Rusty Frantz - President and CEO Jamie Arnold - CFO

Sean Wieland - Piper Jaffray Jamie Stockton - Wells Fargo Nicholas Jansen - Raymond James Mohan Naidu - Oppenheimer Sean Dodge - Jefferies Jeff Garro - William Blair & Company Stephen Hagan - RBC Capital Markets Matthew Gillmor - Robert Baird Mark Rosenblum - Morgan Stanley Anne Samuel - JPMorgan David Larsen - Leerink Donald Hooker - KeyBanc Steve Halper - Cantor Fitzgerald Gene Mannheimer - Dougherty & Company Stephanie Davis - Citi Research

Welcome to the Quality Systems Incorporated Fiscal Third 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. 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 would 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. 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 policy filings with the US Securities and Exchange Commission, including the discussion under the heading Risk Factors in the company’s most recent Annual Report on the 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 any reconciliation of the differences between each non-GAAP financial measure, and the comparable GAAP financial measure can be found 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 us this afternoon to review QSI NextGen’s third quarter results. We are pleased that we had another solid quarter where we continue to make progress and execute our strategic plan. We saw revenue of 131.7 million in the quarter, compared to 127.9 million in the third quarter of fiscal 2017 and non-GAAP EPS of $0.15 compared to $0.23 a year ago, reflecting the investments we have made over this year as well as enabling us to continue to confirm our guidance range. Most indicative of our progress however is the 30.5 million of bookings in the quarter, which reflects a 17% increase sequentially. We expect this trend of sequential increases to continue into the third quarter as well -- into the fourth quarter as well. Before I dive into more of the third quarter details, I wanted to share some of my perspectives on the company from where we stand today, three quarters of the way through our fiscal year. So far this year, we've acquired and integrated two acquisitions that align our solution with the key areas of focus of our clients, the transition to value based care and physician efficiency. We've introduced a simplified business model and billing approach that's aligned with our clients' success and makes us easier to do business with. We've broadened and enhanced our leadership team and we've transformed our sales force to a disciplined solution selling organization. These accomplishments along with many others have begun to manifest in the financial results and the sequential bookings growth we delivered in the third quarter. Based on the pipeline growth, I'm confident that the early signs of delivery from our new fully staffed sales team, but recognize that it does take some time for the full effect of this invigorated and more capable team to flow through the pipeline. Before Jamie goes deeper into the quarterly results, I wanted to provide some color on a couple of areas; the swift uptake in interest from our user base around Eagle Dream, early signs of our cross selling success and an update on our sales force transformation along with a few other items. The third quarter represents the first full quarter in which Eagle Dream is incorporated into our solution and we're already experiencing both deal flow and some significant interest in the solution in that short period of time. Eagle Dream offers a tangible ROI for physicians and physician groups, regardless of where they are on the transition from fee for service to fee for value. That message has resonated strongly with our client base. In fact, during the quarter, we closed 10 deals across a broad spectrum of accounts, both by specialty and geography. Furthermore, we build a meaningful pipeline of interest within our base of clients as evidenced by the number of folks participating in webinars around the new offering. And while the bulk of our efforts are focused on our current client base, of the roughly 15% of our effort focused outside the client base, we're also seeing some additional promising progress. Beyond Eagle Dream, positive trends and peaked interest from a client base could be seen throughout our broader suite of solutions during the quarter. In terms of RCM, where fewer than 10% of our own clients use our solution, we signed nine new RCM deals in the quarter, two of which were entirely net new clients to NextGen as a whole. The early stage pipeline continues to grow nicely and we expect continued progress as we move through the next few quarters. Additionally, Entrada has experienced sequential growth in both pipeline and bookings and EDI revenue increased 6% compared to last year, as clients realized the efficiencies we can now offer to them. Our interoperability framework delivered some notable success in the quarter. As of December 31, we had well over 100 clients integrated into the national care quality framework for interoperability and are adding more every month as clients upgrade to the new release. In addition, we are bringing clients live on to our cloud based fire compliant API. We continue to bring our clients into the national interoperability framework, all to ensure that patient data is transportable, not just within the NextGen client base, but also across the industry. In an era where data blocking for competitive reasons has been an inhibitor to seamless interoperability and enhanced patient care, we are proud to be on the forefront of open and seamless data exchange. You've heard me say this plenty of times in the past, but we remain acutely focused on realizing the significant opportunity present in our current client base by demonstrating the value of our comprehensive and enhanced platform. In my opinion, one of the biggest factors that plays into keeping our clients happy is a smooth upgrade process, enabling them to leverage our latest technology and all of the investment that we've put into delivering solutions for them. This is an area where we've made significant strides lately. Some of our largest clients have upgraded to our latest release just released in September and all came back with glowing remarks about the progress, not just to us, but also to each other. Anecdotally, over a recent weekend, when our teams completed 22 upgrades, we experienced no notable increase in call volume on Monday morning. In fact, of those who've upgraded, we have some substantial improvements in client satisfaction across all aspects of the solution, including the EHR. Over the last two years, we've taken 80% of the effort out of the upgrade process, leading to significantly increased uptake of our new robust releases. It's important for us to keep our clients happy, but also relevant to note that happy clients on the latest version are always more receptive to exploring the breath of our new solutions. On a similar note, as we move into calendar 2018, leaving some of our technical and stability challenges behind us, we look to open up R&D spend to focus on new capabilities. In addition, we also continue to invest in our core platforms, as we focus in on patient and physician workflow efficiency. We will deliver two significant workflow releases this year, streamlining the top 60 workflows that our clients use 90 plus percent of the time as well as adding key capabilities to support more complex specialties and client types. We're very excited about what this will mean for our clients and look forward to walking them through the impact of the great workflow enhancements to our HER and significant expansion of our patient portal capabilities and what effect those will have on their physician and patient population. We're excited to introduce the first step at HEMS this year and looking forward to moving forward from there. As I mentioned in our last call, we had experienced the sales force attrition area era and at the time of the two -- second quarter call, had already filled the vacant spots in our team. About a quarter later, I wanted to share with you how pleased I am with the progress being made by our refreshed and enhanced sales team. Looking at sequential billings growth, sequential bookings growth, the swelling pipeline and the number of deals we've closed on our newest asset, Eagle Dream, it's clear to see that our sales force problem is primarily one of the past. I had the opportunity to sit in our sales quarterly business review last week. The level of discussion, understanding of the industry and quick grasp of our solutions was quite impressive and a new level for NextGen. I'm excited and eager to watch this team take our clients into a great future. The last thing I want to comment on this afternoon is our client attrition. In the third quarter, which is calendar fourth quarter for our clients, attrition did tick up slightly to 7.4%, reaching the higher end of our anticipated range. There's a couple of factors that play here, but I don't see this as indicative of a reversal in the trends we've been seeing or the progress we've made over the last two years. During the third quarter, we did plan for anticipated departures by a couple of longstanding clients, but somewhat anticipated element came from the delays caused -- from the delay of Macra and MIPS, which has allowed some of our clients who are facing that regulatory upgrade to cycle out, while they have a year to go. Given the activity and energy in our business this past quarter, we're confident in achieving our guidance range for fiscal 2018. Looking forward, the positive trends in the sales pipeline continue to validate our confidence in our longer term outlook from low to mid single digit non-leverage growth in FY19 and high single digit top line growth with meaningful margin expansion in fiscal 2020. Naturally, we have to continue to close the deals in our pipeline and convert those bookings into revenue, but from my vantage point, I'm very confident in our ability to execute. With that, I'll turn the call over to Jamie to review the financial results in greater detail. Jamie?

