 million in bookings, up $2.3 million from last year, or sorry, from last quarter, but down 24% on a year-over-year basis if calculated on a pro forma basis. Gross profit of $73.9 million compared favorably to $71 million in the year-ago period due to higher revenue and higher gross margin across a number of revenue line items, which offsets the mix shift. Gross margins remained relatively flat at approximately 56%. I’ll now turn to our operating expenses. SG&A of $41 million decreased slightly from $42.8 million in the second quarter of 2017. This decrease was driven primarily by a reduction in acquisition-related cost, offset by an increased employee cost and bad debt. R&D in the second quarter increased $1.2 million, or 7% to $19.5 million, due to incremental personnel costs, offset by increased software capitalization, which was primarily related to the 5984 release. Our GAAP effective tax rate for fiscal 2018 is 28% and our non-GAAP tax rate is 30.5%. The change in the annualized GAAP effective tax rate from Q1 is primarily attributed to the change in expected annual results after the acquisition of EagleDream. Finally, our GAAP EPS of $0.13 in the quarter compares favorably to $0.06 a year ago. Our non-GAAP EPS of $0.22 fell a $0.01 from the $0.23 in the second quarter of fiscal 2017. Turning to the balance sheet. We ended the quarter with $26.6 million of cash and cash equivalents, up from $23 million last quarter. In Q2, we had net increase in the amount drawn against the line of credit due to the acquisition of EagleDream Healthcare. This leads us with $55 million outstanding against the revolving credit agreement, and total liquidity which is cash plus the unused line of $214 million as of September 30. DSO in the quarter were 56 days. Finally, with half of the fiscal year behind us, we are taking this opportunity to tighten our financial outlook. The fiscal 2018 full-year revenue, we now expect between $522 million and $530 million compared to our previous range of $512 million to $530 million. For fiscal 2018, non-GAAP EPS, we now expect between $0.64 to $0.68 compared to our previous range of $0.62 to $0.70. In the second half of fiscal 2018, we anticipate capitalizing best software development costs due to the timing of major releases as the effect of increasing R&D expense. We also have several significant sales and marketing activities, including national sales meeting, which incurred in the first week of October, our upcoming User Group Meeting in participation at HMIS [ph] in the fiscal fourth quarter. We also have significant increase in cost associated with the 606 revenue recognition project, as well as in Q4, we always see an uptick in personnel cost to – due to resetting the annual limits for employee payroll taxes. That concludes my discussion of the financials for the quarter and our forecast for the remainder of the year. So with that, I’ll turn the call back over to Rusty for a few closing remarks. Rusty?

Thanks, Jamie. In closing, I want to thank each one of NextGen’s employees and clients. Delivering shareholder value begins with client and employee value. I’m really pleased with the progress we’ve made as an organization and truly feel we are developing and delivering an increasingly competitive differentiated solution that enables clients to truly thrive in this complex world of health care. I look forward to keeping you up-to-date on our development throughout the remainder of the year. With that, we’ll open the call to questions. Operator?

[Operator Instructions] And your first question comes from the line of Sean Wieland with Piper Jaffray.

Thank you. Good morning. So double booked on calls here, so hopped around a little bit, but I got that just to the bookings. I just don’t understand the reasons behind the sales force turnover. Can you quantify in terms of number of people or percentage of pipeline and what was the reason for the turnover?

Yes, Sean, good question. As the reason – we’ve certainly done exit in exiting those things. The reason for the turnover, I’ll really draw some – a number of different factors. The first one is a significant change in the way we’re selling. As you know, going from selling single products to selling broad solutions implies an entirely different conversation with the client, and a very different process by selling to the client, which is long term road mapping of those things. That’s a significant shift in behavior for the sales team. In addition, classically before I came in, there were multi-year tails on commissions. We stopped that when I came in, but those tails were still continuing to run out. And then, finally, we are really – as we’re moving from selling Practice Management and EHR to selling an entire broad solution, it’s putting a lot of pressure on skill sets and capabilities. And so I think, you saw a number of books with long tenure with the organization beside that perhaps there was a better place for their skill set and a better fit for them. And the fortunate part about this as we’ve talked about in the past is, we expected sales force transition to happen. We did not expect it to happen this quickly. And so we have kept lines in the water. We had an active sourcing program and we are able to bring in some great talent very quickly. But certainly, like you saw, we started out with that, because that was definitely a headwind in the quarter and something that we continue to monitor closely. But I’d say that, we perhaps had our eye not as closely on the balls we could as we are moving through this quarter and now we’ve reacted to that.

