Rusty Frantz - President and CEO Jamie Arnold - CFO

Sean Wieland - Piper Jaffray Matthew Gillmor - Robert Baird Jeff Garro - William Blair & Co Steven Halper - Cantor Sean Dodge - Jefferies David Larsen - Leerink Ricky Goldwasser - Morgan Stanley Jamie Stockton - Wells Fargo George Hill - RBC Stephanie Demko - Citi Mike Ott - Oppenheimer Sandy Draper - SunTrust Anne Samuel - JP Morgan David Hooker - Keybanc

Welcome to the NextGen Healthcare, Inc. Second Fiscal Quarter 2019 Conference Call. Hosting the call today from NextGen are Rusty Frantz, President and Chief Executive Officer and Jamie Arnold, the Chief Financial Officer. Today's call is being recorded. Before we start, I'd like to remind everyone that the comments made on this call may include statements that are forward-looking within the meaning of the federal securities laws, including and without limitations, statements relating to anticipated industry trends, the company's plans, future performance, products, perspectives, and strategies. Risks and uncertainties exist that may cause results to 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 and the comparable GAAP financial measure can be found within our fourth quarter 2018 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 NextGen. Sir, you may begin.

Thank you, operator and thank you everyone for joining us this afternoon to review NextGen Healthcare’s fiscal second quarter 2019 results. On the call this afternoon, I'll address our Q2 results as well as our view for the rest of the year and beyond. We saw another very solid bookings quarter delivering 36.1 million, an increase of 39% compared to a year ago and our third consecutive quarter of year over year bookings growth. Similar to last quarter, our sales team continued to identify and close the right opportunities and we saw success in our solutions selling, with notable success with our all-in deal flow. Additionally, during the second quarter, we saw the average deal size continue to tick up, which serves as a proof point that our clients are buying into our integrated ambulatory solution. Notable during the quarter, we signed another significant seven figure all-in deal. Additionally, we signed six deals over a half a million dollars. These encouraging signs confirm that our complete solution is very competitive in the market and represents continuing opportunity for us. This multi-quarter sales momentum, along with a healthy pipeline, gives us confidence in the continued strong bookings performance in the back half of the year. Taking a closer look at bookings in the first half of FY ’19, the mix has tended towards more complex recurring bookings than we initially anticipated. This includes more large all-in deals, which due to that complexity take a longer time to implement for the client. This mix shift changes the overall timing of our bookings to revenue conversion. With our original outlook at the beginning of the year, we expected to bring in more of the single solution type bookings to deliver FY ’19 revenue and build our model on that thesis. This mix driven delay and revenue conversion has put pressure on this year's top-line. Revenue for the quarter came in at 129.4 million, below our expectations and down 2% year over year. The bookings mix shift, the slower converting recurring bookings coupled with the bump in attrition cost the downward move in revenue that will continue through the next quarter. As implementation completes on some of these larger deals, we should start to show an uptick in Q4. While we are not happy with the down quarter and the broader full year impact on revenue, our continued bookings growth gives us confidence that consistent revenue growth is untapped for FY ‘20. As I mentioned, our attrition rate came in at 13.9% in the trailing 12-month basis which is higher than we anticipated for the quarter. Continued conversion in our health system affiliated and owned footprint continue to drive attrition above forecasted levels. As stated in the Analyst Day in September, we expect to see jumps attrition based on these dynamics as Epic clients continue to sweep through their physician practices and as Cerner continues to convert the Siemens ambulatory base post acquisition. More on the actions that we're taking to drive retention in a few. Despite the shortfall in revenue, our EPS was in line with our expectations and over performed from one-time accrual adjustments as we updated our view for the full year. However, as we look at the full year and the gross margin impact of lower revenue forecast, we will trim our EPS range slightly to reflect the drop in gross margin. Moving back to client retention, this has been a top of mind issue for us. And as we examined our organization, we felt it was necessary to make a change to the structure to better enable us to nimbly manage and address this issue. We have chosen to eliminate the COO role and bring the senior leadership directly responsible for service and sales up to the executive leadership team. This structure has enabled us to move quickly and with better information and coupled with new leadership within client service will enable us to start bringing retention down to our targeted levels as we move through next year. Specific area of focus are continued improvement in product quality, this has been a core area of focus for the team and will continue to be a core focus going forward. We've already seen a great deal of success here and expect that to be continue. Get clients on the latest version. We see a huge difference in satisfaction from clients on our latest releases. We're focused on upgrading our clients on older versions to the solution of the president and expect to see some significant improvements in satisfaction from those upgraded clients. Optimizing our clients' implementation, we are working with key at-risk clients to ensure that they are truly optimizing our platform and getting the results they need to drive their own success. And finally, starting retention earlier and gauging proactively with potentially at-risk clients before they even think of making a change. This is an area of primary focus for my entire leadership team and the organization as a whole and will continue to be an area of investment throughout the arc of the multi- year plan. Switching gears, I wanted to share a bit about what we discussed our recent sales meeting and also provide you with more detail around our upcoming fall 2018 release. Coming back from our fall sales meeting, I was very impressed by both the energy and capabilities of the commercial team, most of whom have joined in the last year to eighteen months. The team is delivering well and yet still focused on becoming even more effective. We have continued to refine our targeting and our messaging and having the opportunity to walk them through the capabilities coming to market across the platform in the fall 2018 release further arms them for success in the field. In addition, we have aligned our integrated ambulatory solution around five core areas; clinical care, financial management, patient engagement, population health, and connected health. Each of these has specific capabilities both software and services that support our clients' drive to optimize their practice along each of these essential and important lines. Our fall 2018 release is on track and on time. We're in beta with a number of clients and starting to see the benefits of directly integrating our population health capabilities into the workflow both the practice and the provider. We are very excited to bring the entire next-gen integrated ambulatory platform together in a meaningful way this fall. Enabling practices to manage the health of their population of patients, deliver the right care at the right time to drive the best clinical and financial outcomes as well as get the best leverage out of their physician population is essential to the success of our clients. Doing all of this in a way that fits directly into a provider's existing workflow ensures our provider satisfaction and by extension, the practice results. We think we're in a great path to delivering these essential capabilities for the future and are excited to see our clients’ success as we roll them out. Also notable in the release, we will engage our clients to -- we will enable our clients to improve their patient payment capabilities. We will introduce the integration of our new eligibility and pre-service financial clearance transactions, directly into -- directly in our native registration scheduling workflows will have significant improvements in eligibility, prior authorizations, address, and identity verification and patient cost estimations. All of which are intended to help organizations optimize the experience and outcomes related to payment -- patient payments, a significant portion of their receivables. Also at our annual user group meeting in a few weeks, we will be introducing our contract audit and recovery service as the first aspect of broader contract management capabilities, another great opportunity for our clients. We plan to share this release as well as many of the other solution capabilities such as our entrée into telemedicine with virtual visits with our broad client base at our user group meeting in November. We have great attendance this year on par with last year and look forward to engaging with our clients as we look to partner with them to enable their future performance and success. Before I turn the call over to Jamie to review the results in greater detail, I want to comment on our adjustment to full-year guidance. As discussed earlier, the longer implementation cycle from the success in larger all-in deals resigning as well as the bump in attrition rate are causing us to experience a temporal gap in our revenue. As we now look at this year FY ’19, we're going to adjust our revenue guidance to 525 million to 535 million for the full year. EPS guidance will narrow to the lower end of the range of $0.70 to $0.74. That being said, while our solid bookings growth coming in ahead of plan continues to support our multi-year guidance of high-single digit revenue growth in FY ’20, we will watch attrition carefully in the back half as it may put pressure on that forecast bringing us into the mid-single digit range. The short-term dynamics are causing us a bit of a headache, but commercial execution on the sales side is clearly the long-term antidote and we are confident in the future. Now, I'll turn it over to Jamie for a dive into the numbers.