Thanks, Rusty and thank you all for joining us on today's call. I will start by echoing Rusty’s sentiment that this was another solid quarter for QSI NextGen. Our results are starting to show the hard work of our team members over the past two years. Turning to our third fiscal quarter’s financial results, total revenue of 131.7 million increased 3% compared to a year ago and was roughly flat sequentially. Revenue from software license and hardware of 13.1 million was a 23% decrease year-over-year. As we mentioned on our last couple of earnings calls, software license and hardware revenue continues to be under pressure and we expect it will be down year-over-year in Q4. Subscription revenue of 24.7 million was up 10% year-over-year. The growth was primarily driven by continued growth in MediTouch as well as the contribution from the two recent acquisitions. Support and maintenance revenue of 40.4 million was basically flat compared to last year due to maintenance on new license transactions and CPI increases, offset by attrition. The decline from last quarter was due to last quarter benefiting from a one-time maintenance true-up. Revenue cycle management and related service revenue of 21.9 million increased 9% year-over-year. The growth comes from penetrating our MediTouch customer base as well as -- on the last earnings call, we indicated that we expected headwinds this quarter due to multiple hurricanes. Not only did we not experience the headwinds, we were able to generate modest growth. In Q4, we expect normal beginning of the year headwinds due to resetting deductibles on health insurance, which has the effect of reducing collections from payers. Regarding the attrition exposure related to the one large client we previously discussed, we continue to have discussions with the client and do not expect this to have a material impact this quarter. The net of these comments is that we expect modest decline in RCM revenues this quarter. Revenue from electronic data interchange of 23.1 million in the quarter was up 6% year-over-year and was in line with our expectations. Professional services revenue of 8.5 million in the quarter was up 29% year-over-year, due to the contributions from Entrada’s transcription services. To conclude my comments on revenue, our subscription based recurring revenue accounted for 84% of our total revenue this quarter compared to 80% -- 82% last year. Recurring revenue grew 5.5% year-over-year to $110 million. I continue to be encouraged by the growth of this portion of our revenue, which offsets the decline in perpetual licenses and related services. It's trending in the right direction and gives us increasing confidence in our future growth curve. Gross profit of 70.1 million and gross margin of 53.2 million were down year-over-year due to a general shift to lower margin subscription revenue, compression in margins for our software and hardware revenues due to relatively fixed expenses against lower perpetual license revenue and a shift to lower margin subscription revenue and RCM margins being compressed as we invest for future efficiencies and also we have had some headwinds this quarter from one-off personnel expenses. Moving down the income statement to operating expenses, SG&A of 43.6 million increased 6.1 million from 37.5 million a year ago. The increase is due to investment in sales and marketing, including incremental sales and marketing personnel, partially due to the two acquisitions, the 606 and legal cost in a one-time benefit last year from the true-up of contingent consideration related to the acquisition of HealthFusion. R&D of 20.6 million increased 5%, consistent with our plans to invest this year to resolve usability issues and deliver government mandated enhancements. Gross R&D was up 3.6 million, partially offset by an incremental 3 million of capitalized software development costs. Our GAAP effective tax rate year-to-date is 31.3% and we are continuing to use the non-GAAP tax rate of 30.5%. Rounding out my discussion on the income statement, our GAAP EPS of $0.02 compares to $0.17 a year ago. Our non-GAAP EPS of $0.15 declined by $0.08 compared to a year ago. From a cash perspective, we had 23.4 million in cash and equivalents and 39 million in outstanding against our revolving credit agreement at the end of the quarter. We remain well positioned in terms of financial flexibility with 189 million available in total liquidity. DSOs for the quarter were 55 days. Finally, we are reiterating our outlook for the fiscal year 2018. Revenues of 522 million to 530 million and non-GAAP EPS between $0.64 and $0.68. That concludes my review of the third quarter financial results. And now, I'll turn the call back over to Rusty for his closing remarks. Rusty?