So it’s just an odd timing rise that happened in the middle of your fiscal year typically, these things happen after the end of the year. Were there any changes made to the compensation structure of the sales team midyear? And it sounds like these were reps that left on their own accord, is that correct? And…

That is correct.

Also could you, okay. And can you quantify the number?

Yes, I want to say, we lost 13 people total in a very short period of time, so pretty significant part of the sales team and that’s mostly reps, but also a couple of managers. And what I would say is, we’re less than halfway through the year when this attrition happened for our financial year, because it happened in the middle of Q2. And I go back to the fact that when you got legacy multi-year commission tails that tends to mute the impact of an individual financial year.

Okay. And that’s 13 people out of how many reps?

Total of 70.

Out of 70. Okay, thank you very much.

Yep. Thank you.

Our next question comes from the line of Matthew Gillmor with Robert Baird.

Hey, thanks for taking the question. I want to ask you about the revenue cycle, revenue, it’s probably pretty held up, I think a little bit better than what you all had messaged in. And you mentioned that that large client was now in discussions with you all. Can you provide some more detail, do you still expect that client to roll off, or is there the opportunity to keep it?

Well, I mean, we are in discussions with the client, right? So that implies that there is opportunity. We’re not willing to commit to that, because we can’t commit for the client until the client commits for themselves. What we would say is, as always, as we see this timing shift outwards and frankly, we see some potential for it not to happen at all, we immediately brought that forward.

Okay. And then, maybe one broader question on the cloud strategy for the NextGen base. I know part of the long-term vision was to build out MediTouch, who can serve more specialist in some of your larger NextGen clients? Can you just maybe update us where you are in that process in building out those capabilities?

Yes. I’d say, as I said before, we are moving MediTouch more broadly first. And so, as we get into FY 2019, you’ll see MediTouch serve a much greater number of non-surgical specialties. And then, we’ll start to implement some more complex functionality and gradually move it up. Now but I would say is, especially given with the stability and performance of the core NextGen ambulatory Practice Management and EHR that it’s probably not the burning platform it was two years ago, because frankly, clients are pretty satisfied and increasingly satisfied with the work we’re doing on the NextGen Ambulatory platform. And so we look at these two platforms, it’s really fitting different parts of the market. And what I would say is, as we look into the next year, we not now that we’ve finished our government homework and the government unfortunately has moved the date back. So we delivered 5984. We delivered MACRA and MIPS. We are ready to take our clients forward and now that time line has been pushed back a little unfortunate, because we probably would have focused more on usability and less on regulatory compliance last year, but we can’t take that risk for our clients. So as we go into next year, we are planned to spend a good bit of money both on taking MediTouch more broadly, but also on significant enhancements to the usability of the NextGen Ambulatory EHR to bring it up to the level of clients sat with the Practice Management Solution is already on.

Got it. Thanks very much.

Yep.

Your next question comes from the line of Mohan Naidu with Oppenheimer.

…taking my questions. Rusty, maybe one more on the sales rep. So the new sales teams that you have pulled together, how long do you expect the leading time for these guys to become productive?