Thanks, Rusty and thank you to everyone for joining the call today. Turning now to our second quarter results. Total revenue in the second quarter as reported on the 606 basis is 130.4 million, a decrease of approximately 2% year over year because FY ’18 was reported on a 605 basis, we have provided an exhibit in the earnings release which gives the FY ’19 desegregated revenue on a 605 basis to facilitate comparison to the same period in the prior year. We will now review revenue and revenue line items for the quarter on a pro forma or 605 basis. Total revenue of 129.4 million declined 2% compared to the same period last year. Using the reporting format that we're introduced last quarter, recurring revenue of 116 million declined 3% compared to a year ago due to declines in maintenance and managed services. Recurring revenue is 89% of our total revenue for the current quarter, down from 90% in the prior year. Subscription revenue of 27.4 million, increased 2% compared to a year ago, primarily within our connected health and analytics solutions. Support and maintenance revenue of 38.1 million, decreased 9% year over year due to attrition in our legacy NGE customers as well as a favorable one-time client billing adjustment in the prior year. Managed services revenue of 26.1 million decreased 7% compared to a year ago due to the single large customer attrition that we have previously discussed as well as an unexpected termination from another large client that was acquired by a private equity-backed entity. We remain focused on driving RCM penetration in our customer base as well as leading within proposals to new customers. In the current quarter, we expanded our relationship with existing clients as well as landed two new clients. Electronic data interchange revenue of 23.9 million, increased 4% year over year modestly ahead of our expectations. Nonrecurring or one-time revenue of 13.9 million, a 6% increase over the same quarter last year. Software license and hardware revenue of 9.1 billion, increased 2% year over year. Non-recurring services revenue increased 14% compared to a year ago, driven mostly by large professional consulting engagements with clients. Bookings came in at 36.1 million in the quarter, up 39% on a year over year basis benefiting from large RCM contract as Rusty referenced as well as increased bookings for non-recurring services, NGO RCM, analytics and hosting. Bookings increased 24% on a sequential basis. The cost of goods sold and operating expense comments are based on GAAP or 606 basis. Gross profit declined to 69.2 million or 6% reflecting higher expenses associated with amortization of acquired intangibles and capitalized development costs as well as incremental consultants to help with increased professional services assignments. Gross margin decreased to 53% from 55.7% due primarily to the higher costs just discussed as well as the mix shift away from the high margin maintenance revenue and towards lower margin services. Taking a look at our operating expenses; SG&A of 35.4 million is an 19% decrease from 43 million a year ago. This decrease is primarily due to our receipt of a large legal settlement reimbursement, lower commission expense due to 606 accounting, lowered net consulting costs related to the 606 implementation, and lower amortization of intangibles. Note that on a 605-basis commission expense increased year over year due to significant increase in bookings. R&D of 18.4 million decreased about 6% compared to a year ago due to a 1 million increase in software capitalization associated with the upcoming fall releases. As we move into the second half of fiscal year ’19, we expect capitalization to decline as a percentage of gross R&D spend. Gross R&D was flat to the prior year. Our GAAP tax rate for Q2 was 13%. For FY ’19, we will use non-GAAP tax rate of 22%. To conclude my comments on the income statement, our GAAP EPS of $0.20 compared to $0.13 a year ago, our non-GAAP EPS on a 605 basis of $0.21 decreased by $0.01 year over year. Turning to the balance sheet, we ended the quarter with 32.4 million in cash and equivalents and $42 million outstanding against our revolving credit agreement. DSOs in the quarter were 60 days, an increase of 4 days from last year and up one day from last quarter, all within our expected range of 55 to 60 days. Our CapEx excluding R&D was 1 million and capitalized R&D was 5.6 million. To close the call today, let me reiterate our guidance for fiscal 2019. Revenue is now expected to be between 525 million and 535 million compared to our previous range of 532 million to 548 million and non-GAAP EPS is projected to be between $0.70 and $0.74 per share compared to the previous range of $0.70 to $0.78 per share. In closing, I am generally pleased with our performance in Q2 as we execute on our strategic plan. And I am looking forward to continued progress in fiscal year ’19. This concludes my review of the second quarter financial results and now I'll turn the call back over to Rusty for his closing remarks. Rusty?

