Quality Systems' CEO Hosts Analyst Meeting (Transcript)

| About: Quality Systems, (QSII)

Quality Systems, Inc. (NASDAQ:QSII)

May 06, 2013 9:00 am ET

Executives

Steven T. Plochocki - Chief Executive Officer, President and Director

James Sullivan

Daniel J. Morefield - Chief Operating Officer and Executive Vice President

Monte L. Sandler - Executive Vice President of Nextgen Practice Solutions

Gary Voydanoff

Charles W. Jarvis - Vice President of Healthcare Services & Government Relations

Paul A. Holt - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Kelli Castellano

Steve K. Puckett - Chief Technology Officer

Sarah Corley - Chief Medical Officer

Sheldon Razin - Founder, Chairman of The Board, Chairman of Transaction Committee, Member of Proxy Voting Committee, Member of Special Committee and Member of Independent Directors Compensation & Executive Personnel Committee

Analysts

Gavin Weiss - JP Morgan Chase & Co, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

Mohan A. Naidu - Piper Jaffray Companies, Research Division

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Richard C. Close - Avondale Partners, LLC, Research Division

David Larsen - Leerink Swann LLC, Research Division

Michael Cherny - ISI Group Inc., Research Division

Steven T. Plochocki

Well, welcome. Thank you, all, for being here. We appreciate the time you're going to spend with us this morning. And hopefully, by the end of this morning and the end of our luncheon you'll have a better feel for some of the initiatives that we think are going to put the company back on the track that we're accustomed to.

Before I get started, Jim, would you like to read opening statement?

James Sullivan

Sure. Statements that [indiscernible] may contain forward-looking statements within the meaning of the federal securities laws, including, but not limited to, statements regarding future events, developments, QSI's future performance, as well as management's expectations, beliefs, intentions, plans, estimates and projections relating to the future, risks and uncertainties exist that may cause the results to differ materially from those set forth in these forward-looking statements, factors that could cause the anticipated results to differ from those described in certain forward-looking statements are set forth in Part 1 Item A of QSI's most recent annual reform report on Form 10-K.

Steven T. Plochocki

Great. Thank you. And now for intros, we brought the brunt of our management team here. You'll have an opportunity to hear from several of them today and more importantly, spend with time with them at lunch to further expand on the Q&A process, but let me introduce everyone now.

Starting from my immediate left here, Dan Morefield, our Chief Operating Officer; Shelly Razin, our Chairman and Founder; Paul Holt, our CFO; Gary Voydanoff, our Executive Vice President of Sales and Marketing; Monte Sandler, our Executive Vice President of Revenue Cycle Management; Michael Lovett, our Senior Vice President of NextGen Ambulatory; Steve Puckett, our CTO; and then Donn Neufeld, our Executive Vice President of Dental and EDI. And then here in the front row, we have our General Counsel, Jim Sullivan, Jim, could you stand up so everybody can see who you are; Sarah Corley, who's our Chief Medical Officer; Charlie Jarvis, our Government Liaison Officer; Dave Ott, our Chief Information Officer; and where's Kelli Castellano, there she is back there, our Senior Vice President of Marketing. That's our team.

And what's interesting about our team is that I've been affiliated with the company for about 9 years now and last 5 years as the CEO. And when we embarked upon our restructuring last fall, every one of these individuals I just introduced you to has taken on additional responsibilities or new responsibilities in the restructuring, as we're trying to prepare the company on the basis of a groundwork and a framework that can move us onto the next level, from this $460 million run rate onto a $1 billion run rate.

A little bit on the logistics of today. I don't want to miss out on logistics, okay? We're going to have about an hour's worth of presentation. Dan Morefield, followed by Monte Sandler, followed by Gary Voydanoff. We'll be covering the initiatives of the restructuring, the initiatives of our growth patterns that we're establishing and more importantly, how the restructuring is enhancing our ability to fulfill all our goals and objectives on a going-forward basis.

So we have an hour of presentation, we'll have about an hour of Q&A. About 11:30, we'll head down to the third floor of this building where there's a big room set up for us to have a luncheon. And all the members of management will be sitting at different tables, so you have an opportunity to sit with different individuals and further ask on the Q&A.

So I don't want to waste too much time because we have a long presentation before we get into Q&A. So I'd like to now turn it over to Dan Morefield, our Chief Operating Officer, who's been leading the charge and doing a great job in getting our restructuring and focus. Dan?

Daniel J. Morefield

Good morning. I was just -- added one more piece of information. For those of you who would like to use your Wi-Fi while you're here, the user ID is QUA51. And the password, user password, all lowercase is rumabo, R-U-M-A-B-O. Again...

Unknown Analyst

[indiscernible]

Daniel J. Morefield

Yes, both are -- I'm sorry, the user ID is case sensitive, QUA, capital Q, capital U, capital A, 51. And user ID, all lowercase, is R-U-M-A-B-O. And any issues, please come to the back and she'll actually give those to you on paper.

Unknown Executive

Yes. [indiscernible]

Daniel J. Morefield

All right. I hope everyone had a good morning this morning. And for those of you who traveled especially, thank you for making those efforts. Those of you who are local, thanks for joining us this morning.

My presentation this morning is going to be relative -- it's going to be the shortest of the group and we'll be really focused on the restructuring that we have talked about for the last couple of quarters and highlighting how we're restructuring for growth and profitability. This company has traditionally run in the manner of a multiple independent benefit units under one portfolio company's approach. That's had some unique advantages for us. Specifically, our ability to be entrepreneurial and to aggressively go after a rapidly expanding market in Ambulatory has been a big part of our success as an independent business unit structure.

In addition to that, it's also given us about the opportunity, without disrupting our Ambulatory business, to invest into incubated businesses and acquired businesses such as our RCM unit, our EDI, electronic data interchange business, and our Hospital Solutions business. So we've traditionally run this thing as independent business units, but the market has changed and continues to change on us.

Today, we're running the company as a combined business unit, with one business unit, but having multiple divisions. And we've done this for a couple of reasons. First of all, our customers have changed. In the past, where we are typically going after a specific set of customers, it worked very, very well. But today, what we find is that our customers cross our business lines. And today, instead of having an independent sale, we're talking about selling of multiple product lines across our divisions to be able to go after specific clients, and we're seeing early successes in that. So part of it is our clients have changed. Our clients have gotten more sophisticated, they've aligned with other folks, the advent of some of the rural health communities that are a combination of hospitals, dentals and ambulatory practices.

Addition to that, we've seen that the Ambulatory business, especially -- or has slowed, especially as we have gotten to the back side of the bell curve of the large physician practices. We also, at the same time, determined that we needed to have greater efficiencies across business lines and remove duplications across business lines, and we'll talk about that a little bit later. Also, we also took the opportunity last fall, based upon losing a couple of key officers, to accelerate the restructuring of the company. And as many of you know, when you have those opportunities, you tend to take them because it's less disruptive as we go forward.

So what you're going to see later today, especially from our RCM unit, Monte and from Gary, is some of the fruits associated with the restructuring, the ability to cross-sell, some of the growth that we're seeing in RCM, especially from our ability to cross-sell our existing Ambulatory base.

Okay. So how are we structured today. Again, we started talking about this restructuring in the fall of last year. Today, we have 4 major business units, which we call divisions. Our divisions today are: Of course, our Ambulatory, our flagship, has been the core component of our business for a long, long time; Hospital Solutions, which is now a couple years old; our RCM services, which is now 4 or 5 years old, but continuing to grow as we've added in-market acquisitions, as well as grown organically; our QSI Dental, which has been the history of our company that also, embedded within it is the leadership our EDI, electronic data interchange business.

At the same time, we are now focused on shared services, and I'll talk about some of the efficiencies of those in just a minute. But just to give you some of the examples of our shared services: Software development; R&D, as we call it; sales; marketing; global operations, I'll talk a little bit about that in just a minute; human resources; IT, both internal facing and client facing; legal; finance; and facilities management. At my last count, we have 18 facilities within this organization. For a $460 million company, that's a lot of facilities. And I'm not sure I've got them all, but I think I've got them all at this point, and beginning to look at the rationalization of a lot of small offices and what we do there across the board.

