NEXTGEN HEALTHCARE, INC. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Report") and certain information
incorporated herein by reference contain forward-looking statements within the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. All statements included or incorporated by reference in this Report, other
than statements that are purely historical, are forward-looking statements.
Words such as "anticipate," "expect," "intend," "plan," "believe," "seek,"
"estimate," "will," "should," "would," "could," "may," and similar expressions
also identify forward-looking statements. These forward-looking statements
include, without limitation, discussions of the impact of the COVID-19 pandemic
and measures taken in response thereto, as well as our product development
plans, business strategies, future operations, financial condition and
prospects, share repurchases, developments in and the impacts of government
regulation and legislation and market factors influencing our results. Our
expectations, beliefs, objectives, intentions and strategies regarding our
future results are not guarantees of future performance and are subject to risks
and uncertainties, both foreseen and unforeseen, that could cause actual results
to differ materially from results contemplated in our forward-looking
statements. These risks and uncertainties include, but are not limited to, our
ability to continue to develop new products and increase systems sales in
markets characterized by rapid technological evolution, consolidation, and
competition from larger, better-capitalized competitors. Many other economic,
competitive, governmental and technological factors could affect our ability to
achieve our goals, and interested persons are urged to review any risks that may
be described in "Item 1A. Risk Factors" as set forth herein and other risk
factors appearing in our most recent Annual Report on Form 10-K for the fiscal
year ended March 31, 2022 ("Annual Report"), as supplemented by additional risk
factors, if any, in our interim filings on our Quarterly Reports on Form 10-Q,
as well as in our other public disclosures and filings with the Securities and
Exchange Commission ("SEC"). Because of these risk factors, as well as other
variables affecting our financial condition and results of operations, past
financial performance may not be a reliable indicator of future performance and
historical trends should not be used to anticipate results or trends in future
periods. We assume no obligation to update any forward-looking statements. You
are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date of the filing of this Report. Each of the terms
"NextGen Healthcare ," "NextGen," "we," "us," "our," or the "Company" as used
throughout this Report refers collectively to NextGen Healthcare, Inc. and its
wholly-owned subsidiaries, unless otherwise indicated.
This management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to the condensed consolidated
financial statements and notes thereto included elsewhere in this Report in
order to enhance your understanding of our results of operations and financial
condition and should be read in conjunction with, and is qualified in its
entirety by, the condensed consolidated financial statements and related notes
thereto included elsewhere in this Report. Historical results of operations,
percentage margin fluctuations and any trends that may be inferred from the
discussion below are not necessarily indicative of the operating results for any
future period.
Company Overview
NextGen Healthcare is a leading provider of innovative, cloud-based, healthcare
technology solutions that empower healthcare practices to manage the risk and
complexity of delivering care in the United States healthcare system. Our
combination of technological breadth, depth, and domain expertise makes us a
preferred solution provider and trusted advisor for our clients. In addition to
highly configurable core clinical and financial capabilities, our portfolio
includes tightly integrated solutions that deliver on ambulatory healthcare
imperatives, including consumerism, digitization, risk allocation, regulatory
influence, and integrated care and health equity.
We serve clients across all 50 states. Over 100,000 providers use NextGen
Healthcare solutions to deliver care in nearly every medical specialty in a wide
variety of practice models including accountable care organizations ("ACOs"),
independent physician associations ("IPAs"), managed service organizations
("MSOs"), Veterans service organizations ("VSOs"), and dental service
organizations ("DSOs"). Our clients range from some of the largest and most
progressive multi-specialty groups in the country to sole practitioners with a
wide variety of business models. With the addition of behavioral health to our
medical and oral health capabilities, we continue to extend our share not only
in federally qualified health centers ("FQHCs") but also in the growing
integrated care market.
Our company was incorporated in California in 1974. Previously named Quality
Systems, Inc. , we changed our corporate name to NextGen Healthcare, Inc. in
September 2018 , and in 2021, we changed our state of incorporation to Delaware .
As a remote-first company, we no longer maintain a principal executive office.
Our principal website is www.nextgen.com. We operate on a fiscal year ending on
March 31 .
Our Vision, Mission and Strategy
NextGen Healthcare's vision is better healthcare outcomes for all. We strive to achieve this vision by delivering innovative solutions and insights aimed at creating healthier communities. We focus on improving care delivered in ambulatory settings but do so recognizing that the entire healthcare ecosystem needs to work in concert to achieve the quadruple aim… "to improved patient experience, improved provider experience, improve the health of a population, and reduce per capita health care costs." 29 -------------------------------------------------------------------------------- Our long-term strategy is to positionNextGen Healthcare as both the essential, integrated, delivery platform and the most trusted advisor for the ambulatory practices of the future. To that end, we primarily serve organizations that provide or orchestrate care in ambulatory settings and do so across diverse practice sizes, specialties, care modalities, and business models. These customers include conventional practices as well as new market entrants. We plan to continue investing in our current capabilities as well as building and/or acquiring new capabilities. InOctober 2019 , we acquiredTopaz Information Systems, LLC for its behavioral health solutions. InDecember 2019 , we acquiredMedfusion, Inc. for its Patient Experience Platform capabilities (i.e., patient portal, self-scheduling, and patient pay) andOTTO Health, LLC for its virtual care solutions, notably telemedicine. InNovember 2022 , we acquiredTSI Healthcare, LLC ("TSI") for its purpose-built clinical content and differentiated service offerings, which expands the addressable market served by our Enterprise domain, including new specialties, such as rheumatology, pulmonology and cardiology. The integration of these acquired technologies has madeNextGen Healthcare's solutions among the most comprehensive in the market. Further, we are also actively innovating our business models and exploring new high-growth market domains as we extend our position as the essential, integrated, delivery platform and trusted impact partner for the ambulatory practices of the future.