Yes. I mean, I’d say, is – that the good news is, a lot of these people just come right out of the box having actually sold these type of solutions into this type of client base. So for them, I think, it will be a shorter pull, but there are some folks that had come from little further out in the industry. Our expectation is, it’s really three to six months for them to start to come up to speed and really be productive. But I would like to go back to one of the comments I made, which was that over the last two years, we’ve also actually been steady producers of subscription revenue. And so I think, as we look into next year, it’s interesting how contribution from that steady production of subscription revenue actually shows up in next year in ways that frankly, the one-time bookings on the revenue side show up this year and just a little bit in next year. And so as we look at, not just the amount of bookings, but the nature of the bookings we continue to drive, that also continues to mitigate some of the impact of the sales attrition and set us up for next year.

Got it. And just to follow-up on that one, with this change in sales, do you, I guess, I’m trying to figure out what’s the impact would be in the second-half bookings ramp? Are you still expecting a flat or up bookings in the second-half at all?

What I’d say is, I think, at this point in time, we don’t have quite enough track record with the full team and while we’re seeing visibility in the pipeline. I don’t have enough visibility to really make a commitment on the back-half. But what I would say is, when you think about all of the activity going on EagleDream, we’ve signed our first EagleDream client on NextGen Ambulatory, Entrada pipeline significantly increasing. We have a fully staffed RCM specialist team for the first time and a RCM program that is competitive with some of our primary competitors. I think, we’ve got the fundamentals there. It’s a little hard with a partially newer team to absolutely commit to a timing. But what I would say is, we feel confident going forward. And on top of that, as I’ve said, we remain absolutely committed to our growth thesis, as we go forward over the next couple of years.

Okay, great. Thank you very much for taking my questions.

Thank you.

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

Yes. Good morning, guys, and thank for taking the questions. I want to start off by following up on Mohan’s question a little bit, maybe not as much about the whole second-half of the fiscal year. But if you could help us set expectations for bookings activity in the December quarter, given this sales force turnover and also other factors like it’s a typically seasonally strong quarter for the industry, but you also have maybe a little bit less regulatory urgency? And you guys have just started to roll out a broader set of products set that you’ve talked about some excitement within the client base about?

I would expect sequential up from Q2 to Q3. And like I said, I can’t commit to a number until I see a little more of the activity in the quarter. But my expectation is, we’ll be sequentially up and we will be much closer to flat year-over-year.

Great. And then maybe digging a little bit deeper on the broader pipeline. Your customer tour just took place in September that that’s only one piece of the sales in marketing pushed, but you talked about some positive feedback there. Of course, the sales cycle is probably closer to 90 days than 30? So, with those caveats and the sales force turnover how is the sales pipeline tracking relative to your internal plan?

Yes, it’s still early days. But – and naturally, as I’ve said before, I won’t – I don’t call it make quantitative comments on pipeline. But if you’ve heard a couple of qualitative comments from me, I think, that’s a good implication that pipeline continues to improve. We see definitely, we’ve already seen our first deal signed on EagleDream. And as I said earlier in the call, we – we’ve already presented through 100 different clients. We’ve got 15 more unique clients coming next week. And so we really are starting to see a lot of interest there with five RCM specialists all of whom have sold RCM in the past. We expect to continue to see momentum there. And I would say that the receptivity of the client base and the satisfaction of the client base as validated by a lot of the classwork is really increasing my confidence as we move forward through this year and into next year and our drive to get to high single-digit growth in the FY 2020 year.

Great. That’s very helpful. And one last one for me. I was hoping you could give some update on the simplified pricing framework that you’ve rolled out that you’ve talked about allowing you to introduce new capabilities with a straightforward and more transparent pricing model, more aligned with customer’s success. So I was hoping you could comment on how clients are reacting to that approach? And maybe any examples you could give of how that approach has played out for particular customers in the sales discussions?

Yes. I really started just introducing it into clients. But certainly, for clients that have done business with one of our primary competitors, they are pretty used to a simplified pricing model that scales with percentage of net collection. As we look at it, we are delivering a model that enables our clients to easily acquire our solution in a very simple model. We’ve already started to have those conversations, clients are very receptive, simply because it allows them to have a much more predictable and aligned cost structure with their revenue structure. And I think everybody on this call is aware of the nature of that. I’d say that we are starting to have those conversations. I’ve gotten some positive feedback from a couple of perspective clients on it, but it’s still a little early to really make a broad statement about it. I would expect to be much more informed about how it’s affecting in the field when we talk in January.