Additionally, there are 2 groups that have traditionally been part of our Ambulatory business that are taking a greater role within our organization as a whole. The first one is Government Relations led by Charlie Jarvis, and the second one is the office of our Chief Medical Officer, led by Dr. Sarah Corley. Both of those have traditionally been embedded within our Ambulatory business and both of those are taking a much greater role in the leadership of the organization.

Our business divisions, we've introduced the -- our leaders within that. Mike Lovett has taken over the leadership of Ambulatory in late of last year. Mike is a long-term veteran of this organization and gave us the ability that come out of the blocks running from that perspective. Steve Puckett has traditionally run our Hospital Solutions in addition to his role as CTO. We are in the process of making a change there and looking for a leader within that space. In the meantime, I'm taking a more active role running that particular division. And that gives Steve the ability to focus on the critical needs within our overall technology organization. Monte Sandler and Donn Neufeld, those are 2 people that you've known and have met in the past and they remain very, very stable within their -- those roles.

And the reason I bring that up is because I want to highlight that we've got a great deal of stability and depth within both the management team on the business, the line side, as well as the shared services side.

Okay. Just to give you some of the flavor associated with the efficiencies and expense control within the restructuring. For those of you who are hoping for hard numbers-- ahead of our earnings call, you probably or you're not to going get them. So it's going to be a little soft, but I'm going to highlight some of the issues of these. And none of these are -- should be surprising to anyone who has restructured a company in the past.

So synergies across the group, training and implementation, just one specific example on that. We're beginning to use a greater degree of the resources in our Ambulatory team to help lead some of the issues that we're seeing in the Hospital Solutions team. And there's a great example that we've got this huge history and knowledge base of folks who have run large and complex organizations that, as an independent business unit, we didn't cross company lines; whereas today, we're willing to use people across those lines to drive efficiencies and to gain traction. Customer support has the same story.

Software development. All of a sudden, Steve is looking at roadmaps and architectures that cross platforms, that have the ability to drive interoperability across not only our platforms, but platforms of other people within our industries.

Internal and external IT. Different terms, operational -- or the ability to have systems that support internally, such as our email servers, to all the hosting and external-facing systems that are basically client-facing across the board.

Offshoring enhancement. Not only the labor cost arbitrage, but the other term I'm using in that is the intellectual arbitrage. We're beginning to build an intellectual base in our offshore operations to help provide some of the thought leadership, which is one of the pieces of maturing an offshore operation. And then operating controls, common policies, practices, leading to total overall costs.

Again, I can't underestimate when you have 4 groups that are independent, that can sign their own leases, that have the authority to purchase equipment. For the first time, we're seeing common and across-the-board CapEx budgets being able to put good controls in place as to what we spend and why. The HR policies have been interesting as we've had basically 4 different HR policies, depending on the business unit that you reported to. Different vacation dates. If people transfer from one unit to another, what came across. All these pieces are very straightforward, but if you don't address them, they cause conflict within the organization. But once you get through them, then we have a platform upon which to grow aggressively in the future. Again, all of this leads to material savings that we can invest into growth parts of our businesses.

Okay. My last slide. What does that do for us? Well, why do we do this is positioning us for success. Success in our environment means growth and profitability. You're going to hear from Gary and from Monte the enhanced cross-selling and multi-product sales. It's a story we've been talking about on our earnings call. You're going to see it much more today and I'm very, very pleased with what we're seeing on the expanded -- our expanded sales from cross-selling and multi-product sales. I think we've said it once before, but we're finding today, that as an example, 40% of our hospital clients also have ambulatory. And there's probably a lot more that have it that we just haven't discovered.

We have a very -- a relatively small penetration of RCM Services into our established Ambulatory base. What does that mean? That means it gives us a great runway upon which to sell and to provide earnings for the next 2 to 3 years.

You will also see the acceleration of data monetization opportunities. I bring this up not just because of the fact that we're seeing that data monetization as a big part of our financial future, but because we've also determined that data resides in different parts of the company. And the ability to monetize that across the company versus on a division by a division level gives us the ability to enhance that or to monetize it at a much greater event or much greater speed.

Enhanced interoperability across products. There's a theme in our industry today of interoperability across companies. We also -- our focus on making sure that our products are interoperable and well connected across our product lines, and that matches our customer base and the customers that we're selling to.

Enhanced ability to scale operations, the ability to throw people at places that you need it. We also have the ability to adjust in rapidly-changing industries. As we see this industry over the next couple of years, the development of the ACO model or models, whatever that happens to fully be in the next 2 to 3 years, we're positioning ourselves both from a product, a service and an infrastructure capability to address those markets and to effectively compete in them however they end up maturing over the next couple of years.

The ability to have enhanced financial discipline. I think all of you know that. There was a comment made earlier to me about reporting earnings on a GAAP basis for the ability to have consistency and the ability to have -- the ability to basically be able to understand our financials. But that finance or the financial discipline also then gives us the ability to better forecast financial results, which, from an internal operation perspective, is critical as we go forward and it's, I think, something that you, as a group, have always said is important.

And lastly -- but not least important, it's a better client satisfaction across the board. At the end of the day, our client satisfaction, in my opinion, and I think the opinion of everyone sitting at this table, drives profitability, drives stockholder value and drives growth, and so again, positioning to the ability to be able to drive a great deal more client satisfaction.

Okay. So at this point, it's my pleasure to turn the podium over to Monte Sandler that's going to now focus on a review of our operating division -- excuse me, of the RCM division and the growth opportunities there. Monte?

Monte L. Sandler

Okay. Good morning. Thank you, all, for joining us this morning and I hope it's an eventful day and you get all the information that you need. So as a refresher or maybe as an introduction to some, my name is Monte Sandler. I'm Executive Vice President for our RCM Services business. And I'm going to talk to you a little bit today about RCM Services, how we fit into the organization and I really -- my business is a pure service organization. And so we'll talk a little bit about how that fits in to the changes that we're seeing in the marketplace and to Dan's point, a lot more cross-selling and a lot more opportunity to expand our footprint.

So I thought I'd start with just a few facts. The industry statistics say that more than 25% to 30% of lost practice income is as a result of poor billing practices. That's what we focus on. MGMA has reported that practices that outsource their revenue cycle see measurable improvement from an AR reduction perspective, decrease in denials, as well as enhanced reporting and analytics because we really become partners to our customers.

PricewaterhouseCoopers has reported recently 5 top areas and reasons why practices are choosing to further outsource their back-end business office and focus on other efforts. So the #1 reason, lower costs. This is our core competency. This is what we do all day everyday and we have economies of scale that we can pass on to the customer.

Gain access to talent. Again, this is what we do. This is absolutely our core competency. Physicians and practices are focused on treating patients, adopting EHR, achieving Meaningful Use, preparing for ICD-10. They have a lot of things that they're dealing with and there's an opportunity to leverage experts to manage the back office. That leads right into point #3.

Number 4 is an important point. We offer the ability to move from a fixed expense model to a more variable expense model. Our -- the model that we charge our customers is a percentage of collected revenue. So as these practices are going through changes a variable model really behooves them, whether it's reduction in reimbursement, there's certainly a value proposition to have more of a variable cost structure as opposed to fixed, just as moving to more coordinated care and alternate reimbursement models. And as the industry is sorting that out, a variable expense model makes a lot more sense for them.

And I touched on this, but point #5, focusing on higher value activities, allowing providers to treat patients, allowing providers to implement EHR, allowing providers to achieve Meaningful Use. Those are the things that they need to be spending their time on. Those are their core competencies, outsourcing of services to the experts, frees up their resources and time to be able to do the things they need to do.