Market Opportunity, and Trends
The scale and scope of the healthcare industry continues to expand. AnnualUnited States healthcare spend today represents nearly$4.1 trillion and ~20% of GDP. A significant portion of this spend is directed towards the treatment of chronic conditions and administering an increasingly complex system with diverse stakeholders. While there are several convergent market forces reshaping the healthcare industry landscape, we are focused on six trends we believe will materially impact the markets we participate in and our customer value proposition:
1.
Regulatory Influence - Medicare and Medicaid continue to expand and represent
approximately a third of covered lives. Further, the 21st Century Cures Act
("Cures Act") certification requirements and impending changes by Centers for
Medicare & Medicaid Services ("CMS") to Medicare reimbursement and shared
savings programs parameters (i.e., MIPS, MSSP and telehealth programs) represent
continued and escalating regulatory requirements in the healthcare industry
broadly and the shape of primary healthcare. Considering these regulatory and
market-based changes, many ambulatory practices have come to place a very high
value on partnering with vendors that stay ahead of these regulatory and
industry changes
2.
Risk Reallocation - As healthcare shifts away from defined benefit models towards defined contribution, employers, payors, providers and consumers are increasingly evaluating models to share and reallocate risk. In 2020, nearly 40% of all healthcare payments representing over 75% of all covered lives flowed through an alternative payment model. While Medicare Advantage related payments led the charge with over 55% of payments tied to alternative models, a plurality of commercial payors are also leveraging value-based provider arrangements to incent care quality standards and reduce health disparities. For providers, effective participation in these models requires a full view of the patient population's clinical and cost data and robust financial management solutions and services to navigate multiple contract types.
3.
Consumerism - Consumers are increasingly directing their own healthcare and are expecting greater levels of access, convenience, and experience personalization. Beyond tailoring healthcare interactions to their needs and preferences, they also expect much greater transparency about the costs for visits, medications, and procedures. Accompanied by a significant shift of care from inpatient to lower cost outpatient settings and virtual modes, healthcare is poised to becomes increasingly 'retail-like' and will place unique demands on practices and care providers who need comprehensive engagement platforms to attract, retain and engage patients through their complete health journey
4.
New Modalities and Coordinated Team Based Care - Untethered from physical clinics and desktops, care is now being delivered in "boundless" venues by multiple, coordinated care providers.
5.
Meaningful Interoperability & Digitization - Greater levels of data exchange, automation, Artificial Intelligence (AI) and speech enabled workflows.
6.
Integrated Care and Health Equity - Integrated, whole-person health continues to
trend strongly as evidenced by FQHCs/CHCs receiving
NextGen Healthcare is well positioned to play a key role in guiding our clients through short-term and long-term changes that impact healthcare inthe United States and is committed to helping them deliver better outcomes.
Our Value Proposition
•
Integration - Delivering a broad and highly integrated set of solutions and end-user experiences.NextGen Healthcare , a top KLAS-ranked platform solution provider, is driving greater levels of efficiency and experience for practices. Our clients 30 -------------------------------------------------------------------------------- value the full breadth of our solution offering and seamless integration into their clinical workflows. This integration is an important determinant of our success.
•
Interoperability - Building seamlessly connected data and human networks across ambulatory healthcare.NextGen Healthcare's Interoperability solutions help create a frictionless environment where those that need important healthcare data can rapidly find and utilize it. For example,NextGen Healthcare powers over a third of all United States Health Information Exchanges ("HIE's"), with over 170 million patient records passing over our network of almost 2.8 million directory addresses.
•
Insights - Providing intelligence at the point of care to enable better health
and financial decision-making. We are helping our clients move from being data
rich to insight rich. By providing intelligence, through innovative solutions
that take data out of electronic health records ("EHR"), normalize, cleanse, and
present it back as usable data pipelines, NextGen Healthcare can help optimize
prescription guidance, care gap reviews, billing quality, practice variance,
etc. and insert it directly into clinician's workflows in order to facilitate
sound clinical and financial decisions when serving patients.
•
Impact - Delivering and shaping outcomes in all aspects of our solutions and
service.
NextGen Healthcare delivers value to our clients in several ways. Our solutions enable our clients to address current needs while preparing for the needs of the future including expanding access to health services, enhancing the coordination and management of care, and optimizing patient outcomes while also ensuring the sustainability of their practices. Specifically, we offer a range of solutions to allow clinicians to practice anywhere and in new and innovative collaboration models.
We optimize the core with an automation and workflow layer that gives our
clients control over how platform capabilities are implemented to drive their
desired outcomes. The workflow layer includes mobile and voice-enabled
capabilities proven to reduce physician burden. Recognizing that engaged
patients are key to positive outcomes, our patient experience platform enables
our clients to create personalized care experiences that enhance trust and drive
patient loyalty. Further, we support the advances in integrated care that
focuses on the whole person with solutions supporting behavioral and oral
health. Our cloud-based population health and analytics engine allows our
clients to improve results in both fee-for-service and fee-for-value
environments.
In support of extensibility, we surround the core with open, web-based
application programming interfaces ("APIs") to drive the secure exchange of
health and patient data with connected health solutions. Our commitment to
interoperability, defragmenting care and our experience powering many of the
nation's HIE's places us in a unique position to enable our clients to leverage
this technology to lower the cost of care and improve the patient and provider
experience by providing an integrated community patient record.