Thanks, Jamie. In closing, I'm pleased with the third quarter results. Through our team’s hard work and dedication, we're making steady progress in our strategic plan. NextGen has once again become a competitive player in an aggressive market and I believe we have positioned the company appropriately to see a return to growth in the years to come. With that, I'll open the call to questions. Operator?

[Operator Instructions] Our first question comes from Sean Wieland with Piper Jaffray.

Thank you. So wanted to start on the bookings side. If you could just unpack -- good booking number, could you just unpack that a little bit in terms of the source of those bookings? Was it existing customers? Was it net new customers, revenue cycle versus softwares, whatever kind of incremental detail you can provide on this?

Yes. Sean, well, we have not unpacked those bookings in the past and -- but what I would say is it was pretty balanced contribution, but definitely increasing contribution from the new parts of our solution that we've acquired. From an RCM standpoint, this was a return to transaction volume that we haven't seen over the last couple of quarters. And from an Eagle Dream standpoint, this was going from 0 to a number of deals very quickly. But what I would say is it's really kind of balanced production across the portfolio. The one thing I would say as we continue to see pressure on the perpetual license side of the bookings number and yet are still able to maintain our earnings and maintain our gross margin to a large degree as we continue to experience this mix shift.

All right. And then I think I heard you say that you expect bookings number to sequentially increase into fiscal fourth quarter, are you expecting it at that same rate, 17% roughly a teens sequential growth rate or you’re just saying it’s up?

We’re just saying we expect sequential growth. I would say, if I was to call out a percentage, that would be precision without accuracy. So we do see continued sequential bookings growth. But we haven't put a number out there on that.

Your next question comes from the line of Jamie Stockton with Wells Fargo.

I guess maybe just following up on Sean’s questions with respect to the environment, Rusty, I think you threw out that attrition ticked up a little bit, but it was because maybe there were a few more deals that seem to happen this quarter. I assume the government mandates weren't causing people to stick with their current vendors. I mean I assume you're seeing that maybe on both sides, where you're also seeing some more software deals, maybe subscription oriented, but more software deals where you're picking people off from other vendors.

Well, I think, as we said, well, first of all, let me just reframe the overall effort. As I said, about 85% of our effort is focused on monetizing our existing client base. So we are also out looking for competitive deals, but frankly not at the same rate. That being said, this is the first time at least I can remember in my tenure of seeing, starting to see net new clients on the RCM side for example and these aren’t new -- our clients that are signing up for RCM. These are clients that were somebody else's that are now signing up for our solution. Same thing with Eagle Dream, we are out there selling outside of our client base and are seeing some success there as well. And so, from our standpoint, I think we continue to see deals flow within our client base. The replacement market's a tough place right now. I mean, a lot of folks are looking at how do they get ready now for the next January 1st and this transition to value and the implementation of MIPS and MACRA or whatever the government actually chooses to implement at that time. And so I think, folks took an opportunity. We expect attrition to kind of sit in that 5% to 7% range, I think as we go forward and feel like, I mean there will be quarters where it accelerates like when you get to Q4 where the clients get calendar, they're getting to the end of their own calendar year and tend to like to start the New Year fresh and on top of that, as I said, the regulatory piece moves. So it's just something that we see in the natural ebb and flow, but we haven't -- we're well below historic levels. And frankly, we're within the levels that we're very comfortable in our multi-year guidance.