So for all those reasons, QSI entered the RCM services space. We entered it in 2008. In May, we acquired Healthcare Strategic Initiatives. That's the organization that I was a part of. And in October of 2008, we acquired Practice Management Partners out of Baltimore. And most recently, you'll remember, in April of '12, we acquired Matrix Healthcare Management based in Akron, Ohio.

So on the heels of those acquisitions and getting into the space, in April of 2010, we went through, as both HSI and PMP came off of their earnout and integration process to bring those businesses together and create what you'll all remember we called NextGen Practice Solutions. In April of '12, post Matrix acquisition, we brought them into the organization and we renamed ourselves NextGen RCM Services and have continued on that path. And as Dan talked about this past August, we've gone through a corporate reorganization with a shared service model that is bringing more and more resources to the RCM Services business and allowing us to continue to grow our business the way that we intend to.

So when I think about our business, I really kind of draw a line in the sand in April of 2010, that's when we really brought HSI and PMP together, and we really started embarking on the service offerings that we have today.

So what is that service offering? So there's a few points that I want to stress in our service offering and what it means to our customers. We're revenue cycle outsourcing, so we're handling back office services. We have developed that practices. So we have defined exactly how to best use the NextGen applications, how to configure them, how to use them and how to optimize both process and result for our customers.

And our focus is really twofold with those customers. Certainly, it's about optimizing revenue, how do we make sure they get paid for all the services that they're providing their customers. But it's also about how do we help them get the most of our software. As most of you know, the NextGen applications are high-feature function and they're very flexible in configuration. And so our model is really focused on helping our customers leverage all that technology as best they can in order to optimize their results.

Our solution is tailored, so we are not a cookie-cutter solution, where it's our way or the highway, it's a very tailored approach, it's very consultative. We look at the entire revenue cycle on behalf of our customers. We redesign where we need to. We implement, we train and we tailor the offering to meet their specific needs.

As I'm sure most of you know, providers practice differently. And so we can form and tailor our solutions to help them reach their goals. Our solution is scalable, it's built on best practice. We deploy extremely fast. It's not unusual for us to get a call or to close the transaction on a given day and within just a couple of weeks, we're actually in there going live.

We're very transparent. Our application is transparent, our processes are transparent and we really become a partner and an extension of our customer base to help them understand their business. We use a lot of data, we're very account management driven. So we're very sticky with our customers and we hold their hand, and we really become their partner to help them optimize their revenue cycle.

So just a few statistics on our RCM Services business. Again, drawing the line on -- when we brought the organizations together in 2010, we've seen about a 16% cumulative growth rate on the revenue side. With the reorganization, the corporate reorg that we've gone through this past year, we actually realized 130% of contracted annual growth in our -- in new sales for the year. We talked about cross-selling an opportunity there. 67% of those deals are really coming from the existing NextGen Ambulatory customer base. So finding opportunity within the customer base to continue to expand our services.

So being a pure service organization, you guys have heard me talk a lot on our earnings calls, service margins tend to be a lot different than software margins, and so we've been in a significant phase of margin expansion. How do we continue to find ways to improve our service delivery, expand our margins. And I'm happy to report, over that 3-year period, 52% growth cumulatively in operating income, 32% in operating margin. And we've been able to do that through economies of scale, our continued use of offshore labor and finding ways to just get more efficient and effective in the service delivery.

So where are we headed? Again, building on the theme that you've already heard from Steve and Dan, how do we continue to cross-sell our services? We have not -- we have got a small penetration into our existing customer base. There's a huge greenfield there for us within that space. We're in new deals everyday as well, so that part is growing. Imagine -- if you saw the wire this morning, we announced a new partnership with PRN. That's a net new customer to our family, but it was a cross-sell opportunity that we sold our Electronic Health Record, our Practice Management, Patient Portal, our NextPen technology, all under an RCM Services engagement model. So it was a creative model. It gives them access to all of our applications. It gives them access to our service. We're going to help them, in RCM Services, deploy that from a best practice perspective and help them optimize and maximize the use of our technology.

Hospital and Dental. So today, we talk about these 4 distinct divisions. RCM Services predominantly is serving our Ambulatory customers today. There's a big opportunity for us in servicing our hospital customers, as well as our dental customers. And so we've got aggressive plans that we're moving forward on to enter those spaces as well.

We have ICD-10 and on the heels of that will come ICD-11. That is going to create opportunity from an RCM Services perspective. Again, providers are being asked to do a lot today and in the future with Meaningful Use, with the change to ICD-10, with regulatory changes, with reimbursement model changes. So those create opportunities for outsourcing and the back office.

And then partnering with our customers as they move to these coordinated care reimbursement models. How can we be a partner to them to access data, analyze data, make the right decisions when they are joining and partnering in this new reimbursement model. So those are some of the opportunities that we have and the things that we're focused on as an organization moving forward.

So with that, I am going to turn it over to Gary Voydanoff, who's going to walk you through our sales and marketing and where we're headed for the entire company.

Gary Voydanoff

Thank you, Monte. Good morning, everybody. Finally, the sales guy gets up, right? Can we get a little excitement? So first of all, I want to thank Steve Plochocki for bringing me here today. He called me, I don't know, how many weeks back, said, "Gary, hey, you want to go to New York? We're going to go to Analyst Day?" I said, "Steve, that's a great idea. So many people have been telling me I need to have my head examined since I've taken this job, so a day with an analyst was probably a good thing", wrong analyst. So hopefully there's still time for that. But it's great to be here.

I want to talk a little bit about what we've been doing for the last, I guess, 3 quarters since I actually did take this job. My background is I've been with NextGen Healthcare for about 15 years now, so I don't know if I won the job because I was the oldest guy still around or what, but...

Steven T. Plochocki

He's the best guy, that's why.

Gary Voydanoff

Okay, thank you. But nonetheless, I was excited to take on the position. I kind of bleed NextGen blue. I've have been here since, I don't know -- I think Dave Ott's the only guy that's been at NextGen longer than myself, whether he was employee 3 or 4 or whatever. I was in the top 30 or 40, somewhere in that range. So it was important for me to take the position because the job wasn't done.

And so the first thing that I really had to do is kind of look around and figure out, well, what are the assets that we really have and what do we need to do to get this thing moving forward again. One of the things I did know that I had is the best ambulatory sales team in the business, a group of tenured ladies and men that I would go to battle with anybody with.

And I think today, we average something like, on average, 5 years of tenure for our sales execs, which, in a sales business, especially this one, that's a long time. We've got several folks that have been with us for 7, 8, 9, 10 years, so that was a great asset that I had. And the first thing we really had to is, kind of, rebuild a sense of team. You can imagine, when you lose a few folks in the kind of the core leadership areas, you need to kind of rebuild that again and get some vitality going and really give them a vision for where you're, kind of, going in the future.

So that was really the first order of business, to bring this team together and tell them that we're going to start to refocus on certain key areas and look at trends at where the industry was going, and so they can, kind of, see a path to where they could be successful.

So some of the first things we did. We had to first integrate sales and marketing across all the divisions. We were very siloed. There were sales groups that were selling Inpatient, sales group for Dental, sales group for Ambulatory, each had their own marketing, so we kind of knocked down all of those walls. You can, kind of, imagine if you had an offensive unit of a football team and the wide receivers, and the running backs, and the quarterback, and the line never came together to do anything, kind of looked ugly when you got out on the field. So, we had to bring that team together to begin with. And so we worked hard to do that. I'll talk a lot about what we did in the marketing ranks, but that was really the first thing to knocked down those walls and put one team in place across all the divisions.

The next thing we had to do is really align ourselves -- align sales with where the industry was going. So we talked a lot with -- you listened to Monte, and RCM was certainly one of the leading indicators of where the industry was going.

The area of consulting services was another place where the industry was beginning to boom. I call it Ambulatory fringe markets, but there is still a lot of white space out there with the, kind of, the late adopters coming to the market. So areas like PT. Monte just talked about the PRN press release, a very large PT organization that's an area we've been doing very well; other places like behavioral health. So you got to look a little bit harder and you've got to make maybe a new set of contacts, but there are plenty of those kind of, as I would call fringe market opportunity still out there.