Finally, to ensure our clients get maximum value from our solutions, we have
augmented our technology with key services aligned with their needs, helping to
ensure they reach their organizational goals. We partner with our clients to
optimize their information technology ("IT") operations, enhance revenue cycle
processes across fee-for-service and fee-for-value models, service line
expansion and operations, as well as advise on long-term strategy.
Positioning NextGen Healthcare for Growth. As NextGen Healthcare applies this
value proposition framework across the ambulatory care market, we incorporate
some or all our current solution offerings within three broad domains
illustrated in Figure 1 below:
•
Enterprise - The Enterprise domain is both the largest and incorporates our broadest portfolio of solutions (e.g., clinical, financial, and patient engagement solution portfolios) provided to ambulatory care practices that incorporate 10 or more healthcare providers. One of these solutions, our practice management offering, NextGen® Enterprise PM, was recognized as the #1 Practice Management Solution (11-75 Physicians) for four consecutive years - 2019, 2020, 2021 and 2022 Best in KLAS Report.
•
Office - The Office domain reflects almost all solutions (software solutions and adjacent services) provided to an ambulatory care practice that incorporates fewer than 10 healthcare providers. Our main offering in this group is a cloud-based, multi-tenant SaaS EHR and PM solution, called NextGen® Office, which was recognized as the #1 Small Practice Ambulatory EMR/PM (<10 Physicians) in the 2022 Best in KLAS Report.
•
Insights - The Insights domain incorporates solutions that address
interoperability, data and analytics, and value-based care. Previously described
as population health and connected health, the Insights solutions portfolio is
offered to clients across both our Enterprise and Office domains as well as
additional ambulatory healthcare stakeholders addressing connectivity or
value-based care needs. NextGen is highlighting this domain as a reflection of
its overall importance and high future growth potential.
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--------------------------------------------------------------------------------Figure 1: NextGen Healthcare Solutions Domains
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Results of Operations
The following table sets forth the percentage of revenue represented by each item in our condensed consolidated statements of net income for the three and nine months endedDecember 31, 2022 and 2021 (certain percentages below may not sum due to rounding): Three Months Ended December 31, Nine Months Ended December 31, 2022 2021 2022 2021 Revenues: Recurring 91.9 % 89.8 % 91.0 % 90.4 % Software, hardware, and other non-recurring 8.1 10.2 9.0 9.6 Total revenues 100.0 100.0 100.0 100.0 Cost of revenue: Recurring 41.4 38.8 40.9 38.7 Software, hardware, and other non-recurring 7.1 5.3 7.0 5.2 Amortization of capitalized software costs and acquired intangible assets 4.2 5.5 4.4 5.4 Total cost of revenue 52.7 49.6 52.2 49.3 Gross profit 47.3 50.4 47.8 50.7 Operating expenses: Selling, general and administrative 28.5 31.6 29.5 35.9 Research and development costs, net 12.1 13.0 13.1 12.9 Amortization of acquired intangible assets 0.6 0.6 0.5 0.6 Impairment of assets 0.2 0.0 0.3 0.4 Restructuring costs 0.0 0.0 0.1 0.1 Total operating expenses 41.4 45.1 43.5 49.8 Income from operations 5.9 5.3 4.2 0.9 Interest income 0.9 0.0 0.3 0.0 Interest expense (1.4 ) (0.2 ) (0.6 ) (0.2 ) Other income (expense), net 0.0 0.0 2.2 0.0 Income before provision for income taxes 5.5 5.2 6.1 0.7 Provision for income taxes 0.6 1.7 1.4 0.4 Net income 4.8 % 3.5 % 4.8 % 0.3 % 32
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Revenues
The following table presents our disaggregated revenues for the three and nine
months ended
Three Months Ended December
31, Nine Months Ended December 31,
2022 2021 2022 2021
Recurring revenues:
Subscription services $ 45,850 $ 41,158 $ 132,025 $ 120,581
Support and maintenance 37,382 38,246 114,670 115,736
Managed services 32,963 27,521 94,663 83,636
Transactional and data services 32,525 27,571 90,624 82,533
Total recurring revenues 148,720 134,496 431,982 402,486
Software, hardware, and other
non-recurring revenues:
Software license and hardware 5,258 8,920 19,373 24,202
Other non-recurring services 7,899 6,305 23,267 18,403
Total software, hardware and other
non-recurring revenues 13,157 15,225 42,640 42,605
Total revenues $ 161,877 $ 149,721 $ 474,622 $ 445,091
Recurring revenues as a percentage of
total revenues 91.9 % 89.8 % 91.0 % 90.4 %
We generate revenue from sales of licensing rights and subscriptions to our software solutions, hardware and third-party software products, support and maintenance, managed services, transactional and data services, and other non-recurring services, including implementation, training, and consulting services performed for clients who use our products.
Beginning in fiscal year 2023, in order to align the presentation of
disaggregated revenue with the manner in which management reviews such
information, we revised our presentation of disaggregated revenues by major
revenue categories to reclassify revenues related to patient pay services and
certain other services from the managed services category into the transactional
and data services category, which replaced the prior Electronic Data Interchange
("EDI") and data services category. The prior period presentation of revenues
disaggregated by our major revenue categories and by occurrence above have been
reclassified to conform to current year presentation.