Thanks Jamie. In closing, while bookings mix and attrition have put a little pressure on the FY ’19 revenue line, our strong and consistent bookings execution continues to keep our multi-year growth plans intact. We are aggressively managing client retention as well as commercial and technical execution. We are excited to show our growing and maturing solutions with our clients at our user group meeting. And our entire NextGen team wakes up every day focused on how to enable our client success and empower the transformation of the ambulatory care. More to come as we continue to drive great results for clients and great opportunities for our employees. With that, I will turn it over to the operator to start question session.

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

So, first starting on the attrition, I guess what you are doing to be proactive in stem the tide here and convince these clients to stay with you.

So, let me separate first of all the two buckets of attrition, one being buckets of attrition driven from health system affiliate and owned versus kind of normal run rate attrition in our core ambulatory base. We're comfortable though not satisfied with attrition in the core ambulatory base, but what we are doing now is we have segmented our client base from the bottoms up and looked at every single client where they sit within their local ecosystem and what the pressures of that client are and from that really come up with a forecasted at-risk list. And sort of be proactive, we're actually getting in and optimizing those clients long before they ever even think about whether or not there is a different opportunity available for them within their local ecosystem. And then on top of that, we continue to beef up and expand our account management footprint and making sure that we really tightly connected with the client base.

So given this forecast that you have, do you have any insight you can share as to when this trend turns around and you’ll get this back under control?