We had to do a lot more cross-selling into our own client base. And I think we're really doing a very effective job of selling our ancillary products into our client base, so it was another trend that we need to take advantage of and really look to increase. We had we to also look for multi-product kind of opportunities, so opportunities where we could sell both Dental and Ambulatory or Ambulatory and Inpatient together or all 3 of those together. So we wanted to focus more on doing that.

The next thing I had to do is kind of open up the price book a little bit. We've been traditionally just a software sales team and so we had one pricing model. You want to buy our license? There aren't any other options. We got red, we don't have blue or green or anything else. So we had to change our pricing methodologies. And I'll talk a bit about that with some particular situations, but we had to be much more flexible to address some of the emerging markets.

So, we also had to put the right people in the right position. So in addition to myself, we've got a lot of tenured, very successful folks in our organization that I had to put into key roles. So these are just some of few that -- changes that I made. Kelly Skeen, who's been with us almost as long as I have been, been in health care for 25 years, we're putting into the role as Vice President of Ambulatory Sales. Patty Rutherford has been with us for several years. Patty's been doing a great job of Ambulatory inside sales. Very successful year-over-year growth. What we had to do with that is again knock down those silos, so we put in Patty in charge of inside sales for all of our divisions. So expect this year to start seeing some growth in Dental and Inpatient with the cross-selling of inside sales.

James Muir has been a very successful sales exec, Divisional Vice President of Sales for us. A real passion and love for practice management, so he was the natural choice to establish and put in the role of VP of RCM Services, so a very specific leader now taking on that challenge and growing that division. And finally, Kelli Castellano, who we introduced a little bit earlier. Kelli's in charge of Marketing and Communications, a VP of that group. We'll talk a little bit more about what we've doing with marketing. Kind of the next set of lieutenants that we have in the organization of all of my district sales leadership. We have about 200 combined years of experience, so I guess more old guys are just focused there on health care for a long time. And so a lot of contacts and really understand what's going on in the industry.

So one of the first things that Kelli and I had to do was kind of really align marketing and sales. Marketing before we got together had really been tied more closely with product management. And so we broke them away from product management and put them into a more traditional role of sales and marketing, working hand-in-hand. So we could really be aligned with my core objective, which was growing revenue, create demand for the NextGen product, fill the funnel with leads. That was, in my mind, what we had to do in terms of core marketing.

We also want to really start positioning NextGen as a thought leader. We got so much experience and again, so much tenure. We've been doing this so long. We've got so many great client stories that we forget about. We kind of focus on the moment. And so we had to, again, reestablished NextGen into that position, and that's really what we've been doing.

So a couple of things that Kelli's team has been working on. First of all, just feeding the top of the funnel, that core activity of lead generation and creating demand. So we've seen about 110% growth in lead generation to this point from this time last year at the same point. So that's a good thing. So as we're getting more and more of those leads into the funnel, we're going to transfer, obviously, some of those into opportunities, and begin to grow the pipeline. So, we're starting to see that at the top end of the pipeline funnel.

The other thing that's encouraging is we got a lot of web traffic. In Kelli's mind, everything leads to the web. So all of her marketing campaigns, all of the things that she's been doing are designed to drive folks to our website. So that's a place where they can come and they can see case stories, campaign information, a lot of data on what we're doing with NextGen and kind of, again, with that proven theme of what we've been doing in the marketplace. And with about 0.5 million web hits a month, you can see that over time, you're going to start to establish that thought leadership if you bring the right information to them. Information that's engaging, not just kind of typical sales leadership but information on what our clients are doing, what the success stories are out there and topics that are relevant. We talked about Meaningful Use 2 or ICD-10 and how we can help folks to do those kind of things. Those are the things that are relevant and those are the things that establish thought leadership.

We're also investing a lot more in Google AdWords. Again, everything leading to the web here. Traditionally, in the past, if you did a web search on EHR, and you're going to find NextGen along with a host of other vendors. So we really need to expand that beyond just EHR, again, to a more relevant topics. So if you do searches on Meaningful Use, ICD-10, population health, revenue cycle management, all of those things now are going to lead to NextGen. So as a result of that, we're getting, again, many more clicks to the NextGen website. That's what's driving that web traffic. And again we're hoping that, that's translating into leads, more opportunities, and to grow the pipeline.

And we think it's having the right effect. So, here's just some of the trends that we're seeing. Obviously, Monte told you a lot about the RCM story. You need to get more pumped up about that, Monte. We really kicked some butt in the last couple of quarters, so that's a good thing. Professional consulting services, we've been doing a really great job, had a great year there. We're going to talk in a little bit more detail on each of these. Cross-selling into the client base, it's been exciting to see what we're doing there under Patty's leadership and really kind of again knocking down those walls. The multiproduct sales and the new business opportunities, again, that's exciting. And really the long-term funnel as a result of what we've been doing on the marketing side. We're starting to see it taking effect with new opportunities and the pipeline growing at the very top of the funnel.

So I'll talk a little bit about cross-selling into our client base. So you can kind of take a look at this graphic and what it really shows is the first 2 columns there should be EPM and EHR but obviously, our client base is mainly made up of those 2 core products. The other ancillary products like patient dashboard, Patient Portal, our NextPen application, EHR Connect, Population Health and HIE really shows a lot of whitespace within our client base. So we've got a lot of opportunity to continue to sell into our client base and to generate more and more business there this year. There's significant demand for that. We're using a lot more metrics now that kind of focus in on our clients to figure out which ones don't have specific products so we're not doing such a shot gun approach to marketing to them anymore. If we know there's a client that specifically needs portal, dashboard and EHR Connect to help satisfy Meaningful Use requirement, we can focus in on those clients and really target market them. So that's been a success for us as well. So as a result of that, we had about a 14% increase last year in inside sales. And that's really without Patty's full effect now being seen in some of the other divisions so we're looking to increase that more and more this year and increase the Patty's effect -- I'll call it the Patty effect in dental and inpatient sales as well.

Another trend that we had to take advantage of is what was going on in outsourcing. So again, we were a traditional kind of health care software sales focusing on the EHR market. And we saw that outsourcing was really expanding rapidly. And no matter what publication or where you looked online, there's all kind of information that's saying, "Hey, sourcing is really exploding out there".

On the RCM side, that's estimated to be a $50 billion market and it's 75x larger than the EHR market itself, the place we had to be and we had to be in scale. Just IT outsourcing in general, continuing to grow very rapidly at 28% clip, and again 3.5x faster, another place we had to be. We had to address the professional consulting services.

Finally, some information from Gartner, and this really lines up what we were seeing in the industry. Our clients and our prospects were really looking for ways to reduce costs. Their margins are razor-thin and it's getting tougher and tougher to survive out there so they want a model that lets them reduce costs. They want a model that lets them improve profits-- processes, a lot of the things that obviously Monte was talking about, their core competencies. They want to be more competitive and they want their leadership to be able to take their mind and their focus off implementing systems and focus on growing their business.

So Monte's already gone over some of these with you but I'll reiterate them because, again, we kicked butt. We grew 130% in revenue with RCM sales. The pipeline was up dramatically, about 139% year-over-year. Professional consulting services went crazy, up 1,200% from the year before. We had a little bit of success the year before but we frankly have had great success in the funnel is building and building in this particular area, especially fueled by the things that are going on with ICD-10 and Meaningful Use conversions, our clients want a lot of help in this particular area.

That little fact toyed at the bottom of there that I think is great is that only 5% of our client base has been penetrated with RCM so there's a huge opportunity to still continue to move into RCM, into that space. It's also telling me, too, we did a nice job on selling net new clients like PRN and T-Systems, a couple of great wins for us in the net new business RCM space. So we're beginning to become the real factor in the RCM space out there in terms of sales.