Consolidated revenue for the three months ended December 31, 2022 increased
$12.2 million compared to the prior year period due to a $14.2 million increase
in recurring revenues, offset by a $2.0 million decrease in software, hardware
and other non-recurring revenues. The increase in recurring revenues was driven
by a $5.4 million increase in managed services, $5.0 million increase in
transactional and data services, and a $4.7 million increase in subscription
services, partially offset by a $0.9 million decrease in support and
maintenance. The increase in managed services revenue was primarily due to
higher patient volumes and billings compared to the prior year, as well as an
increase in hosting services associated with higher recent bookings. The
increase in transactional and data services revenue was primarily driven by
higher transaction volumes associated with our patient pay and EDI services. The
increase in subscription services reflect the incremental revenues associated
with the acquisition of TSI and higher connected health subscriptions from
higher recent bookings. Support and maintenance decreased primarily due to net
client attrition, our continued shift to subscription-based solutions, and the
negative impact to revenues associated with the acquisition of TSI, which was
one of our value-added resellers, and the disposition of our Commercial Dental
assets, as described in Note 6, "Business Combinations and Disposals" of our
notes to condensed consolidated financial statements included elsewhere in this
Report. The decrease in software, hardware, and other non-recurring revenues was
primarily due to a decrease in software license revenue due to lower bookings,
partially offset by higher professional services revenue from more hours
incurred and projects completed in the current year period.
Consolidated revenue for the nine months ended December 31, 2022 increased $29.5
million compared to the prior year period due to an increase in recurring
revenues. Software, hardware and other non-recurring revenues was flat compared
to the prior year period. The increase in recurring revenues was driven by a
$11.4 million increase in subscription services, $11.0 million increase in
managed services, $8.1 million in transactional and data services, offset by a
$1.0 million decrease in support and maintenance. The increase in subscription
services reflect the incremental revenues associated with the acquisition of TSI
and higher subscriptions of our NextGen Office and Insights solutions, including
interoperability, virtual visits, mobile, financial analytics, and NextGen
Enterprise solutions, due to higher recent bookings. The increase in managed
services revenue was primarily due to an increase in hosting services and RCM
services revenues associated with higher recent bookings. The increase in
transactional and data services revenue was primarily driven by higher
transaction volumes associated with our patient pay and EDI services. Support
and maintenance decreased primarily due to net client attrition, our continued
shift to subscription-based solutions, and the negative impact to revenues
associated with the acquisition of TSI and the disposition of our Commercial
Dental assets. Software, hardware, and other non-recurring revenues were flat at
$42.6 million as the increased professional services revenue from more hours
33
--------------------------------------------------------------------------------incurred and projects completed in the current year period were offset by a decrease in software license revenue from lower bookings.
Bookings reflect the estimated annual value of our executed contracts, adjusted to include the effect of pre-acquisition bookings if applicable, and are believed to provide a broad indicator of the general direction and progress of the business. Total bookings were$44.8 million and$37.7 million for the three months endedDecember 31, 2022 and 2021, respectively. The increase is primarily due to higher bookings of population health subscriptions and patient pay services, partially offset by lower software and maintenance bookings. Total bookings were$121.5 million and$111.2 million for the nine months endedDecember 31, 2022 and 2021, respectively. The increase is due to higher bookings of patient pay services and EDI and data services, partially offset by lower bookings of software and maintenance and subscriptions of mobile, virtual visits, and NextGen Office. We continue to see overall practice volumes at healthy, pre-pandemic levels. This reflects in our volume- and transaction-based solutions, as noted above, and reflects an ongoing industry trend of procedure volumes migrating out of higher cost settings, like hospitals, favoring lower cost care settings and independent healthcare providers. We also continue to see healthy activity levels in our current pipeline. Sales development activities, such as lead generation and demos, indicate a positive demand environment. We have not been significantly impacted by the current economic concerns and general market conditions, and we continue to constructively engage prospects and our clients to find ways to achieve better outcomes for all.
Cost of Revenue and Gross Profit
The following table presents our consolidated cost of revenue and gross profit for the three and nine months endedDecember 31, 2022 and 2021 (in thousands): Three Months Ended December 31, Nine Months Ended December 31, 2022 2021 2022 2021 Cost of revenue: Recurring$ 67,047 $ 58,033 $ 194,330 $ 172,312 Software, hardware, and other non-recurring 11,515 7,978 32,988 23,085 Amortization of capitalized software costs and acquired intangible assets 6,787 8,193 20,665 24,246 Total cost of revenue$ 85,349 $ 74,204 $ 247,983 $ 219,643 Gross profit$ 76,528 $ 75,517 $ 226,639 $ 225,448 Gross margin % 47.3 % 50.4 % 47.8 % 50.7 % Cost of revenue consists primarily of compensation expense, including share-based compensation, for personnel that deliver our products and services. Cost of revenue also includes amortization of capitalized software costs and acquired technology, third party consultant and outsourcing costs, costs associated with our EDI business partners and clearinghouses, hosting service costs, third party software costs and royalties, and other costs directly associated with delivering our products and services. Refer to Note 8, "Intangible Assets" and Note 9, "Capitalized Software Costs" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information on current period amortization of capitalized software costs and acquired technology and an estimate of future expected amortization. Share-based compensation expense included in cost of revenue was$0.7 million and$0.6 million for the three months endedDecember 31, 2022 and 2021, respectively. Share-based compensation expense included in cost of revenue was$2.3 million and$1.6 million for the nine months endedDecember 31, 2022 and 2021, respectively. Gross profit for the three months endedDecember 31, 2022 was$76.5 million compared to$75.5 million in the prior year due to a$12.2 million increase in revenues as discussed above, offset by a$11.1 million increase in cost of revenue as discussed further below. Our gross margin decreased to 47.3% for the three months endedDecember 31, 2022 compared 50.4% in the prior year period. Gross profit for the nine months endedDecember 31, 2022 was$226.6 million compared to$225.4 million in the prior year period due to a$29.5 million increase in revenues as discussed above, offset by a$28.3 million increase in cost of revenue as discussed further below. Our gross margin decreased to 47.8% for the nine months endedDecember 31, 2022 compared to 50.7% in the prior year period. The increase in cost of revenue for the three and nine months endedDecember 31, 2022 compared to the prior year period was primarily due to higher costs of patient pay services directly associated with higher recent revenues and bookings. Other recurring cost of revenue, including subscription services, managed services, and EDI and data services costs, also increased driven by higher revenues and bookings, resulting in higher hosting costs and higher salaries and benefits from increased employee headcount associated with delivering our software solutions and services. Software, hardware, and other non-recurring services 34 -------------------------------------------------------------------------------- revenue costs increased compared to the prior periods primarily due to higher salaries and benefits from increased employee headcount and an increase in consulting costs associated with the delivery of our professional services as we accelerate Spring'21 migration. These increases in cost of revenue were partially offset by lower amortization of capitalized software costs and acquired intangible assets, as noted above. Our gross margin for the three and nine months endedDecember 31, 2022 compared to the prior year period decreased primarily due to increased investments in professional services as we accelerate Spring'21 migration and a shift in product mix to lower margin transactional and data services, including patient pay services, and higher managed services, as noted above.