Great. Thanks for taking the questions, guys.

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

Hi there. This is Rose Lauricella in for Ricky Goldwasser today. I was just wondering if you could speak to the status of the EagleDream integration? I think at the last call, you had mentioned it would take around six months. So how are we tracking in regard to that timeline?

So a couple of things. Number one, we’ve already started to augment from an R&D standpoint. We’ve already started to augment that capability broadly across the organization, including starting to build resources in our India Development Center as well. For the sale standpoint, we have now trained the entire sales team. We have made sure – we’ve actually brought EagleDream live on a variety of test data basis to make sure it works well with NextGen. And as I said, we’ve already closed our first deal and we’ll bring that client live. From a back-end information system and financial integration, I’ll pass it over to Jamie.

Thanks, Rusty. The back-end integration will be completed at the end of Q3 or the very first part of Q4. And they will be on all of our systems, we would expect to have them on our systems from a revenue standpoint at the end of Q4. It takes a little longer to get the lead to cash process into our system. But it’s going very smoothly. I think to add to what Rusty said, we’ve also hired four sales reps who focus exclusively on EagleDream. They are specialist in the analytics area. So we’re very excited about getting them on boarded.

Yes. And this really – this is simply a repeat of the same performance on the Entrada platform. And so what I would say is all of the work we did before we started making acquisitions on integrating all of the past acquisitions prior to my tenure, has really trained this organization to really run these things through quickly and integrate them completely into the business.

Excellent. And if I could with one more. Some of your competitors have spoken to slowing claim utilization in the ambulatory market. Are you seeing the same trends on your side?

We are not seeing it to the extent that it sounds like some of our competitors are seeing it.

Excellent. Thank you.

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

Yes, good morning. Thanks. You mentioned the release of the new 5984 version and now having that deployed in the 10 client. What you – when you anticipate deploying that more broadly? And how good of an opportunity where you’re making those upgrades, is that to sell in other pieces of the platform that you are now offering?

So first of all, what I’d say is, that was on our beta pull, 10 clients live, another, I think, 15 or 16 in test. We also have the fast start – the fast track program. These are clients that we’ve been working with. They were not part of the beta program, they were waiting for general release. But these are clients that we’re looking to come up quickly. Now, like for example, more than 40 of them were CPC+ clients who were going to have a January 1 reporting period, that’s now been moved back. So reduce some of the urgency on their side. But we’re still moving through the pipeline with a lot of clients to bring them live on 5984. And what I would say is, yes, it is an opportunity to have those conversations, but it’s a general rule when we’re having that kind of conversation. What we’re really talking about is not – let’s install a bunch of other things at the same time we do an upgrade with the major core platform is, look, while we upgraded to the great major core platform, let’s look at what the multi-year roadmap should be, because a lot of times, folks are not looking to add complexity when they are upgrading the core platform for their operational organization. Now that being said, when we are coming with these upgrades, we are seeing opportunities to talk about great provider workflow with Entrada to talk about that transition to value, which MACRA and MIPS definitely imply by bringing in EagleDream to really show gaps in care. And so we have the opportunity to talk. But I would say, that our primary focus at this point is still getting the client from the last release to the next release, making sure they have a great experience, making sure the system is performing to their expectations, which continues to earn us the right to execute on that multiyear roadmap we develop with them.

Okay, thanks. And then Rust, on your last call, you mentioned a 20-city road show you are undertaking over the quarter three potential on existing clients. I’d expect to give you a pretty good sense of what broader sentiment in buying intentions are like out there? Can you boil down for us a couple of takes or feedback you got from them?