We've got some great channel partner relationships that we're going to continue to grow. It's a strong partner. We keep adding new partners all the time. Probably the one that's gotten the most press, I would say, in the last 6 months or so is the Medline relationship. Tremendous number of Medline reps out there in the field selling services and programs within the health care industry. We've generated probably just in the last quarter or so as we've kicked that off about $1 million in new opportunities in the pipeline. We're excited that we're going to start rolling out RCM into that Medline base now, too, so we're going to increase that RCM funnel through that network. So we're excited to see where that's going.

We've got a lot of consulting partners out there that also helps fuel our pipeline and our growth. We've established about 75 active consulting partnerships out there. We do some nice things with the consultants this year to continue to stay engaged with them. So we do continue to see them bring us opportunities. But more importantly, I think what we've done is we've established a great two-way relationship with a lot of them. Several of those partners plugged right into our professional consulting services program where if we don't have a specific expert on a certain area, we can bring them in. We can sell their services on our paper to increase our top line revenue. And then there are cases where it just makes sense to hand a particular client or a customer with a need off to those partners so we're helping them grow their business and they're helping us grow ours.

We're doing some nice things on the channel side, in our VAR program. We're going to focus a lot more on that because I think there's a lot of untapped opportunity that we can continue to grow in this area. As soon as I leave here, I guess tomorrow morning, I'm flying down to our VAR conference where we're going to talk about many of the same things. The things that have made us successful in this past year to start turning the ship and growing it again. We're going to talk about those same things to the VARs. They want to hear what we've been successful at and so we're going to make sure we're more in tune with the VARs and give their sales teams and their leadership the things that they need. So we're going to talk to them about cross-selling. RCM, dental, inpatient. They begin in some cases to bring us some inpatient business and we need to really grow that. And talk to them about new products by population health, where that market's going.

Another area that is really interesting to me is kind of this untapped specialty market area. So there's a lot of specialties out there that still don't have a lot of adoption. We've seen some of our resellers attack them. A specific one is we've got a reseller that created some great clinical content around rheumatology. And very recently, they've begun to see a lot of sales increase in that particular area because they're able to go in with a very focused sale. So we're going to offer that type of program off to many of our VARs where they can concentrate on a particular clinical specialty. We're going to support them with our sales team. We're also going to support them by making them really exclusive in that area and providing them leads that we see because we think they can be more successful at going in and selling those particular specialties. So things like rheumatology, pain management and some other areas that we're identifying that we think we can expand.

We're looking to expand some VAR coverage in areas where we don't have coverage today. We'll probably get somebody up in Nome, Alaska or something like that, but really just in areas where we don't have good sales coverage. And we're also working on some competitive replacements in the VAR area. There's a number of competitors that maybe don't have as strong a VAR partnership as we think we do and they're looking to potentially come with NextGen.

So I'll wrap up, talking a little bit about the future. That's kind of what we've done to, I think, stabilize things and turn the ship around and begin to grow and point us in the right direction. But there's a lot of good things that are going on in the future that I'm excited about that I think will lead to a good year for us. Number one, I know that cross-selling and the RCM model is working, and so we're going to continue to feed that. That's where the industry is going. I'm excited that Monte's beginning to push us into the RCM market into the hospital area. Some of our inpatient clients are coming to us and saying, "Hey, can you help us out with your RCM Services?", so we're going to keep pushing more of that with Monte in expanding that area. I think that's a huge area for growth.

We're starting to see the funnel for population health continue to grow. It's kind of a new concept in many cases to a lot of practices out there and so they're beginning to understand, they're beginning to see what the product can do to help them not only drive more business and kind of fill the schedule a little bit more but to really help identify the gaps in care so that they can provide better care to their patients, both chronic and wellness care. And it's really going to be the cornerstone of where value-based medicine is going. We're excited with what we can do with that product.

Professional consulting services. I've kind of challenged my sales group from professional consulting services to look outside NextGen. There's no reason we just have to be focused on NextGen clients. There's a big world out there and they have a lot of expertise and there's no reason you can't walk into a practice using another system and provide them help with ICD-10 or Meaningful Use compliance workflow process improvement, all of those kind of things. So we're going to incent my guys a little bit more to go out and find some more of those opportunities and really grow that business so it's a serious business and a very strong and competitive consulting services offering.

We're going to continue to scare up and find those fringe markets that I've talked about. There's a lot of good ones in the pipeline today. I'm also excited because I don't think Cloud technology today is as exciting-- as all it's cracked up to be. We'll talk a little bit more about that, why I don't think that way. And the one thing that's been great for me here at NextGen is we continue to be kind of that strong stable consistent company. It's the classic tortoise and the hare story. We're clearly the tortoise. We just kind of continue to grow and we've been there. And I've seen through my 15 years, a lot of companies get hyped and fall off. And another one comes in and gets hyped. Or a new leader comes into a company and gets hyped. And we just keep growing and the ones with all the hype seem to fade away, so I'm excited that we built that kind of company.

So a couple of things about the markets and where we're going that give me reason to be optimistic. So we're now in the top 4 here in Meaningful Use adaptation. That's a good thing for us. If this was the Billboard Top 100, we'd have the arrow going up and a couple of the other vendors above us have really flattened out. So it's exciting to see us picking up a lot of momentum and thus continuing to build. And hopefully, we can move up into that next spot up the chain there.

I'm excited because we're still only 1 of 3 vendors that's got their ONC certification for Meaningful Use 2. It was a very difficult thing to do. It took a lot of work, a lot of individuals worked very hard at doing this. But the great thing is that our application was able to do it and it gives me pause, to wonder what's going on out there and why aren't the other ones catching up because they don't have as powerful and flexible of an application. So what's all this really mean? We're starting to see some decertification happen out there. A couple of vendors just announced in the past 2 weeks that had been decertified by the ONC. There's 500-plus EHR vendors right now. This is again going to continue and we're really starting, I think, to see the beginning of that consolidation happen and I wouldn't be surprised if there's less than 200 EHR vendors down the pipe. That's going to mean there's going to be a big replacement market, a lot of whitespace for us to go after and we're starting to see a little bit of that.

We also know that the replacement market is made up of some very savvy buyers. There's several replacement sales that we've done in the last year and we know that the sales process is very, very different. They want a proven, they want a safe vendor. They want to have service level agreements that, in many cases, have some risk involved. They want us to take on risk with them, and we're willing to do that. That's one of those areas where we've changed our pricing model to create, for example, a gain share agreement. If we know we can go in and replace a vendor and we've got a big upside that we can help them with financially, we're able to take risk and share in that. And we're starting to see the fruits of that. And ultimately, instead of just discounting a contract heavily, we can make up-- essentially backup to our list price of our software in that gain share and that upside, so it's an exciting place we're going and we're doing more and more of those. And that's kind of opening up of the pricing playbook that I talked about a little bit earlier. So I think we're really kind of poised to pick up business as more the safe long-term choice.

The other thing that I'm really optimistic about is we're starting to see this emergence of these physician mega-groups forming. Many of them are multi-specialty, many of them are forming around a single specialty. And I'm excited because that's an area where we're particularly strong. These groups are forming because they're going to compete directly with the hospital-owned physician groups.

The physicians that are owned by the hospitals, they're having a tough time once again and this is kind of a cycle we go through every few years where the hospitals employed physicians and they have a tough time figuring out the processes and the workflow and they have a very difficult time making money. We're seeing a lot of the hospital organizations trying to cut costs because they've employed so many physicians and they're losing money. But these large groups are particularly positioned to compete with them. And we've got a great base of them. Crystal Run, Mount Kisco, Optimum Health, Hill Physicians. These are large groups and they continue to grow so they're going to be adding licenses. They're going to be adding more ancillary products and this is an area that I see for us to continue to grow.

In particular, there's 3 names up there Monarch Healthcare, Optimum and CareMore that are owned by payers. Another market that we're strong in and we hope that by the end of this quarter, we can announce another win in that particular sector. So we see the payers now buying more and more and employing more and more physicians. And again, that's -- it's been an area of strength for us.