Selling, General and Administrative Expense
The following table presents our selling, general and administrative expense for
the three and nine months ended
Three Months Ended December 31, Nine Months Ended December 31,
2022 2021 2022 2021
Selling, general and administrative $ 46,177 $ 47,238 $ 140,097 $ 159,615
Selling, general and administrative, as
a percentage of revenue 28.5 % 31.6 % 29.5 % 35.9 %
Selling, general and administrative expense consists of compensation expense,
including share-based compensation, for management and administrative personnel,
selling and marketing expense, facilities costs, depreciation, professional
service fees, including legal and accounting services, legal settlements,
acquisition and transaction-related costs, and other general corporate and
administrative expenses.
Share-based compensation expense included in selling, general and administrative
expenses was $6.7 million and $5.3 million for the three months ended December
31, 2022 and 2021, respectively. Share-based compensation expense included in
selling, general and administrative expenses was $19.4 million and $13.7 million
for the nine months ended December 31, 2022 and 2021, respectively. Refer to
Note 14, "Stockholders' Equity" of our notes to condensed consolidated financial
statements included elsewhere in this Report for additional information of our
share-based awards and related incentive plans.
Selling, general and administrative expenses decreased $1.1 million in the three
months ended December 31, 2022 compared to the prior year. The decrease in
expense from the prior year period was primarily driven by lower incentive bonus
expense and lower facilities and infrastructure costs, partially offset by
increased share-based compensation expense, as noted above, higher travel,
conferences, and conventions costs, and incremental acquisition costs associated
with the acquisition of TSI.
Selling, general and administrative expenses decreased $19.5 million in the nine
months ended December 31, 2022 compared to the prior year. The decrease in
expense from the prior year period was primarily driven by higher legal and
related costs for our shareholder litigation matter incurred in the prior year
period, including a $11.4 million payment related to the indemnification of
certain expenses related to the Hussein matter and approximately $9.3 million of
incremental proxy contest expenses associated with our prior year annual
shareholders' meeting. Incentive bonus expense and facilities and infrastructure
costs also decreased compared to the prior year period, which was partially
offset by increased share-based compensation expense, as noted above, higher
travel, conferences, and conventions costs as these activities resume, higher
legal fees associated with our regulatory matter, and incremental acquisition
costs associated with the acquisition of TSI.
Research and Development Costs, net
The following table presents our consolidated net research and development
costs, capitalized software costs, and gross expenditures prior to
capitalization, for the three and nine months ended
Three Months Ended December 31, Nine Months Ended December 31,
2022 2021 2022 2021
Gross expenditures $ 28,111 $ 25,514 $ 89,179 $ 75,066
Capitalized software costs (8,490 ) (6,124 ) (26,906 ) (17,837 )
Research and development costs, net
Research and development costs, as a
percentage of revenue 12.1 % 13.0 % 13.1 % 12.9 %
Capitalized software costs as a
percentage of gross expenditures 30.2 % 24.0 % 30.2 % 23.8 %
Gross research and development expenditures, including costs expensed and costs
capitalized, consist of compensation expense, including share-based compensation
for research and development personnel, certain third-party consultant fees,
software maintenance costs, and other costs related to new product development
and enhancement to our existing products.
35
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The healthcare information systems and services industry is characterized by
rapid technological change, requiring us to engage in continuing investments in
our research and development to update, enhance and improve our systems. This
includes expansion of our software and service offerings that support
pay-for-performance initiatives around accountable care organizations, bringing
greater ease of use and intuitiveness to our software products, enhancing our
managed cloud and hosting services to lower our clients' total cost of
ownership, expanding our interoperability and enterprise analytics capabilities,
and furthering development and enhancements of our portfolio of
specialty-focused templates within our electronic health records software.
The capitalization of software development costs results in a reduction to our
reported net research and development costs. Our software capitalization rate,
or capitalized software costs as a percentage of gross expenditures, has varied
historically and may continue to vary based on the nature and status of specific
projects and initiatives in progress. Although changes in software
capitalization rates have no impact on our overall cash flows, it results in
fluctuations in the amount of software development costs that may be capitalized
or expensed up front and the amount of net research and development costs
reported in our condensed consolidated statements of net income and
comprehensive income, and ultimately also affects the future amortization of our
previously capitalized software development costs. Refer to Note 9, "Capitalized
Software Costs" of our notes to condensed consolidated financial statements
included elsewhere in this Report for additional information on current period
amortization of capitalized software costs and an estimate of future expected
amortization.