For sure. First of all, I never eat another steak, it will be too soon. But what I would say, frankly, it’s a phenomenal exercise. I mean, I ended up going to a total of, I think, 11 cities, being personally with somewhere in the neighborhood of 55 clients in total. And as going through that experience, being able to talk to them, getting feedback, not just on where they are and what their challenges are. But frankly, it’s a little gratifying given all the hard work we’ve done over the last two years to get feedback of folks, steak would say, it’s like an entirely new organization. And for the first time, we really believe that you are aligned with what we need as a business. And so those kind of conversations plus in some of the road shows, we actually had Dr. Betty Rabinowitz, the CEO of EagleDream actually doing some light webinars. We really did receive a tremendous amount of interest. And when you look at the – at how those folks went home, grabs some of their folks and got on webinars with us on EagleDream subsequent to the road show, and as that excitement continues to percolate to the fact that we have 50 new clients signed up for Monday’s webinar. I think this continued executive intimacy and field base leadership that we’re showing as an organization continues to make the client base much more comfortable in looking at us as a comprehensive solution provider.

Very good. Thank you, again.

Thank you.

Your next question comes from the line of Nicholas Jansen with Raymond James.

Hey, thanks for the comments. Just one or two for me. First, in terms of the guidance that you kind of laid out at the Analyst Day in September about kind of margins as you think about fiscal 2019 and beyond? Does the push out in bookings growth for a quarter or two impact any of those conversations we think about fiscal 2019 in terms of either SG&A or R&D leverage, just not sure if the lower cap rate that you are going to see in the back-half of this year kind of translates into next? Just any thoughts there would be helpful.

Yes. We’re just starting the 2019 planning process. But I – when I look ahead, I do think that there probably is a little more cost in the structure than when I look across at the consensus for 2019? So I think, there will be some additional R&D cost next year.

Yes, I think, and as I look at the business and I look at next year, I’d say, I think, we’re generating a lot of success with our investment. When I came into the organization frankly, our R&D was completely unleveraged. As we sit here today, we are getting a significant amount of value out of every dollar we spend in R&, and we are continuing to expand our solution in ways that are really engaging the client base. I see that continuing for next year. I think we will continue to work hard above the gross margin line, but I think we will continue to stem below the gross margin line.

That’s helpful. And then just definitely on Entrada, I think when you acquired it, you were anticipating some level of attrition, just wanted to kind of get your thoughts on how that has played out in context of your initial expectations?

I think, we’ve seen attrition. But what we have seen is, we’ve seen some slowdown in some of the competitive pipelines and some relatively significant reductions in those competitive pipelines as, at least, one competitor, I think, has looked at this as something that they don’t want within their patch.

Okay. And then Jamie just quickly?

But when I talk about significant increase in the pipeline, let’s just be absolutely clear that the NextGen client base opportunity, as we’ve always said from a cross-selling standpoint, has quickly come in and outpaced any loss in pipeline from the competitive footprint.

Okay, that’s helpful. And then, Jamie just really quickly, what was the cap rate or capitalized software in the quarter?

The capitalized software development cost was $4.3 million.

Thanks. I’ll hop back in queue.

Your next question comes from the line of Gene Mannheimer with Dougherty and Company.

Thanks, and good morning. I just want to get my arms a little bit more around the sales force attrition. So how does quotas change Rusty, say under the new solutions-based approach versus the old way and – or said differently, I mean, how much money could a salesperson make under the old plan versus the new plan? And then, Jamie, can you just share with us what was the one – what was the amount of a one-time true-up on maintenance in the quarter? Thanks.