And then maybe just some housekeeping, Jamie. And you can look this up if you don't have it on your fingertips and we’ll check later. Operating cash flow during the quarter, capital spending and then the bookings number that you guys threw out. I think, you said it was up 17% sequentially, but I didn’t catch a year-over-year growth number. That would be great. Thank you.

Actually, the bookings were down year-over-year because our bookings number last year, sorry, I’m trying to get to it right now, but the bookings were down year-over-year. They’re down about 10%. Sorry, give me one second. Bookings were down about 10% year-over-year. That’s on an organic basis. So, and your other question was operating cash flow.

That in CapEx if you’ve got it?

18.7 is the operating cash flow and the CapEx was 2.3 million. You didn't ask me about software capitalization. But I can –

But we're going to tell you anyway.

It was $4 million.

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

Question for me in terms of what level of bookings dollars do you guys need over the next, let’s call it, four or five quarters to really get to that high single digit revenue growth assumption that you guys are thinking about for fiscal ’20?

We actually haven't put that number forward. That would be kind of -- that's forward looking prior to us being ready to provide guidance. But what I would -- let me give you a little color on how we’ve constructed the plan. We started with very conservative, as I think we've talked to a number of you about, very conservative penetration rate of the various cross sell solutions like RCM and Eagle Dream and Entrada, et cetera. What we've now done is we've actually gone bottoms up and mapped out the sales activity as well as the client targets by rep to make sure that we can get to the number. So now, there's always a little bit of a well, geez, we did a top down plan, which we think is conservative, but is the bottoms up going to support that? As we've gone through and trued up top down, the bottoms up, that has only increased our confidence in our ability to deliver our guidance, because we're getting that down to targets that we can deliver to salespeople as well as adoption pathways based on different type of clients to make sure we're bringing the right solution to the right client at the right time. So as we step back and we look at the integration of that top down plan with a bottoms up sales activity plan, we find that we're firmly committed to our guidance because with that -- with our modeling of attrition, with all of those things, we see the numbers as achievable and not achievable at the far outside of possibility, but right down the middle.

And then maybe for you Jamie, in terms of the gross margins in the quarter, there was a lot of puts and takes, but how do we think about the nearer term gross margin trend and then layer in maybe just quickly your thoughts on tax reform?

Yeah. So the, I think the gross margins -- the way I think about it is, given the shift that we’ve had away from the perpetual licenses, it has put a lot of pressure on our gross margin relative to last year. So I think what we're experiencing now is -- will be in the near term. There may be a little bit of improvement because we had a little bit of a one-time charge in a couple of areas, but I'm not expecting it to change dramatically for gross margin. And regarding the tax reform, we are still working our way through the impact of it, because it’s not quite as simple as saying that it is -- there's a rate drop, there's a number of other factors that affect our tax rate. There were changes for deductibility of qualified domestic manufacturing, foreign tax credits, R&D credits. So there's a lot that goes into it, to make it sound, really complicated, but like everything, it’s always more complicated in the headline. Short answer is, I do expect as we move in, when we give the Q4 results, I will give the guidance for next year. I'm expecting on a non-GAAP basis that the number will be in the low-20s next year.

Percentage, not million. [indiscernible]

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

Rusty, great to hear about the traction in Eagle Dream, can you set us up of the opportunity that you have within your customer base? What portion of your customers can benefit from this? And is it fair to say the opportunity is within your large customers, not the one, two physician practices?

Let me see. So what I'd say is, simply, the nature of the Eagle Dream platform is such that it provides incredible value both to fee for service clients as well as all the way up to fully-capitated clients. And so regardless of where our clients are on that journey, the Eagle Dream platform has value and capabilities that it can deliver to them. Now, so we say, somewhere in the near 100% of our clients could benefit from Eagle Dream. That being said, as we look at our model, we have a number very significantly south of that built into our model, simply because just because 100% of your clients may need it doesn't mean that 100% of your clients are going to buy it. So we've taken a very conservative approach to what that penetration should be. Yes. Large clients benefit it, but frankly so do the smaller ones and some of the things that we're looking at is how do we continue to wrap more services around the platform, so that we can provide that value all the way down to single doctors. More to come on that as we move forward, but when we look at our desired penetration metrics, let's just say they're more in kind of the 20% to 40% range. And that's kind of where we look at from a multi-year model standpoint. So we are appropriately conservative in spite of the fact of the applicability to a broad swath of our client base.

That's great. Maybe couple more questions I guess on this one, how are you pricing it? Is it a recurring revenue based on the patients or how are you pricing Eagle Dream right now?