Share-based compensation expense included in research and development costs was
$1.7 million and $1.2 million for the three months ended December 31, 2022 and
2021, respectively. Share-based compensation expense included in research and
development costs was $4.9 million and $3.4 million for the nine months ended
December 31, 2022 and 2021, respectively.
Net research and development costs for the three months ended December 31, 2022
increased $0.2 million compared to the prior year period due to $2.6 million
higher gross expenditures, offset by $2.4 million higher capitalization of
software costs.
Net research and development costs for the nine months ended December 31, 2022
increased $5.0 million compared to the prior year period due to $14.1 million
higher gross expenditures, offset by $9.1 million higher capitalization of
software costs.
The increase in gross expenditures in the three and nine months ended December
31, 2022 compared to the prior year was primarily driven by an increase in
consulting costs and higher personnel costs due to our annual merit increases
and increased headcount, partially offset by lower incentive bonus expense. Our
software capitalization rate fluctuates due to differences in the nature and
status of our projects and initiatives during a given year, which affects the
amount of development costs that may be capitalized.
Amortization of Acquired Intangible Assets
The following table presents our amortization of acquired intangible assets for
the three and nine months ended
Three Months Ended December 31, Nine Months Ended December 31,
2022 2021 2022 2021
Amortization of acquired intangible assets $ 919 $ 881 $ 2,329 $ 2,643
Amortization of acquired intangible assets included in operating expense
consists of the amortization related to our customer relationships, trade names,
and re-acquired rights intangible assets acquired as part of our business
combinations. Refer to Note 8, "Intangible Assets" of our notes to condensed
consolidated financial statements included elsewhere in this Report for an
estimate of future expected amortization.
Amortization of acquired intangible assets was flat for the three ended December
31, 2022 compared to the prior year period and decreased $0.3 million for the
nine months ended December 31, 2022 compared to the prior year period because
the declining amortization of the customer relationships intangible assets
associated with Medfusion and HealthFusion that are amortized under an
accelerated method of amortization were partially offset by the amortization of
customer relationships and re-acquired rights assets associated with our
acquisition of TSI.
Restructuring Costs and Impairment of Assets
During the nine months endedDecember 31, 2022 , we recorded restructuring costs of$0.3 million , consisting of payroll-related costs, such as severance, outplacement costs, and continuing healthcare coverage, associated with the involuntary separation of employees pursuant to a one-time benefit arrangement, within operating expenses in our consolidated statements of net income and comprehensive income. The payroll-related costs were substantially paid as ofDecember 31, 2022 . During the nine months endedDecember 31, 2021 , we recorded restructuring costs of$0.5 million within operating expenses in our condensed consolidated statements of net income and comprehensive income. The payroll-related costs were substantially paid as ofDecember 31, 2021 . 36 -------------------------------------------------------------------------------- In the three and nine months endedDecember 31, 2022 we vacated portions of certain leased locations and recorded impairments of$0.2 million and$1.6 million , respectively, to our right-of-use assets and certain related fixed assets associated with the vacated locations, or portions thereof, inSt. Louis ,Atlanta , Horsham,Hunt Valley ,Chapel Hill andBangalore based on projected sublease rental income and estimated sublease commencement dates and the remeasurement of our operating lease liability associated with the modification of ourSt. Louis lease and the early termination of our Horsham lease. In the nine months endedDecember 31, 2021 , we vacated portions of certain leased locations and recorded impairments of$1.6 million , to our right-of-use assets and certain related fixed assets associated with the vacated locations, or portions thereof, inIrvine and Fairport based on projected sublease rental income and estimated sublease commencement dates. The impairment analyses were performed at the asset group level and the impairment charges were estimated by comparing the fair value of each asset group based on the expected cash flows to its respective book value. We determined the discount rate for each asset group based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the impairment date. Significant judgment was required to estimate the fair value of each asset group and actual results could vary from the estimates, resulting in potential future adjustments to amounts previously recorded.
Interest and Other Income and Expense
The following table presents our interest and other income and expense for the
three and nine months ended
Three Months Ended December 31 ,
Nine Months Ended
2022 2021 2022 2021
Interest income $ 1,530 $ 50 $ 1,650 $ 79
Interest expense (2,239 ) (321 ) (2,894 ) (958 )
Other income (expense), net (21 ) (9 ) 10,266 (43 )
Interest expense relates to our convertible senior notes and revolving credit
agreement, as well as the related amortization of deferred debt issuance costs.
Refer to Note 10, "Debt" of our notes to condensed consolidated financial
statements included elsewhere in this Report for additional information.
The increase in interest expense for the three and nine months ended December
31, 2022 compared to the prior year period is primarily related to the $275.0
million aggregate principal amount of 3.75% Convertible Senior Notes due 2027
that we issued on November 1, 2022 , as described in more detail in Note 10,
"Debt" of our notes to condensed consolidated financial statements included
elsewhere in this Report. Interest expense changes are also caused by
fluctuations in outstanding balances under our revolving credit agreement and
the related amortization of debt issuance costs. As of December 31, 2022 and
December 31, 2021 , we had no outstanding balances under the revolving credit
agreement.
Interest income is earned from funds in our money market accounts. The
fluctuation of other income and expense compared to the prior year period are
primarily due to changes to the
The change in other income (expense), net for the nine months endedDecember 31, 2022 is due to the$10.3 million gain from our disposition of our Commercial Dental assets. Refer to Note 6, "Business Combinations and Disposals" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information.