We expect to see the trend stabilize as we move through this year and moderate into next year. We've built that into our model as I've said and frankly that challenged our model a little bit on this year, but as we look at next year, frankly, the bookings energy that is coming through plus you know if we look at there are some finite pools of attrition that I mean frankly the Cerner conversion of the Siemens space moved much more quickly and suddenly than we expected but that has a finite -- that has a finite limit to it which is not too far down the road, so that's one bucket of attrition that we feel will start to roll off. As we look forward, naturally we don't have a crystal ball, we can only make the best efforts to understand which client could be at risk and forecast based on that. But it's a challenging thing to forecast, but we continue to get a little better at it as we really look bottoms up.

And thanks for that and then just one more quick one. Has there been any change in how you calculate and measure bookings?

No.

Your next question comes from Matthew Gillmor of Robert Baird.

Thanks for the question. I may have missed it, did you give the attrition number and then I'd be curious if you could give us a sense for what portion of your attrition you think as sort of controllable or can be mitigated versus what's just sort of normal in terms of health systems making decisions or PE firms buying clients.

First of all, the number was 13.9% and I guess I should say thank you for the questions since I'm not asking you what. But I think when we look at it, we haven't broken out attrition more granularly up to this point in time. What I would say is, I go back to the previous comment which is when you look at kind of normal attrition in our core ambulatory base that's actually well within what we expect, it's really a little bit of a spike in the other part of the base, the health system owned and affiliated that's driving the overage.

And then as you -- I appreciate the comments on the three-year outlook and getting to the high-single digit growth rate next year. You did make a comment about if attrition continues and you’d be more like mid-single digit. I think previously you talked about kind of 8% attrition or somewhere in that zone as being sort of baked into the three-year target.

Actually no that's not correct, we actually talked about a higher number than that, we talked about 11% being baked into this year. We're naturally above that right now and that's putting a little bit of pressure. I think if we look at longer term, as our understanding has continued to evolve, I think we're comfortable kind of in the 8% to 10% range from an attrition standpoint and if you look at the longer-term model, as we bring that down towards the 10% number, the model continues to be intact.

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

I want to follow-up on bookings here. You are well ahead of 20% year over year bookings growth for the first six months of the fiscal year and you are kind of set that as a expectation for the full year previously. So maybe you could help us think about a revised expectation or how we should think about the back half whether year over year growth is achievable in each quarter and where that might land you guys at the end of the fiscal year. Thanks.

Well, naturally if you looked at FY ’19, we made the first half of this year a little easier by not doing that well in the first half of last year, right. So we've driven some great bookings growth, but we did it off of some lower comps. And so as we move into the back half when we started seeing strength in the back half in FY ’18; FY ’19, our expectation is that we should continue to see year over year bookings growth in each quarter, but I would not expect the level of beat that we've seen in this quarter.

Understood. And then one more from me on the revised revenue outlook for the fiscal year. I was hoping if you could provide more of a breakdown on the impact from scheduled implementation versus client implementation and kind of type or magnitude of bookings that’s come in and maybe shifted as you’ve tracked deals throughout a quarter from that more licensed deal to more subscription and all-in nature as that’s evolved into -- to your revenue outlook. Thanks.

Yeah, I mean I'm not really in a position to comment on the breakdown of the two -- the contribution of the two, but what I would say is, if we if you think about for example the deal we signed -- we signed -- the significant deal we signed in Q2. It has as we look at the implementation plan, it's quite complex because we're not just implementing software, we're actually outsourcing their entire financial back end. And so when you get into these larger complex implementations and frankly, we're learning a little bit as we go along and start to see these larger and larger deals. We're really starting to have a better understanding of how to forecast them. But the reality is that we did expect probably some more of the single solution deals than we ended up with and that's put a little bit of pressure on revenue conversion. It's kind of why when you think about what I talked about on the call; Q2, clearly we're down a little bit; Q3, we expect kind of the same dynamic; but in Q4, back half of Q4, you start to see the cut in some of these large deals and that starts to bring the revenue number back and then as we get into next year, this continues to flow in. And so, I would say that certainly attrition put some pressure on the revenue, but we really expected the revenue mix to show up differently and that just put pressure on timelines which creates this gap. The good news is that you know this gap then flows into the ratable revenue that flows from these large recurring deals.

Rusty, if I could just a little color because I mentioned it in my comments about the managed services revenue being down. We had a client that was acquired by a private equity firm that without notice and a client that was quite happy with the service they were getting from us terminated their relationship and a multi-million dollar hit to the revenue this year. So that also added into the other factors that we've talked about.

Your next question comes from Steven Halper from Cantor.

On the opening comments, you indicated that earnings benefited from some one-time accruals in the quarter, could you just expand on that?

Yes, my least favorite one-time accrual, Steve. It is the one-time accrual of lowering management incentive plan because our expectations on revenue are not what they were at the beginning of the year.