At this point, it’s per provider per month. We will put a simple business model that’s easy for the clients understand. It's got predictability associated with it versus on patient volume. And on top of that, it’s a new offering and so we're -- we may evolve over time, but as we sit here today, that’s what we’re refreshing it. Just to be abundantly clear, just for everybody on the call, we are not looking to add perpetual license maintenance products to this portfolio as we move forward. We will continue to move more and more to subscription revenue.

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

So maybe staying on Eagle Dream just for a moment, it sounds like it could be a big opportunity. How long is it until we see a NextGen or maybe a MERF offering that integrate some of the Eagle Dream functionality?

You will see that if you come to our booth at HIMSS.

Okay, so that’s already out and generally available in the markets right now?

No generally available. What we're doing is we're giving a preview of the spring release and the reality is for years we have had NextGen Care which is a great outreach platform, but without an analytics platform to sit in front of it you can't figure out who to reach out to. Now that we have the Eagle Dream analytics platform all of a sudden that takes an asset that frankly had been somewhat marginalized in NextGen Care and now creates value with the combination of those two things. And so the ability to show not just patient identification but patient outreach and not just patient identification but inserting that into provider workflow we feel is the real answer. A simple population health analytics platform alone shows you problems but doesn't enable them to be fixed. Having an opportunity to treat a chronic or patient or patient with complex conditions you have to be able to reach out to that patient and you have to make sure that when they show up the appropriate things are done with that patient to make sure that you're generating a great outcome and either generating increased revenue and fee for service or protecting your profitability by enabling wellness in a fee for value arrangement.

Okay, and very good. And then – so Rusty 5984 realize, it sounds like that's going very well. Can you give us a sense of how many clients have been migrated now and how long you expect it will take your entire base switch to over?

Let’s say give or take about 25% to 30% of our NextGen Ambulatory clients have either migrated or are in test on 5984. Some of our largest clients have migrated and in fact one of the clients actually took the opportunity to get on the list serve and told all the other clients that it was the single best darn release they had even from NextGen. And so we are continuing to see uptake on the release. We are also evaluating frankly a push to get more and more people on the release. We expected -- we spent a lot of money meeting the government's requirements and we expect the government to respond by actually implementing the requirements and we expected a significant number of our clients to move forward to enable to 365 day reporting period. Unfortunately the government backed away from the regulations. And so we're looking both on the satisfaction side clients are starting to move to 5984, but we're also looking at how do we continue to incent them to come up to the latest release because frankly it gives them the best experience but it also enables the cross sell to the greatest degree.

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

Yeah, good afternoon guys and thanks for taking the questions. I want to dig in a little bit more into the reiteration of guidance. At first, does the fiscal Q4 guidance reflect any benefit from a lower tax rate?

Not, it does not.

Understood.

Because some of the analysts have not updated for it, so rather than confused everybody with a mixed message I – my intention was to use the non-GAAP tax rate of 30.5 for this full year and when we provide guidance, we will give the guidance on an apples to apples basis and then show you what the impact of the tax change would be just so that –

So it's clearly identified, but also so that we keep everybody in a common -- on a common playing field of understanding and there's not confusion in the investment community as, is this the new model or the old model.

Understood. And then second on the guidance. Really in the revenue range we use a bit of a wide range so any thoughts on which end results are more likely to hit or any factors that might be contributing to a wider range?

Well, we haven’t widened the range. We also have a -- we actually collapsed the range last quarter and we chose just to keep it where it is because frankly we are just continuing to execute the plan that we've put forward and expect to hit our guidance range. We're not going to qualify whether it's upper or lower or middle or in the range. We're executing our plan. I think you can see that consistent performance along the year as well as the fact that we started out the years that we're going to invest more. You're seeing that come in. And so, like I said, we feel comfortable with the range. I am just going to leave at that.

That's fair. One last one for me, maybe a follow up on Sean’s questions on bookings. Any update on the timing you imagine towards achieving year-over-year growth in bookings.

So we haven't commented on that yet. Sequential growth into next quarter will certainly put us in that neighborhood, but whether we end up above or below we'll see. As we move into next year I would definitely expect the year over year growth.

Got it. Thanks for taking the questions, guys.

And just to give one point of clarification on what Rusty said, so sequential growth in Q4, we expect Q1 of next year will be a step back from Q4 and I don't think that will come as a surprise to anybody.

Yes, absolutely. We don't expect sequential growth in Q1 from Q4, but we do expect year-over-year growth in Q1.

Your next question comes from the line of George Hill with RBC Capital Markets.

Hi, it’s Stephen on for George. Let’s just dig into strength in professional services this quarter, it has come ahead of expectations. I was wondering what drove that strength.

The strength in professional services is largely driven by the Entrada transcription services which last year would not have been in the number. So the strength there has been on the back of Entrada.

Okay. And then so far what have you seen from the e-clinical works issues and then what are your expectations related to the Practice Fusion acquisition?