So really, again, just an area that I see more sales in existing licenses. I'm excited because our client base is very, very vibrant. So even in a time where in general it seems like we hear a lot about physicians not liking the systems that they're on, we still have a very strong and vibrant client base, very kind of sticky. Almost if you went to one of our user meetings -- and maybe we'll let Steve invite you all to a user meeting so you can kind of really experience what that's like, it's very -- a very vibrant community almost cultlike, if you will. They're very excited about where we're going as a company. There's a lot of hard work but they kind of know we're all in this together so it's great to see. So, I'm excited about what our client base is doing. And again, just a bit more about our clients. They're doing a great job, 10,000 attestations, 2,300 medical homes, 130 ACOs that they're involved in. They're really the cream of the crop.

Last part. I'm excited about our future in technology and where we're going. But as I said before, I don't think the Cloud systems, they are really all they're cracked up to be. To me, they're kind of like the old and kludgy UNIX systems that we came from 20 years ago. I use one of those Cloud systems everyday in our office automation, our CRM system. They're expensive, total cost of ownership of these systems is outrageous when you really start to do the math, and that's got to change. They're kludgy, the workflow isn't very good. That's got to change. There's nothing app-like about those kind of systems.

The delivery model is very limited. It's in the Cloud. If I wanted to host it myself, I can't. If I want somebody else to host it, I generally can't. There's just 1 method of deployment. And the industry is beginning to really look for a hybrid approaches in this area. Now and I think there's a real pent-up demand universally for a new technology within EHR. I can't -- I don't know of a physician that goes to work every morning saying "I can't wait to turn on my EHR and I can't wait to start pointing and clicking. And I can't wait for that thing to freeze up on me. And I can't wait to get behind on my patients". They universally don't like what we're having to do right now because of all the regulations and the things we've had to add and so they're dying for a new EHR technology.

So I'm optimistic about what Steve Puckett's doing. You'll all have a chance to talk to Steve. It's what he's doing, it's his role as the CTO. I'd like to say that what he's doing is really Cloud version 2. We're looking at a Cloud-based application that if we call it the next generation, NextGen, or whatever we call it, that's a hybrid model, it's much more app-like. I see a lot of folks are using their phone technology, and their iPad this morning and that's the kind of experience we want within an EHR. It has to be highly configurable like our system is today but very, very user-friendly, and it should think like we think. We're building a system that's going to protect our existing clients' investment. We're going to improve on the strengths that we have. We're going to create a completely integrated set of products across inpatient, dental, and ambulatory so that they really work together. We're going to also expand our population health our ACO capabilities with that product line. And I hope to actually take that into kind of a standalone environment as well because I don't think there's a lot of good population health applications out there today, so I really see a market where we can take that out and not just be a NextGen-centric product anymore.

So as we talk about what the next generation of NextGen is, these are kind of the pillars that Steve has really kind of demanded of his team. When you think about building anything, when you think about designing anything, it has to be interactive, it has to be connected and it has to be intuitive. If it's not any of those things, don't build it, don't waste your time. So what do they mean? To have an interactive system like our mobile phones or our iPads, our tablet devices, it has to be personal. We have social networks that's folks are connected. It has to be a two-way communication between provider and patient. We have to have that same type of experience. We have to really open that up. We have to support things like touch, mobile, hand gestures. We saw some things on the plane coming out yesterday about the next generation of phone technology using gestures as opposed to having a point-and-click at everything, so that's something that Steve's team is looking at and been experimenting with. It has to have audio built into it. So, it really has to be a modern and elegant kind of user interface. Has to be connected. So interoperability is a hot word right now but we're all kind of struggling in this industry with some of the standards and to truly get an interoperable system. Even though it claims to be interoperable generally aren't very interoperable. So we have to build a system that's the most interoperable and open system on the planet. We want everybody to be able to connect to us. We want to be kind of part of an ecosystem that can be connected to any system or any third party out there. And we feel like by really opening up the system to connectivity, people are going to want to come to NextGen and build apps that extend our capabilities.

Finally, it has to be intuitive. Our systems today universally across the industry aren't intuitive at all. You can't just pick it up and use it. And that's what Steve's challenge has been in his team. I want physicians to pick up this application, use it without any training. At least be able to do the minimum set of, how do I see a patient without having to look through a manual or watch the online tutorial, just pick it up and use it. And that's what he's really working on. And it has to also employ some of the things that we're used to everyday within the web. And they're doing some really interesting things with kind of Google-like search technology within it that's context sensitive. So, if I'm in the middle of seeing a patient and I say, "I've seen this particular symptom or this syndrome before. Where else have I seen it in my patient base?". And if I just typed that in allowing the system to go quickly out, look through my entire base and retrieve that information. So those are the kind of things that we're building into the next generation of NextGen technology.

How it would kind of look? Essentially, it's that the core application is at the bottom, hospitals, dental, ambulatory all combined into a single application with a top set of ancillary products, again, all tied together and all integrated, all wrapped in that kind of interoperability engine. And ultimately we want to be able to create a NextGen app community, if you will. We have a number of clients out there today that are actually building their own apps that are tied into NextGen. So we know there's a demand for it, it's just very difficult to do it.

In the early days of NextGen, when I was first here, we had a lot of clients who would exchange templates or clinical content and really a cottage industry kind of grew around that. So we know that there's a demand for doing that because every time we go into a different client, although it may be of the same specialty, they all think they have a different way of doing it. Physicians were trained at different institutions and they learn things in different ways. And they want to be able to adapt and change the system. And that's the kind of open technology we want.

So I'm optimistic because I think we're building an EHR that physicians are going to want to use. So I know each of us have a car but all of us, we're going to want to change that car in a few years. So everybody kind of looks into the, why is this physician going to want to go through all of this. Well, they're going to want to do it because it's easier to use. If you can be the first to market to put an app-like user interface in front of them that they can just understand and work with, they're going to want to use it. So I'm excited about where we're going with that right now.

And with that, thank you very much, I'll turn it back over to Steve.

Steven T. Plochocki

Thank you, Gary, and thanks, guys. I appreciate it very much. Hopefully, you've got a bit of a flavor of some of the things that we're looking to do to basically get our growth patterns back on track. I have long said that we're a company that has a 20% return on investment, 20% operating income margin, 13% net income margin. We have a pristine balance sheet, $120 million in cash and a 71% recurring revenue model. The 1 piece we need and the 1 piece that we needed to put a lot of emphasis on is growth. If we add growth to all those other features, we're going to be back on track. And that was our initiative in trying to portray this scenario to you today. And then, of course, now we'll open it up to any questions you may have. And I think we have a floating mic here somewhere. Just raise your hand, yes.

Question-and-Answer Session

Gavin Weiss - JP Morgan Chase & Co, Research Division

Gavin Weiss from JPMorgan. First, I just want to talk about ACOs. Steve, in the past, you've mentioned you've had relationships with about 50 ACOs. Maybe Dan, can you talk about, in more detail, what those relationships entail and what sort of products you're selling to these ACOs?

Daniel J. Morefield

Let me ask Mike to respond to that. As Mike has, and owns most of those relationships, I think he can give us the best flavor for that question.

Steven T. Plochocki

And before you start, Mike, on our website we're up to 126 ACOs that we're working with now, so just wanted to bring that up. Go ahead, Mike.

Unknown Executive

Sure, I'll jump in. So we've got 120 different clients out there that are [indiscernible] ACOs. I think we provide a number of different solutions for them within the application itself whether it's through our EHR care guideline, the analytics that we have with them. We also have the services layer that we wrap in with Sarah's physician resources, our professional consulting. There's a number of different ways that we approach the ACOs because each of them are a little different. The ones that we -- just locally here, we got Mount Kisco, which is a stone's throw away from here. We've got Crystal Run. A lot of them are using some of the flexibility, the configurability of our application to help them create new content layers within the application itself that they need to capture additional data for some of the reporting they have to do. So inherently, within the application itself there's a lot of different solutions. There's a lot of different applicability that they're bringing to the table.

Steven T. Plochocki

Charlie and Sarah, did you have anything to add?