Provision for Income Taxes
The following table presents our provision for income taxes for the three and
nine months ended
Three Months Ended December 31, Nine Months Ended December 31,
2022 2021 2022 2021
Provision for income taxes $ 1,019 $ 2,535 $ 6,479 $ 1,653
Effective tax rate 11.5 % 32.8 % 22.3 % 56.6 %
The decrease in the effective tax rate for the three and nine months ended
37
--------------------------------------------------------------------------------Liquidity and Capital Resources
The following table presents selected financial statistics and information for
the nine months ended
Nine Months Ended December 31,
2022 2021
Cash and cash equivalents $ 241,550 $ 49,429
Unused portion of revolving credit agreement (1) 300,000 300,000
Total liquidity $ 541,550 $ 349,429
Net income $ 22,586 $ 1,270
Net cash provided by operating activities $ 35,977 $ 36,636
(1)
As of
We had no outstanding borrowings under our revolving credit agreement as ofDecember 31, 2022 ,March 31, 2022 , andDecember 31, 2021 . Our principal sources of liquidity are our cash generated from operations, driven mostly by our net income and working capital management, our cash and cash equivalents, as well as our revolving credit agreement and convertible senior notes. We believe that our cash and cash equivalents balance as ofDecember 31, 2022 , together with our cash flows from operating activities and liquidity provided by our debt agreements, will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months. The extent to which COVID-19 and other macroeconomic factors may impact our business, financial results, cash flows, and liquidity requirements depend on numerous evolving factors including, but not limited to, the magnitude and duration of COVID-19; the impact on our employees; worldwide macroeconomic conditions, including interest rates, employment rates, and health insurance coverage; and governmental and business reactions to the pandemic and other macroeconomic factors. We continue to monitor the broader implications of the global COVID-19 pandemic and other macroeconomic factors and may take further actions that we determine are in the best interests of our employees, customers, partners, suppliers, and shareholders.
Cash and Cash Equivalents
As ofDecember 31, 2022 , our cash and cash equivalents balance of$241.6 million compares to$59.8 million as ofMarch 31, 2022 and$49.4 million as ofDecember 31, 2021 . As described in more detail below, the increase in cash and cash equivalents is primarily due to net proceeds from our convertible senior notes. We may continue to use a portion of our funds as well as available financing from our revolving credit agreement and convertible senior notes, to the extent permissible, for share repurchases, future acquisitions, or other similar business activities, although the specific timing and amount of funds to be used is not currently determinable. We intend to expend some of our available funds for the development of products complementary to our existing product line as well as new versions of certain of our products. These developments are intended to take advantage of more powerful technologies and to increase the integration of our products. Our investment policy is determined by our Board of Directors. Excess cash, if any, may be invested in very liquid short term assets including tax exempt and taxable money market funds, certificates of deposit and short term municipal bonds with average maturities of 365 days or less at the time of purchase. Our Board of Directors continues to review alternate uses for our cash including an expansion of our investment policy and other items. Any or all of these programs could significantly impact our investment income in future periods.
Cash Flows from Operating Activities
The following table summarizes our condensed consolidated statements of cash
flows for the nine months ended
Nine Months Ended December 31,
2022 2021
Net income $ 22,586 $ 1,270
Non-cash expenses 48,121 59,489
Cash from net income, as adjusted $ 70,707 $ 60,759
Change in contract assets and liabilities, net 2,248 (2,770 )
Change in accounts receivable (2,625 ) 6,319
Change in all other assets and liabilities (34,353 ) (27,672 )
Net cash provided by operating activities $ 35,977 $ 36,636
38-------------------------------------------------------------------------------- For the nine months endedDecember 31, 2022 , cash provided by operating activities decreased$0.7 million compared to the prior year period, primarily due to a$8.9 million decrease in cash from changes in accounts receivable and a$6.6 million decrease in cash from changes in other assets and liabilities, partially offset by$9.9 million higher cash from net income, as adjusted for a$11.4 million decrease in non-cash expenses, and an increase in cash of$5.0 million from net changes in contract assets and liabilities. The decrease in cash from changes in accounts receivable is primarily related to growth in subscriptions and milestone invoicing from higher bookings, partially offset by continued efforts to resolve aged balances and improve collections. The decrease in cash from changes in other assets and liabilities is primarily due to a decrease in cash from higher payments of cash incentive bonuses compared to the prior year due to a higher rate of bonus achievement for the prior fiscal year, partially offset by changes in our income tax assets and liabilities, including our uncertain tax positions tax liability, and a decrease in rent payments compared to the prior year period as we have early terminated a number of our leases in the current year period. Net income increased$21.3 million compared to the prior year period, as described in the sections above. Non-cash expenses decreased primarily due to a$10.3 million gain from the disposition of our Commercial Dental assets reflected in the current year period. The increase in cash from changes in net contract assets and liabilities was primarily due to lower software bookings and the termination of a number of RCM contracts in the current year period, partially offset by the timing of invoicing and recognition of annual licenses that are billed at the beginning of each year.
Cash Flows from Investing Activities
Net cash used in investing activities for the nine months endedDecember 31, 2022 was$65.2 million compared with$19.9 million in the prior year period. The increase in net cash used in investing activities is primarily due to$47.5 million of cash paid (net of cash acquired) for the acquisition of TSI and a$9.1 million increase in additions to capitalized software in the current period, partially offset by$11.3 million in cash proceeds from the disposition of our Commercial Dental assets.