So from an ECW standpoint, we haven't really commented specifically on competitors. We continue to see them in the field. We continue to engage in hand to hand combat and we've continued to see client dissatisfaction in that patch especially given the things that have come out of ECW. But that being said, they still have a robust solution that is relatively inexpensive and they're a viable competitor. Do we see opportunity there? We do. But we don't really get down to commenting on specific hand to hand combat. On the Practice Fusion side, I think Allscripts is executing their strategy and their strategy is different than ours. Their P&L have different aspects have than ours and it’s -- I see them as bringing in a cloud based solution and we have a cloud based solution. And so that's about all I can comment on it.

Okay, thank you.

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

Hey, thanks for the question. I wanted to ask about the new sales hires and the productivity ramp from that cohort. Were they fully up and running and sort of productive in terms of an average sales rep for the quarter or are they still ramping and so we'll see the benefit from those new folks more in the future than we did in the results this quarter?

Yeah, I mean we brought in folks that had ambulatory experience, had solutions selling experience, had revenue cycle management experience and analytic sales experience. So we brought in folks who have absolute competency and capability in the market and solution sector. They still have time to come up to speed on the specifics of the NextGen solution. So we've seen the beginnings of progress. We've seen them get engaged frankly much quicker than we expected, but it's still a complex market. Our clients are complex clients and the solution is broad. So it will -- I think we're continuing to see increased effectiveness and will. And as we move into next year, it's what gives me confidence next year in the bookings rate, because we're already seeing the beginnings of it on that trajectory I’d say we've still got some room to improve and that's awesome, because we're doing well and yet we still have room to improve.

Got it, thanks. And then a follow up on the attrition comment. Were the clients that left, were those clients from quarters ago, where they -- you knew that they were leaving and they just happen to leave this quarter or was that a near term phenomena?

Yes.

Okay.

And it was primarily driven by hospital consolidation that had been on the plate years ago finally coming to fruition. And that was kind of the increase. There's a natural attrition rate as well, so that's not the totality of it right, but that's really -- that's what kind of drove this quarter's slight increase.

Got it. Thanks, Rusty.

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

Hey, guys, it's Mark Rosenblum on for Ricky. Most of my questions have been answered, but in the RCM division, you guys had a client loss, but outside of that can you comment on the utilization trends?

What I would say is, we are seeing more revenue proposition as we move forward so we are seeing a little bit of increase there. But as we move into course, as we move into Q1, you've got patient adoptable resets and so you see that come down. Beyond that I'm not sure that we – we haven't really talked about that in the past and I'm not really going to get any deeper than that if that’s okay.

Okay, all right. Thank you. That's it on my side.

Your next question comes from the line of Anne Samuel with JPMorgan.

Hi, guys, thanks for taking my question. On margins, as you move from your investment base to your growth base, how should we be thinking about the margin moving pieces and then the cadence as you move towards leverage?

Okay, so let me see if I understand the question. So basically as we move forward through the growth plan on an operating margin basis how should we see this.

Right and then the pieces in between. Yeah, the growth and then the investments that you are going to be making as well, how should we think about the cadence of that?

What you should think about -- how you should think about is first of all that next year you may see a little bit a leverage but you'll primarily see somewhere close to one to one from revenue to earnings growth on a percentage basis, because we will continue. Next year what you'll see is you can see us continue to expand investment in sales and marketing just in advance of an even bigger bookings number the next year and certainly because we're primarily subscription and recurring, it takes time. Cost comes in ahead of revenue. And so that's where as you look into next year you see a low to mid-single digit growth probably on top and maybe mid-single digit growth on the bottom. But as you get into the year after that, we've really built leverage of infrastructure in this business. And so as we get past next year where we're still investing to get up to the 8 plus percent in the out years you'll see us first year relatively non-leverage, but as we get into FY20, now you see higher revenue growth but we are really at sufficiency from an internal structure standpoint. And so maybe you see a little bit of [indiscernible] growth or CPI driven growth just around merit and those kind of things, but for the most part we've built the organization necessary to deliver into the future. And so that's really how we see FY20 we see sales flat, marketing flat R&D flat because we've already kind of built out the structure and the capabilities. We’ve integrated the entire organization together, so we're getting that leverage by delivering kind of a platform as a service strategy. Does that help?

Yes, that's very helpful. Thanks very much.

Thank you

Your next question comes for the line of David Larsen with Leerink.

Hi. Rusty, you mentioned a couple times that you're working on some new major releases that will improve, I think you said workflow. Can you maybe talk a little bit about that? Is that – are those media releases the 5984 product or is it something else?