Charles W. Jarvis

No.

Gavin Weiss - JP Morgan Chase & Co, Research Division

Okay. If I can just ask 1 additional question. In terms of the deal that you announced this morning, have you had a similar deal in the past where you've sold all of those products and installed all of those various products or is this a new type of relationship?

Steven T. Plochocki

Well, we've had a number of announcements over the last 6 to 8 months on multiproduct sales, going all the way back to the Norton Sound deal where we did the -- we had hospital, inpatient, ambulatory as well as dental. The interesting thing about some of the last deals we've done, T-systems, Syracuse and now, this morning, we announced PRN, is that it's a multiproduct sell but it's a unique multiproduct sell on the basis of the fact that we're leading with RCM. In other words, we did the PRN deal historically and sold them software. We would lead with software. They would pay us for software, we would implement and train and put them on maintenance. But by providing a package deal that includes a 5-year contract for revenue cycle management services, coupled with all the different product offerings that we'll be adding to the deal, it gives us a deal now that has a much broader base of revenue for us over a 5-year period. And it's with an organization that has already got 3- to 5-year plans for rapid expansion and growth. So on the surface, it's already a very large deal for us. If they do affect their 3- to 5-year growth plan, it's going to be twice that. So these are the types of deals we're looking to do. And that's why we focused so much on RCM this morning. We want to lead with RCM, bring our product and service offerings into the mix and thereby, get long-term deals. This is very -- it's going to be a very beneficial opportunity for us and kind of move us down the path of creating a base of business that will become more recurring. We're 71% recurring today. We see that number growing very dramatically over the next 3 to 5 years and it's a much better business opportunity for us all around, because then it leads into consulting services as well and you've got to captive sticky customer for a long period of time. Yes, Monte, please.

Monte L. Sandler

I would just add -- the other thing I think it's done is it changes our relationship with our customers in a significant way. And instead of just being a vendor, we really become a partner and a long-term partner. And a partner that is tied to our customer's success. So as they expand, as they're more successful, as they optimize the use of our products and services, we benefit as well. And so it's really a transformation of the relationship into much more of a partnership.

Unknown Analyst

Maybe for Gary, the chart you threw up with huge growth number of prospect sessions on the website. I think it was 80,000 to 440,000 or something like that. It didn't seem like there was a corresponding massive uptick in the ad words at the same time. So could you give us just some color on what's driving that big increase and the number of prospects that are coming to the NextGen website, as you guys see it?

Steven T. Plochocki

Kelly, do you want to talk about that figure hiding back there a little bit? Did you hear the question?

Unknown Executive

Sure. There's not a direct correlation with ad words because we're also driving traffic to the site from various inbound campaigns outside of the paid. Outside of paid, we've also earned about 2.5 million impressions through various publications in the market, and all of those have links to our website in them. When people are clicking on those, they're also going to the site. So outside of ad words it's organic search and all the campaigns leading at the site. Like Gary said, everything really leads to the site right now, the way we're marketing.

Unknown Analyst

And then maybe, just one more Gary, you talked about how you think Cloud is going to evolve and then you're going to see better products in the future. I think you guys are going to be rolling out a new system sometime next year. Could you give us some thoughts on how you'll integrate that newer platform with your existing platforms from a sales standpoint avoiding any kind of disruption in the business model as you guys transitioned to more of a cloud-based product?

Gary Voydanoff

Yes, well, having been in health care for 30 years, I've seen that not work a lot of times in other cases, so I think the key is going to be a longer-term transition. So when we introduce a new product, we very much think it's going to probably be in a specialty area or a certain niche because our clients are -- they're kind of going through -- they've been living with a product that's very feature-rich for a long time. So whenever you bring out kind of a version 1 of a system, it's not going to be as robust so we think it's going to be tailored to a particular market to begin with. What that is, we'll have to figure out whether it's small practice or specialty niches or something like that. But the key is going to be laying out a strong strategy to take their existing data and bring it over to the existing -- to the new platform. If we do a good job of that, then I don't see that we're going to have a problem over time beginning to migrate some of those folks to a newer technology. We've been showing clients what we've been doing, what the technology looks like and some of the concepts and things we're building and they're excited about it and that's good. It's giving them a reason to want to stick with us for the long term and to look forward. But right now, they're not so much focused on that as they are what they need to do to get through Meaningful Use 2 and Stage 3 and those kind of things. It's like the biggest home improvement project that you can imagine right now, just the kind of things that you have to do. So after that, I think they'll kind of turn their sights to what we can offer with new technology. But I think we'll build the right path for them to do that as long as we can bring the data.

Glen J. Santangelo - Crédit Suisse AG, Research Division

Just Steve -- Glen Santangelo from Crédit Suisse. Just 2 quick questions. First, you spent a fair amount of time this morning talking about population health and data analytics. And I'm just kind of curious, could you talk about the revenue model for that business, how you plan to capitalize on that? And then secondly, the other topic you spent a fair amount of time on is RCM. And I'm just wondering if you were to strip out Matrix last year, could you give us a sense for maybe how much Matrix might have added to the growth in RCM in the past year?

Steven T. Plochocki

Paul, you want to touch on the Matrix question first and then Gary, take the second piece?

Paul A. Holt

Yes. I think you'll see some more color on this when we do sort our numbers out and file our 10-K for the year. But I think generally speaking, Matrix was a pretty significant part of the growth last year for RCM, and that's really being -- was driven by several things. I mean, we're really starting to see great progress being made in the pipeline and the sales efforts in that arena. But RCM is more like a freight train. It doesn't necessarily instantly turn into revenue. It takes a little while before the train gets started. So I think good things for the future but I think looking behind us, I think a fair amount of the growth last year was related to that.

Gary Voydanoff

In the area, I'll the pricing model so there's, a couple of different models we've deployed so far. So one is kind of a SaaS model for provider per month model for population health. And the other has been a licensing model. We've kind of started with the SaaS model but oddly enough a lot of our clients said "Hey, we just want to own it", so we've adapted again and so we have both models right now. I think in the future, this is an area again where we're going to see more of kind like the gain share model as well. So clients are going to say, "Look, if I have a particular contract maybe with Aetna and there's an upside for me of $2 million a year or something like that, are you willing to put your application and then go at risk for some portion of that. So, your population health is going to help me take better care of my patients and in turn, I'm going to be able to increase my -- what I'm getting from Aetna", so I can see some gain share contracts in those things in the future.

Mohan A. Naidu - Piper Jaffray Companies, Research Division

Mohan Naidu, Piper Jaffray. Gary, the first question for you, the lead generation slide you had like it was up 110% but the pipeline is not showing the similar growth. What are we missing there?

Gary Voydanoff

Well, so, I guess, with lead generation, there's always a lag to the pipeline and there's also a conversion of lead. It isn't necessarily an opportunity, it has to go through a qualification. It could be that there's, in some cases, a quick hit. But on average, you're looking at probably once we turn something into a qualified opportunity, about a 200-day-or-so sales cycle, so it's going to take some time before we're starting to see that impact.

Mohan A. Naidu - Piper Jaffray Companies, Research Division

Any particular focus you're seeing from the leads like RCM or EHR, which ones you're seeing strengthen?

Steven T. Plochocki

All right Kelly, do you have any -- is there any particular focus or things that you're seeing there? Seems to be pretty widespread but maybe you can help.

Kelli Castellano

[indiscernible]

Mohan A. Naidu - Piper Jaffray Companies, Research Division

One quick question about NG 7, is there any update on what's going to be in NG 7. You talked about integrated inpatient and outpatient, is SaaS going to there? Any thoughts on when the timeline is going to be?

Unknown Executive

Steve, you want to talk about that.