Bonus accrual.

Yeah, got it.

We have a pretty steep…

Yes, there's a pretty steep pay-for-performance curve which is absolutely appropriate. And as we look at that, we have to look at the range of results and that's why I said our EPS was in line with our expectations, but then there was an extra benefit laid on top of it.

And your next question comes from Sean Dodge from Jefferies.

Jamie maybe going back to the booking for a moment, great result there, can you share with us how much of that was driven by replacement activity or came from outside your core NextGen footprint and then I guess if you don’t want to give that level of granularity, can you at least help through the proportion from replacement was higher or lower this quarter then it was last?

I believe it is slightly up from previous quarters, we are seeing a little bit of uptick in that area from the prior quarters.

On the revenue delays, Rusty, I think you touched on it a bit, but these larger more complex deals, on average, how much longer are those implementations take? Is this the expectation that we see revenue kind of tick up in the fourth quarter is that because other things are coming out of backlog or is that because these things on average take two quarters longer to put in place?

Yeah, I mean what we're generally seeing especially these large all-in RCM deals is, it's more in the six- to nine-month range from a cut in standpoint. Whereas, for example, the implementation of next NextGen Enterprise perhaps that's more like a three- to four-month. Eagle Dream, our population health analytics and mobile are also much shorter timelines. And so, as we get -- and also especially given that these were not just all-in deals not just the implementation of RCM, so when we see like a single RCM deal for an existing client that's more kind of in the four- to six-month timeframe than the six- to nine-month time frame.

And your next question comes from David Larsen from Leerink.

Can you talk a little bit about your revenue expectations for fiscal ’20, I mean with such like healthy and robust bookings growth for the first half of the year, how long does it take to convert that bookings and backlog into revenue? Is it six to nine months or is it three to five years?

So, what we said when we talk about next year is that -- especially given the great performance on the booking side that we are committed as we sit here today to our high single-digit revenue guidance that we've provided now for the last year and half. As we look at next year and frankly, as we look at probably not doing the best job of forecasting attrition over the last couple of quarters that's pushed us to maybe be a little more conservative in next year's guidance that we might have other and if you heard in my opening remarks I did leave room that if we're incorrect in our attrition forecast that could put pressure on next year's revenue number down to the mid-single digits. But just to be clear, attrition is a continuing fact frankly in everybody's business. There is client churn, there is pressure on the health systems side, all of that is really built into our model. Going from where we are this year, which is really pretty much flat on the revenue line now. When you look at the bookings growth that we have, it's pretty easy to see how that's going to turn in and more than offset the attrition and like I said, as long as attrition sixes in, what we expect to get it to, we expect to deliver high single digit growth next year, but we are leaving room frankly just because we haven't been as effective for a little bit of pressure on that.

Okay. And then can you quantify how much of a benefit there was in the legal settlement in your SG&A? And for the bonus accrual, was that also in SG&A, like, how much, there was a very significant sequential drop, I think, it was like 10 million bucks. How much of that is one time and like what’s a steady like state going forward?

So the legal settlement was a credit of about just under $6 million in the SG&A. And the other thing, year-over-year, under 606 accounting, you get a -- you amortize the cost of acquiring new customers. So that resulted in about – a little over $1 million decrease year-over-year, where if we were on a 505, it actually would have been an increase, sorry, 605, it would have been an increase in expenses. And then as well, we have lower consulting costs related to the conversion of 606.

Okay. All right. And then was the bonus piece -- was that in gross profit or SG&A and can you size that and if not, no problem at all?

It’s right across all line items. And in terms of sizing it, off the top of my head, I rather not say, but it’s enough to make a difference that we call it down.

Your next question comes from Ricky Goldwasser from Morgan Stanley.

Just going back to the fiscal year 20, high single digit goals. Obviously, as you are more successful in closing the all-in deals, we’re going to see these conversion ratios potentially continue to expand. So when you think about next year, how do you think about that kind of like target mix. Do you build in an acceleration in the all-in deals or are you assuming the same ratios as you’ve experienced year-to-date?

I think at this point in time, we’re assuming maybe a little bit of growth in the all-in deals, as we continue to get more effective there and so that would indicate that bookings are going to stretch a little longer. That being said, as we continue to -- as I said earlier in my remarks, we've made some significant investments in leadership on the service and support side, which includes implementation and so we're also starting to -- we're increasingly maturing as a group able to implement more effectively and so I kind of expect those two things to somewhat offset each other and the bookings to revenue conversion as a whole probably to stay not too different than it is today.

Okay. And then can you just comment on the margin progression for this year and then how should we think about margins for next year?