No, these are actually -- these are the next enhancements for the 5984 platform. So with 5984 we worked on some usability, a lot of government regulations and a good bit of performance and continued stability. Now given the fact that we don't have another set of government regulations to chase, we're turning our investment dollars specifically on the NextGen Ambulatory product to reinventing the top 60 workflows that our clients use most. A workflow is not a screen, a work flow is from where you enter the application to where you leave the application. And so really now focusing –we had actually been working on this for a while. We've done a tremendous amount of work with our physician clients to make sure that what we're delivering truly meets their usability and efficiency goals as we move forward over the year. We'll do a spring release, we will also do a fall release. And at that point time we will really feel like we have delivered a great experience for our physician and provider clients which is core to their ability to thrive and grow. In addition to that – one more though, in addition to that we are also significantly focusing on the patient portal and how do we make sure that the patient experience as well as the provider experience are both great but also enabling them to interact more effectively to team on driving the best outcome possible.

Okay, that's great. Thanks very much. So that's the spring of ‘18 and the fall of ‘18 that new leases will be made generally available? Is that correct and then are there any charges or higher fees tied to those?

There are not charges or higher fees tied to those that we view that as inherent in our agreement around maintenance and providing value for the maintenance revenue that we are getting. And, yes, you are correct in the spring and fall of this year.

And just one more. I mean, I think talked about 10 new Eagle deals. What about Entrada, whether several new Entrada deals, anyway you can sort of size the bookings tied to those, the number of deals tied to those or anything around pricing would be very helpful? Thanks.

We're not going to -- the reason we talked about Eagle Dream is because it's net new. It came in with almost no revenue and we wanted to give an understanding of that increase and RCM is so material to the cross sell opportunity. What I'd say is Entrada continues to grow nicely. We're not going to get in the habit of unpacking number of deals by client. It's just at this point in time given those two notable things in the cross sell and frankly the dependence on the investors of seeing the beginning of the ramp we’ve decided to expose a little more detail and we are going to draw a line there.

Okay, great. Thanks very much.

Thank you.

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

Great. Good evening. One of the things I didn't quite understand maybe from Jamie's comments around the subscription gross margins, I am not getting to in the weeds here but I understand the overall mix shift away from perpetual licenses to recurring revenues which is great lower margin, but good better quality revenue of course. But the subscription margins were down and you said something about a lower margin type of subscription revenue, if I heard you right. Can you unwrap that a little bit?

Kind of across the board when I look at all because there's a whole bunch of small products that run through that number and there was a little bit of noise in here that brought the overall margin down for subscriptions this period. So there were two things going on. One is the overall shift into the lower margin business, the recurring revenue streams like subscription, RCM, EDI, but then inside of the subscription number, it's down a couple of points from the previous quarter. And so the fact that it is a bigger part of the revenue but it by itself had some – there is little charges that are falling through there, there is couple of hundred thousand dollars but it moves in a couple of points this quarter and unpack it completely. I'm trying to give you complete disclosure, sometimes I get wrapped around the axle in the detail.

Yeah. Okay, that's helpful. Maybe one last one, I was curious I guess you guys with Eagle Dream sell to physician practices that are both dealing with fee for volume and fee for value economics. And I was just curious if you're seeing, I understand with the MIPS delays and uncertainty but just generally are you seeing kind of trends toward more alternative models ACOs, bundled payments things like that kind of any trend there versus maybe last year? Or is it maybe a little slower than you thought?

It's going slower. It's going slower than the industry thought. I think honestly I mean I've been watching this train go slowly for a lot of years now. But I would say that it is definitely present in our clients mind. There's nothing like finding yourself four months away from such a transition to spur a lot of thinking and if you were -- when you were a kid maybe you woke up and found that you didn't study for the test, but it got delayed day and you were pretty darn happy. But you actually study the next day. I think that's kind of the way our clients are looking at it. I mean to some degree it's the same shock and awe that I think many other companies have run into 606, all of a sudden here we are, right. That one is not getting delayed. And so the clients I think their appetite has actually increased for these kind of capabilities. The great news is back to the point I said earlier is, this is something that's applicable on both sides of that line and therefore they can invest, achieve a positive ROI regardless of where they are in that journey and frankly regardless of what the government does in the longer term.

Thanks for the insight.

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

When you said fiscal ’19 earnings growth will grow slightly faster than revenue, I'm assuming that does not reflect any change in tax rate yet?

That's correct. We're just looking at a pro forma, Steve, until we truly understand the impact of the relatively complex new tax situation.

Right, but to your comment low 20% range for fiscal ’19 is sort of the range -- now just as sort of a mechanical thing –

Yeah, from a tax standpoint -- I'm sorry, from a tax rate standpoint, yes, you are correct.

Yeah, just from a mechanical standpoint, not going to change the fourth quarter number but will you be paying a lower tax rate in your fiscal fourth quarter?

Yes.

Yes. Okay, good. That's good thing. Thank you.

I want to emphasize the word slightly leveraged.

Slight leverage for ’19. Absolutely. The second you said 20%, Steve, I'm like no, no, no, we weren’t talking about 20% earnings growth next year.

No, I was talking tax rate.

Yeah, and so look I mean we may get a little bit of tailwind on the leverage but I wouldn't expect much. I'd expect it to be very close to one to one.

Okay, thank you.