Yes, so we certainly changed the way folks are in the past. I was at a highly complex comp plan and frankly, highly complex comp plans generally create a lot of perverse behavior within the sales team, because they are trying to figure out how to succeed with it. And frankly, when it’s complex, you end with a lot of different behaviors. We went through a much more simplified comp plan, but we’ve also made sure that people can earn. I mean, from our standpoint, the top earner in this organization should make some real money. And I want everybody who is successful to do that, so there’s accelerators past the end. What I would say is, we are not selling into a meaningful use funded environment anymore. We are selling into environment that is driven by ROI. ROI takes time and it takes work on the front-end of the client relationship to get that multi-year roadmap to truly understand their business and do all those things, it’s just a very different sale. And I think folks really felt like with – from where the legacy opportunity was, this is a much different selling process. Now, this process represents much more of the process you see broadly across industries versus a mandate-driven tailwind. I think that made it more difficult to earn, because you are having to really spend time curating opportunities rather than simply walking into a client who already knows that they can get a stimulus if they sign a contract. So I think, it’s those things, I think, it’s also a lot of change in the organization as a whole. And so I think, we were pretty clear. We expected some turnover. We didn’t expect it to happen so quickly. We had two external entities come in, one of which had a legacy person from this organization and another, which is actually one of our horizontal vendors came in and actually grab a number of people. It’s one, look, the reason I let off with it is, because I think we’ve made some really good moves along the way. I’d say this one, it was a little bit of a misstep and we are going to take accountability from that and keep moving.

Great. Very helpful, Rusty. Thanks. And Jaime, did you have that number on the nations true-up?

Sure. It’s approximately $1 million.

Okay, great. Thanks, guys.

Your next question comes from the line of Steve Halper with Cantor Fitzgerald.

Follow-up on the previous comments, with respect to the sales turnover and again, we are beating this. What do you think in hindsight, you could have done differently to have a more orderly sort of sales force transition?

Yes. It’s a great question, Steve. I mean, I think, as we’ve looked at it and as we look going forward, first of all, we did – we have made a market adjustment to make sure that our folks are comfortable. We did a market research study, and found we are a little bit below where the peer group was and made a market adjustment in sales comp there. I think, as we’ve cycled through, we’ve got a new sales leader. We’ve got almost into new – completely new sales management team. A lot more activity management and understanding when people are pulling their foot off the gas, because they are actually out looking for something else. I think, as this – as our sales process continues to become more robust as our sales systems come more robust. And as we really are starting to look at activity patterns, I think we are starting to see the warning signs earlier going forward. That being said, we – I’d say, 70% of the sales team is less than a year tenured in this organization, but they are not less than a year tenured in this industry. And so we feel like we’ll be able to turn this around pretty quickly. I think, we still expect a little more attrition here and there as folks decide that this is not the place for them. But we’ve got a great leadership team that has experienced across this industry and now we’ve really filled in the blanks on the – kind of the standard sales reps. We’ve also built out a great specialist team to help them. So we feel like we’ve really got most of the right team in place. We want everybody to be the right team, some people may decide they want to be somewhere else. But we’re well-prepared now and we’re very vigilant on making sure that we understand the signs and that we’re working with the sales team to make sure they feel comfortable on one side. And on the other side, if they truly want to move on, we want to support them in their career.

Okay. Thank you.

Our next question comes from the line of David Larsen with Leerink.

Can you talk about any differences that you might be seeing between, like the Practice Management and revenue cycle operations of the business versus the EMR? Are you seeing any sort of like higher growth rates on the RCM side than the EMR side at all or not? Thanks.

I think I understand the question, Dave. I’ll answer the question, I think I understood, you can correct me if I’m wrong. I would say that, what we’re not seeing is a lot of standalone Practice Management RCM business, while we do see a little bit here and there. Generally, Practice Management and EHR are sold together and RCM comes in after the fact. If I was to rank the two, I mean, Practice Management right now is an incredibly strong asset. We – the class report on Practice Management was very complementary of the trajectory we are on. We are really, I mean, I think when I came in, it was something like 60% of clients, felt like they were hostages, looking to leave. That number in class is now down to 30. Those are significant moves. EHR would be moving along with Practice Management, except that we spent the last year doing our government homework only to have the government back away from the time line. So this year, we are going to take that great velocity that we had on the EHR side and delivering the MACRA and MIPS release and folks that solely on provider, satisfaction, provider usability and system performance. So I absolutely expect to see EHR come up to the level that Practice Management is, as we move through this year from a client stat standpoint. Practice management and RCM certainly work very well together. And as that organization continues to evolve, I think, we’re getting to more and more operational strength there as well as sales strength now.