So we would expect next year that the operating margin will show leverage. As the revenue starts to accelerate into the high single digits, you will start to see the leverage start to show up on the income statement. But we're talking 100 or 200 basis points, but what we've laid out is that we would expect to start to show leverage next year, leading us to getting to at or about 20% by fiscal 2022.

So that remains the same, right? Thank you.

It does.

And your next question comes from Jamie Stockton from Wells Fargo.

Hi. Good evening. Thanks for taking my questions. I guess maybe the first one, just the attrition, is it hitting the subscription line as well. And the reason I ask that is that number has kind of been hanging out around 27 million or something in that neighborhood for a number of quarters. So I'm just wondering how we should be thinking about the puts and takes there and the direction of it going forward.

There is attrition in the subscription line and the number we give, to be clear, the number we give is related -- is factored for NextGen enterprise maintenance. But there is attrition in this subscription line, particularly as you think about the NG office, which is a small practice subscription offering that we have. So there is subscription. I will culminate with period notes, but we had a large credit, a larger than usual credit, it went out this quarter. We had a very short term blip in our subscription offering and so we gave customers a credit in the quarter, I didn't call it out as a factor, but that’s attributed to the lower growth, we referenced a 2% growth in subscription for the quarter year-over-year, but that was somewhat muted because of this credit that we gave.

And then, the bonus accrual maybe, part of what's going on in the R&D line, but it was down a decent amount sequentially. I know, it sounds like your capitalized R&D was up maybe $1 million or somewhere in that ballpark, but is there just a lower level of kind of absolute development work that you guys are having to do right now? Or is there maybe a transition of headcount to lower cost areas, is there any color on what's going on there?

Two things. Quarter-over-quarter, gross R&D expense is down a little bit and it's down for -- because of the bonuses part of it, we’ve reduced the number of outside consultants that we’re using, doing more of it internally and then the capitalized software was up almost $1 million quarter-over-quarter. So if you put those factors together, that's why you're getting a decrease in the net R&D costs this quarter.

I would not expect us to reduce gross R&D expense throughout this year. [Technical Difficulty] ebb and flow of employee attrition.

Yeah. We have been working to be more efficient and do more of the work using internal resources.

Jamie, if you've got the operating cash flow number, that would be great and that's it for me?

It was, I believe at $11.9 million for the quarter.

Your next question comes from George Hill from RBC.

I guess first here, Jamie, can you talk about bookings concentration in the quarter. The number in and of itself was pretty impressive, but I guess can you talk about the number of deals that kind of continued to the strong bookings and then I have a quick follow up?

We don't really break them down that way, but what I'd say is the bookings concentration was pretty -- was relatively consistent from what we saw in Q1 as well. I mean, we did have one large deal, but all in all, I would say everything just shows up a little bit larger and we're seeing really good deal flow. I mean, I would say that right now, we feel like it's primarily driven by just consistent execution of a playbook.

And then I guess if -- just as a remainder, I imagine when we talk about churn, we're talking about it on a dollar basis and not as a seed basis. And I guess I would then – I’d ask kind of the inverse question of what is the churn rate or I guess what would be the elevated churn rate where we would start to be concerned about an inability to deliver 5% or 6% revenue growth next year.

What I would say is, I’d say that if we're at current levels, my expectation is throughout next year that that will probably push us into the mid singles. Jamie, would you agree that?

I agree.

And your next question comes from Stephanie Demko from Citi.

So just on the implementation side, as your bookings [indiscernible] you’ve made for your implementation teams to prepare them for these largest scale deals?

Absolutely. So the first thing we did was about six months ago, we moved out a legacy leader and brought in a gentleman who came out of Allscripts who's got some great background and capabilities, both in the space and it also worked with a number of our leadership team. On top of that though, now, over the last six months, he's also replaced and brought in a leader from the implementation side that really brings in a lot of the external capabilities versus the ones just invented here and is really starting to challenge our teams to look at things differently and we're starting to really also aggressively invest in making sure that our folks are trained, not just in our capabilities, but in understanding the client's environment. And then finally, really establishing connectivity between sales implementation and support classically. They've operated a little more separately and you can see the challenges that bring. Sales, that's one expectation with the client, implementation team comes in may or may not be aware of that expectation and so by really starting to regionalize our structure and bring people together much more tightly, we're establishing a much more continuous handoff, but also kind of joint accountability across our organizational math for delivering the right implementation result in the right timeframe. And so between that and also continuing to look to how do we expand that team ahead of demand, so that we make sure they're educated and on-boarded when it is show time.

And then have you, I guess on the flip side of attrition, have you see any benefits from the strategic alternative passes that is going on at one of your peers to kind of help the bookings process?