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

Thanks. Good afternoon. Thanks for squeezing me in here. I want to just piggyback off prior question on some of the acquired businesses. So Rusty, Jamie are you calling out or would you call out the amount of revenue that came from Eagle and Entrada in the quarter?

No, we simply -- we only disclose as a subscription line. We've talked a little bit about uptake simply because I think it's important for investors to understand speed of integration and speed to impact. But, no, those all show up in the subscription line and in the professional services line in the case of Entrada because of this transcription business.

I see. Is it fair to say though that if we were to back out those businesses, there would have been an organic growth year on year?

Looking to Jamie.

It's close.

It’s close, yeah.

Okay, all right. Good. And then question Jamie on the maintenance stream. I know you periodically implement some inflationary adjustments. Is that – do you do that on January 1 or is that more on a rolling basis?

It’s largely on January 1.

Okay. So we would expect all else equal that fiscal ’19 maintenance should be higher than the prior year, just based on inflationary.

Here is what I’d say – what I’d say is when we provide maintenance attrition, we are providing a gross attrition number. What that means is that you can't just take that percentage and get to a number because also -- because not only are there CPI increases but there's also additions of licenses. And so that's not a net dollar retention number, that is purely a maintenance attrition number from the client, from the dollars you started with, the clients you start with, to what it is at the end of the quarter.

Gene, if you go back to Analyst Day presentation that where we had indicated maintenance, I have an amber color associated with it, if you will and that the attrition, I expect it to be in a slight decline as you go forward because the software, the new maintenance contract because software is getting to be such a small part, is not adequate to replace what's lost in intrusion even with the CPI increase.

Right. Okay, very good. Thank you.

We'll take one more question and then close it out.

Yes, sir. Your final question comes from the line of Stephanie Davis with Citi Research.

Hey, Rusty, hey, Jamie, thank you for taking my question. Let me round at the end. Given the recent bookings improvements despite sales force turnover, could you maybe walk us through the standard ramp up time for your average sales hire at NextGen and if you are seeing any productivity gaps, the new versus existing hires, so how that can improve in the coming quarters?

So, as far as ramp up time, first of all, we're an evolving organization and so I don't know that we have an absolute precise answer for ramp up time. What I would say is that you're seeing -- given when attrition happened and this increase in bookings I think you're getting an idea of ramp up time. From productivity standpoint we don't disclose the very productivity per rep. What I would say is that both our new reps and the reps who have been in this company for a long time that continue to commit and invest in this company that we're seeing good balanced productivity across them. What the folks that are committed, see the opportunity here, that are excited about all of the progress we're making, that have been here for a long time are also being very productive. What it really comes back to is folks are following sales process, they're following sales discipline, they're calling on the right clients in the right way and from that we're starting to see benefits. It will continue to evolve as they get more time in the job.

What I would say, I think my takeaway from this quarter is that bringing in experienced reps who know the industry and know how to do solution selling, we are able to close opportunities that were already had been identified. I think we're there. So it's probably a little better than if you had somebody who maybe wasn't as well versed on the industry, but I think where they're going to behave – it’s like with any new rep coming into an area, it's going to take them six to nine months to build their individual pipelines, because that's where you have to go out. You've got to become acclimated with your clients. And so to that part I think you would expect them to be more like the traditional -- everywhere I've been for the last 20 years, I think the view is it takes nine to twelve months to become fully ramped. I think we were fortunate we had some opportunities. They were able to come in and close those opportunities and that's why we had sequential growth.

And we’ve seen much of the same situation next quarter, but as we get into the next year that's where we really start to see the beginnings of them of the opportunities that they are creating especially on RCM really come to fruition.

Understandable. That makes a lot of sense. And a follow up that’s a little bit more conceptual. Just given the recent news that Apple is aggregating EMR data and they're trying to working to become more of an intermediary between the patient and the health system, how can we think about the moat you've built around your EDI business and kind of that clinician patient data exchange?

So I'm not totally sure I understand the question but first of all let me say that I don't comment on press releases. Apple can put out announcements not the end of time until I really understand what it is they're doing and what they're really doing versus the press release, I'm not going to comment. Have we built a moat around? I'm not sure I totally understand the –

It’s like a barrier to entry sort of idea that long term contracts, it’s the idea that maybe your solution offers much more than just data interchange.

Well, so that's not data interchange, that's the Apple health app pulling data off of a fire-based API which we already have.

I get that.

And so what I’d say is, the moat around our clients is the fact that we continue to perform more and more effectively for them, we can drive value. We are completely focused on the ambulatory market and we are providing a great client experience and executive intimacy as reflected in the continuing increase of our class force. And so whether it's Amazon, whether it's Apple, whether it's any introduction on a press release, I just can't comment on that. We're just executing our plan.

All right. Sounds good. Well, thank you so much guys. Appreciate it.

Thank you, Stephanie.

And ladies and gentlemen, this concludes today's call. You may now disconnect.