Okay, that’s helpful. And then, can you talk a bit about EagleDream. It seems like that’s a fantastic asset, it seems like that’s what comp providers are looking for in the future? Have you been able to develop that, maybe link it with Entrada or Mirth?

Yes. In fact, one of the things we are going to show at UGM is, how those assets work together across the platform. I mean, if you think about the fact that, if I can identify gaps in care in EagleDream and I can close those gaps in care, I can indicate those gaps in care directly to the provider in the palm of their hand – on the Entrada hand health, that’s a great win, because it’s not just identification, it’s actually closure. When you think about, for example, NextGen share with a referral network with over 1 million endpoint providers on it, right? The ability from Entrada to hit a share button and directly do a referral from the hand health out to somebody completely outside of your organization if you need to. Those are the kind of capabilities that we are going to be talking – walk into client base through at UGM and really showing how – as we build out our platform as a service strategy, it’s not simply adding a bunch of capabilities on top of an API. It’s developing workflows that flow across those properties to solve problems that the individual properties or those properties’ individual competitors couldn’t solve themselves, because they are different companies, whereas we are bringing new solutions together very effectively. I think also though, when you think about EagleDream, right? EagleDream is a population health tool, being able to validate what a person gaps in care are and what hasn’t them enclosed requires interoperability, because you need to see that longitudinal view of the patient. So when you think about EagleDream and Mirth connection and when you look at the class report interoperability and how much great work we’re doing there, I think all of these things are coming together in a really great way at a really great time.

Great. Thanks a lot.

Thank you.

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

Hey, guys, I appreciate you taking the questions. Either Rusty or Jamie, could you guys talk about how much of bookings are coming from, what I would call, the either the core product solution versus products that were required in the last 12 to 18 months? Just trying to get a sense for growth drivers and where growth for the business is coming from?

We don’t unpack bookings down to product level. But I would say George is, when I look at the continued progression of subscription revenue over the last couple of years versus the one-time software revenue and the associated maintenance, we continue to see more and more strength in subscription over the multi-year arc. And to some degree, we are starting to see that one-time quarter – instant quarter recognizable revenue. I think it starts to moderate and we expect that continuing to moderate over time.

Okay, that’s helpful. And then…

The great news is that subscription revenue shows up in the year, it was fine and it also shows up in the year after and the year after, whereas license maintenance revenue shows up heavily in year one, but not as much as in years two or three.

Okay.

I think, if you you – hey, can I just offer, if you look at the software license revenue line on the financial statements, you got a pretty good indicator of kind of the legacy products since they were primarily sold on a perpetual basis not entirely, but primarily. So you can see, if that line declines, you see the – that helps you understand the makeup of the bookings.

No, that’s helpful. I guess, forgive me if I miss this number. Did you guys breakout kind of what percent of clients are coming from new – what percent of bookings are coming from new clients versus what percent of bookings are basically cross-sell?

No, we haven’t. But what I would say is, as we’ve stated in our strategy, our primary opportunity is cross-selling within the base.

Okay.

While we continue to look at new footprint, primary focus at this point in time is on the bigger opportunity, which is at cross-sell opportunity.

Okay. Is it wrong to assume something like an 80, 20 or 85, 15, which would not be terribly dissimilar from others in the industry?

Yes, I think that’s a fair assumption.

Okay. And if you’re giving just a quick third one. If we look – actually, I’ll stop right there, I’ll follow-up after the call. I appreciate, Rusty. Thanks.

All right. Thanks, George.

Thank you.

At this time, there are no further questions. This concludes today’s conference.

All right. Well, thank you, everybody, and we look forward to talking to everyone in November, I mean, in January, excuse me, and looking forward to our User Group Meeting in November. Everybody have a great day.

This concludes today’s conference call. You may now disconnect.