It's interesting. I’d say it's -- so I don't think that many of our clients really spend a lot of time reading about the investor side of their providers. I think we've seen benefit less from the strategic process and just more from the fact that we work -- we wake up every day focused on this market and some of our competitors have multiple markets they're focused on and that distraction has been a benefit for us and really enabled us to frankly with some of our competitors move from losing to neutral and with some to taking share. And so it's been great to watch that transition and yeah, I mean, that's kind of the way I see it. It is interesting, though, I mean, those of us who talk at the investor level really know all these things, but the average ambulatory physician practice neither knows nor cares. They just want a good solution that drives their results and gets them to the place they need to and they want to know that their vendor wakes up every day and thinks about their success, not both their success and the success of the hospital down the street.

And one last quick one from me on the Telehealth side, what drove your decision to partner with auto?

We did a strong RFP process and we looked at somebody who had a capability that really fit well into our solution and as we've exposed our API layer, had the capabilities to truly integrate with them and it's interesting, Telehealth and Tele-medicine is a very broad category from everything, from telemetry and monitoring to, I don't even have a physician and I just want to get a physician for this one, for Jamie's cough that you guys all hear in the background. And what we have though, on the other hand, we already have providers. For us, it’s giving them the capability to be able to interact with their patients in a situation where the patients don't have to show up at the office, right, and so that virtual visit capability enables our client base to deliver the patient engagement capability that frankly is very captivating. And so it puts them and enables them to compete with some of the pure play telemedicine players that are out there and frankly given the fact that they already have the patients, that they have specialty capabilities and everything like that, we think it actually gives them a nice leg up. We’re excited to share at UGM.

Your next question comes from Mike Ott from Oppenheimer.

If I could, just a follow-up on the Telehealth contract Stephanie just asked about, can you disclose any more about the structure of the users there, maybe even the pricing?

I'm going to save that one for our user group meeting, but let's just say that the pricing that we're putting forward we feel is very competitive. It enables our clients to be competitive against the Telehealth offerings that they compete with in the field.

And then at the Analyst Day last month, I believe you said CMS ACO risk proposal from August was increasing demand a bit for Eagledream or risk contracts. I just wondered if you have yet maybe try and creep the share there in terms of prospects or anything that they’ve got signed so far.

I mean we're seeing a lot of success with the population of the analytics capabilities. What I'd say is, we continue to see nice momentum from the sales side. We're starting now to deliver the NextGen population health clients that are live that can start to be references to the rest of the client base. Any time you bring in a new capability like that, you start with your early adopter pool who are always going to jump on board and frankly then having a great medical officer who truly understands the market and can captivate them as often. As we start to move forward now, we start to move to the clients that want to hear some success stories, not from us, but from other clients. And so that's really the focus now and I think that we're seeing good deal flow now, but as we start to see those referenced stories really emerge, especially with the integrated capability we're launching in the fall with building that directly into the ambulatory platform, that's when I think we’ll start to see more uptake.

And your next question comes from Sandy Draper of SunTrust.

Thanks very much. And I think Jamie, I think I can match your cough. So hopefully you can hear me okay. I guess, my question is, it’s essentially similar to the comment Rusty made early on about getting people on the latest version. One of your competitors mentioned that they’re a big user of your conference. How much control do you have on that, because I totally agree and I think it makes sense, but what can you do and how much control do you have to be able to get them to upgrade because there -- you can show them functionality, but if they're like, yeah, but the downtime of the commitment, how do you get them over the hump. If they haven't moved now, what's going to make them move tomorrow?

So it's interesting. So I mean if I look at it, probably somewhere in the neighborhood of 50% of our core direct clients have upgraded and there's another 50% that tend to skew smaller that haven’t. And so we're putting together both programs to help them get upgraded and frankly we're also dedicating some dollars to it. And then on top of that though, over time, we're going to start, for the first time in this organization, we're going to start talking with our clients about end of life and end of support and so we're not there yet, but at some point in time, our clients really need to move forward, frankly not for us, but for them. And so it’s, number one, it is really targeting clients having the conversation, holding our reseller channels accountable to be doing the same things, investing in resources to help get them over the line and frankly pulling people into hosting arrangements, so we can upgrade them as they come into that arrangement. There's no silver bullet here. It's a little bit of just -- it is attacking the issue from all sides. But as we move into next year October, we believe that will drive upgrading within a broader client base, as you see the next regulatory boundary come along. And then on top of that, as we look at national interoperability, if you're on old versions, you don't have access to that. So there's a lot of good and over time, there will be a little bit more pressure from us, but in the near term, we're trying to lead them there and even sometimes spend a little bit of money to get them there.