Cash Flows from Financing Activities
Net cash provided by financing activities for the nine months endedDecember 31, 2022 was$212.1 million compared with$41.0 million cash used in financing activities in the prior year period. The increase in cash provided by financing activities is primarily due to$275.0 million in proceeds from our convertible senior notes, net of$8.5 million in debt issuance costs, partially offset by a$14.0 million increase in share repurchases in the current year period.
Contractual Obligations
Convertible Senior Notes
OnNovember 1, 2022 , we issued$275.0 million in aggregate principal amount of 3.75% Convertible Senior Notes due 2027 ("Notes"). The Notes were issued pursuant to, and are governed by, an indenture, dated as ofNovember 1, 2022 , between the Company andU.S. Bank Trust Company, National Association , as trustee. Net proceeds from the issuance of the Notes were approximately$266.5 million , after deducting issuance costs totaling$8.5 million .
The Notes will accrue interest at a rate of 3.75% per annum, payable
semi-annually in arrears on
Approximately
Refer to Note 10, "Debt" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information.
Line of Credit
OnMarch 12, 2021 , we entered into a$300 million second amended and restated revolving credit agreement (the "Credit Agreement"). The Credit Agreement matures onMarch 12, 2026 and the full balance of the revolving loans and all other obligations under the Credit Agreement must be paid at that time. In addition, we are required to prepay the revolving loan balance if at any time the aggregate principal amount outstanding under the Credit Agreement exceeds the aggregate commitments thereunder. OnMay 17, 2022 , we entered into an amendment to the Credit Agreement, which, among other changes, provides more favorable terms and flexibility with regards to our ability to obtain additional revolving credit commitments and/or term loans thereunder, including amendments to the net leverage ratio and definition of restricted payments. OnOctober 27, 2022 , the Company entered into that certain Amendment No. 2 to Credit Agreement (the "Second Amendment") with the Administrative Agent and the lenders party thereto. The Second Amendment modifies the Credit Agreement to make certain updates to the conditions restricting the making of certain dividends, distributions, and other restricted payments by the Company so that the Company's compliance with the net leverage ratio governor contained in such conditions is calculated net of the net cash proceeds of the Notes issued pursuant to the Indenture. 39 --------------------------------------------------------------------------------
As of
Refer to Note 10, "Debt" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information.
Non-cancelable Operating Leases
As ofDecember 31, 2022 , the total amount of future lease payments under operating leases was$9.8 million , of which$4.6 million is short-term. Our operating leases have a weighted average remaining lease term of 2.2 years. Included in our total future lease payments are$7.3 million of remaining lease obligations for vacated properties, of which$3.5 million is short-term. Remaining lease obligations for vacated properties relates to certain locations, including Cary,Brentwood , North Canton, Fairport,St. Louis and portions ofAtlanta , Horsham,Hunt Valley ,Irvine ,Chapel Hill andBangalore that we have vacated as part of our reorganization efforts and are actively marketing for sublease. Refer to Note 5, "Leases" of our notes to consolidated financial statements included elsewhere in this Report for additional information. The remaining obligations have not been reduced by projected sublease rentals or by minimum sublease rentals of$2.3 million due in future periods under non-cancelable subleases.
Purchase Obligations
As of
Share Repurchase Program
InOctober 2021 , the Board authorized a share repurchase program under which we may repurchase up to$60.0 million of our outstanding shares of common stock throughMarch 2023 . The timing and amount of any share repurchases under the share repurchase program will be determined by our management at its discretion based on ongoing assessments of the capital needs of the business, the market price of our common stock and general market conditions. The program does not obligate the Company to acquire any particular amount of our common stock, and the share repurchase program may be suspended or discontinued at any time at our discretion.
On
During the three months endedDecember 31, 2022 , we repurchased 2,103,049 shares of common stock for a total of$40.0 million at a weighted-average share repurchase price of approximately$19.02 . As ofDecember 31, 2022 ,$74.3 million remained available for share repurchases pursuant to the Company's share repurchase programs.
Deferred Compensation
Deferred compensation liability was$7.6 million , for which timing of future benefit payments to employees is not determinable. To offset this liability, we have purchased life insurance policies on some of the participants. The Company is the owner and beneficiary of the policies and the cash values are intended to produce cash needed to help make the benefit payments to employees when they retire or otherwise leave the Company. The cash surrender value of the life insurance policies for deferred compensation was$7.4 million .
Income Taxes
We have an uncertain tax position liability of
Off-Balance Sheet Arrangements
During the nine months ended, we did not have any relationships with unconsolidated organizations, financial partnerships, or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.
New Accounting Pronouncements
Refer to Note 1, "Summary of Significant Accounting Policies" of our notes to condensed consolidated financial statements included elsewhere in this Report for a discussion of new accounting standards.
Critical Accounting Policies and Estimates
The discussion and analysis of our condensed consolidated financial statements and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of these condensed consolidated financial statements requires 40 -------------------------------------------------------------------------------- us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors we believe to be reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. On a regular basis, we review the accounting policies and update our assumptions, estimates, and judgments, as needed, to ensure that our condensed consolidated financial statements are presented fairly and in accordance with GAAP. Actual results could differ materially from our estimates under different assumptions or conditions. To the extent that there are material differences between our estimates and actual results, our financial condition or results of operations will be affected. We describe our significant accounting policies in Note 1, "Summary of Significant Accounting Policies," of our notes to consolidated financial statements included in our Annual Report. We discuss our critical accounting policies and estimates in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report. There have been no other material changes in our significant accounting policies or critical accounting policies and estimates since the fiscal year endedMarch 31, 2022 . 41
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