And then jumping back on to the revenue push out of the bookings, just trying to make sure I understand how much of this do you think was your forecast or your -- you saw the bookings, you forecast in a certain way and then it didn't work as you forecasted or that you had to plan out and then once you got operational, things got slower. I’m just trying to understand, was it operational delays, it could be a little bit of both?

It’s probably a little bit of both. I mean, certainly, we did not anticipate the all-in deals being as effective as they are nor did we anticipate frankly some of them coming in from outside of our client base, right, which was a longer cut in time. And so, certainly that was part of it, but then certainly -- but then also, look, I mean as everybody knows, we’ve come through a tremendous amount of change and evolution over the last three years. We keep on running into the next challenge as we start to really move towards growth and this -- so the first challenge was keep, make your client successful and have software that actually delivers for them. The second challenge was okay, now, let's build capabilities and bring in capabilities to help really drive the clients to the next level or take them to the next level. The next challenge was, get a commercial organization that can deliver bookings growth. Now, we've moved into implementation as the next challenge and then frankly past that, we would get into service and support, which we're working on directly right now, but I expect it to move all the way back to the front end of strategy and R&D as soon as we really get this current model operationalized, because once we're effective with what we're doing today, you can expect us to then choose to do more.

Your next question comes from Anne Samuel of JP Morgan.

As we think about the delay in revenue recognition from some of those subscriptions that you called out, how do we think about how that impacts the gross margin line. Do you see near term benefit from mix in the near term and then just on the expense line, is R&D incremental investment in SG&A necessary to turn around that attrition number?

So let’s see if I can take that first actually, maybe you take the first, Jamie.

Let's start with the second question. We have started a discussion internally over whether we should, whether some incremental resources would be helpful because Rusty touched on what is making us successful in addressing this earlier, which is closer contact with the large clients and in getting into their C-suite. And to do that on a regular basis, it may require us to add the small number of incremental resources, so we are actively exploring it as we see. So, there might be a small increment that we bring on that had not been anticipated, but it is -- we have included some portion of that into our guidance as we go forward.

Yeah. On the first question, I'll take a stab at it. What I'd say is from a gross margin dollar standpoint, the all-in deals and the delay have put pressure on the gross margin absolute dollar line, which to some degree has been offset with the one-time positive accruals and that's really how you get from the previous midpoint of our EPS range to the current one. So you've got some downward pressure from revenue delay and the gross margin that didn't come with that and you've got some upward pressure from one time accruals.

And I would further add Anne that the accounting for revenue and expenses under both 605 and 606, as is often, as you get a different answer under those and this is an area where under 605, five we would not be taking revenue on these contracts or under 606, you would be taking particularly the services and implementation revenue. So I have not thought about a specific question you have and that’s why Rusty and I sort of look to each other and said, no, you take, no, it’s yours. So, good question and we don't have a real clear answer on it.

And your next question comes from David Hooker of Keybanc.

So with respect to the attrition thinking going forward, where is your sort of client mix with respect to sort of standalone physician practices and with respect to health system affiliated practices. I mean, there I guess, you never want to lose a client, but I guess the good news, you can't lose them twice. So I mean, going forward, is there kind of some reassurance to hey, maybe had some bad luck with a couple of big ones, but hey, going forward, we're more -- less aligned with those types of practices, can you comment on that a little bit?

Yeah. I mean, we haven't broken out attrition, we haven't broken out the client base by whose hospital affiliated not and don’t want to go that deep in to the client base, but what I will say is that from the big player in the industry, we expect pressure to continue from the second biggest player, we expect that to moderate.

And then I guess you guys have focused a lot on hosting and I think you might have alluded to this in one of your answers to one of the questions. I assume as you get more hosting that you’re not experiencing much attrition within those clients, right, if you get that hosting arrangement, I would assume you're more locked in, is that a fair assumption?

You're more locked in, but you know what, we're taking share from some of the cloud based competitors, right? So, the fact that you're hosting some of these single tenant or multi-tenant is by no means a silver bullet. And so it helps. I’d say it helps more because we probably do a better job of both upgrading and monitoring and managing their solution and perhaps they do especially at some of our smaller scale clients and so that does have a positive impact on stickiness, but I just don't want to get too comfortable in it, because as I said, I mean, hey, we’re taking share from Athena, right, and they're taking some from us, but clearly it's not stopping people from leaving a fully hosted co-source arrangement with Athena.

And ladies and gentlemen, this does conclude today's conference call. You may now disconnect. Thank you for your participation.

Thanks everyone.