Steve K. Puckett

I'll talk a little bit about that. What we're doing and I'll kind of piggyback on Gary's comment earlier too and someone was asking about how we're going to move forward in the transition and that sort of thing. What we're looking at NG 7 being is more of an infrastructure, more of a framework for the applications. And when you get into even population management and those things, we're looking at how can we bring those tools together. And not only how can we bring them together but how can we deal with the existing product line at the same time. So in other words, what you're going to see -- Gary alluded to the fact that we're focusing on some specialties, some people like that. We're looking at even whether they'd be some of our franchise clients some of our bigger clients or whether they'd be some new opportunities for us. It doesn't necessarily mean that you have to be one or the other. In other words, we can start bringing that to life a little bit and coexist side-by-side with the existing product line. And you're going to see things like when you see our population management tools, those kind of things, we're going to be starting to look at a bigger -- a broader part of the market besides just the ambulatory pieces with the inpatient pieces, the home health, all of those pieces which are going to be a necessity to really run population management holistically. I don't know if that answers your question directly or not but...

Mohan A. Naidu - Piper Jaffray Companies, Research Division

One quick follow-up. Do you guys have SaaS for ambulatory in that one?

Steve K. Puckett

Yes, as far as the actual pricing or the way we're going to sell that model, it certainly can support that. The way we talked about a Cloud or Cloud type 2, the current thinking is we can provide a private Cloud model, if you will, so that can be done. There's a number of our clients that want to maintain hosting, those kind of things. We can also do that and host it broadly in a much broader sort of salesforce.com model as well. But as far as the pricing and distributing it and how we would actually sell it, it's fully capable of supporting that model.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Bret Jones from Oppenheimer. I want to follow up on the RCM question that was asked a little bit earlier, not so much in terms of the growth and how much is driven by Matrix, but we have seen that business grow. We talked about scale but we really haven't seen the gross margin take off dramatically as we thought we would as it ramped up. And I'm just trying to think, is there any technological IP issues that would limit the ability to drive gross margin in that business or is it just a matter of where-- or is there a scaling issue that you've run into?

Steven T. Plochocki

So gross margin or operating margin or both.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Gross margin in particular.

Steven T. Plochocki

So we're deploying efforts to target both gross and operating margin and we're doing with the use of offshore labor, we're doing that with better use of the technology and gaining efficiency. And we're also doing it kind of in the operating expense side as well, right, reducing expenses from an operating perspective. We actually -- going back to the slide, I mean, over the last few years, I mean, from an operating margin, bottom line perspective, we've seen significant margin expansion to the tune of 50-plus percent cumulative. So, I mean, we have made considerable progress over the last few years. Our plan, as we continue to add growth, we'll continue to expand both the gross margin and op margin. There's a certain amount of infrastructure that we need to run the business

and the growth then will help to continue to expand both gross and operating margin.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Just a quick follow-up. And as you look at that businesses, is there a target gross margin that you think you can get into? Right now, it's running in the high 20s, let's just say, 35% gross margin business or low 30s, 50%, somewhere, anywhere?

Steven T. Plochocki

Well, yes, I'll probably refrain from giving you an exact number. But I -- suffice it to say, we think that we can still expand both gross and operating margin pretty significantly.

Richard C. Close - Avondale Partners, LLC, Research Division

Richard Close, Avondale Partners. Can you talk a little bit about your R&D spend company-wide? I think it runs around 5%, 6% of total revenues, if I'm not mistaken. And a lot of the competitors in your group are running, call it, 10% to 12%. So what are your objectives, I guess, going over the next several years with respect to R&D spend?

Steven T. Plochocki

Paul, are you going to start with that?

Paul A. Holt

I think to really look at R&D spend or development spending, you have to look at 2 pieces. You have to look at what we're showing as an expense, an R&D expense, but also what's being capitalized as software development. So I think if you incorporate that, you're going to see bigger, a bigger amount of investment being made in development. And without getting into specific numbers, I think directionally the amount of investment that we're making in development is not going to go down like -- just likely to, if anything, be somewhat higher but -- because there's a lot of opportunity out there for us but these things require investment so...

Richard C. Close - Avondale Partners, LLC, Research Division

But do you think you've underspent over the last 4 or 5 years, I mean, considering the level you're at versus your competitors?

Paul A. Holt

Well I'm not -- still we're going to -- it's kind of a tough question to answer. Whether I think we're underspending or overspending, I think there's other folks at the table here, I think, who could probably answer those kinds of questions. But I think it's more important to just think about the future and in what we plan on doing, not necessarily looking at the rearview mirror.

Steven T. Plochocki

I think one of the ways to look at it is that if you look over the last 5 to 8 years, we've been pretty consistent in our spend. You'll see a lot of our competitors who've had peaks and valleys from 1 year to the next in their spend. And I think part of that consistency and keeping the spend at a relative level has been able to keep us at the forefront. I mean, we're one of the first companies Stage 1-certified. We're one of the few companies that have been Stage 2-certified. And I think it's the consistency that pretty much is more important than a big bloated spend 1 year and then a diminished spend the next year. But it is safe to say that we will be spending more going into the future in terms of development. That is safe to say, yes.

Richard C. Close - Avondale Partners, LLC, Research Division

One other follow-up. With respect to the integration of the RCM businesses, I think, Monte, you said it took 2 years from the acquisition of the initial 2 transactions to fully integrate them together on 1 platform or go-forward strategy. When you guys do acquisitions in the future, will these be fully integrated at a faster pace going forward? Because 2 years is a pretty long time.

Monte L. Sandler

No, I think there's budget. So dating back to the initial acquisitions, both of those acquisitions were done with 2-year earn-outs. So that was probably the biggest rate limiting stat that we had to integrate. Our future deals, our Matrix deal, our future deals, we're structuring them differently that will allow us to integrate them a lot faster. The other point I would make is the acquisition of HSI and PMP were our first entry into the space, right? So there was a lot of infrastructure to be built, a lot of best practices to be created, and that's been done. When you look at the Matrix acquisition we did last April, they were a pure NextGen RCM shop. So they were already using our application, they'd been using it since 1998. So integrating them into the organization was a lot easier and faster for both the reasons I mentioned, the infrastructure had already been built plus they had the knowledge base and were already on the application. So that, coupled with the way we're going to structure deals going forward I think will allow us to bring them in a lot faster and a lot more efficiently.

David Larsen - Leerink Swann LLC, Research Division

Steve, Dave Larsen from Leerink. Gary, can you just comment, please, on, sort of, the pace of EMR sales that you're seeing now versus 1 year ago, like obviously docs had calendar 4Q '12 to attest to Stage 1 to get 100% of stimulus dollars? Are you seeing more replacement market opportunities? Can you just sort of talk a little bit about that and maybe size the ACO opportunity as well relative to, sort of, your core products?

Gary Voydanoff

Yes, I would say, in general, to just the pace -- it seems like the pace is similar in terms of the number of opportunities out there. I would say that, again, there are more replacement opportunities that we're seeing out there. They tend to be a little bit longer sales cycle because they're going to be very picky the next time around, so it tends to lengthen the amount of sales out there. I think in the small practice market we've continued to see good activity there. We're going to expand the sales team a little bit more. And we call our sales rep area, the SRs, the, kind of, the 1 to 10 physician space because there's, I think, still a lot of activity there. And in terms of the large deals, there aren't as many or there haven't been as many, but it actually seems like there are a few more over the last couple of quarters. And I think, again, just because we're starting to find some ways to identify some of those fringe areas that we haven't in the past, so a behavioral health sale or a PT sale or something like that, it's a much different kind of find than we've been used to in the past. Our apps lend itself -- lends itself very well to those. We just got to dig a little bit harder for them, so it's still kind of a mixed bag.

David Larsen - Leerink Swann LLC, Research Division

Without naming any specific vendors, can you sort of comment on are you taking share from sort of the big vendors that are publicly traded? Or is it more of those 700 other [indiscernible]...

Gary Voydanoff

Well, I think there are a couple of the bigger ones that are a little bit more at risk right now that -- again, without naming names, there's a couple of fairly big ones that I don't think have done a very good job of investing in their applications although they've spent an awful lot of money. And we got in their banks, their buck, they're still fairly disjointed. And so we are taking some business from some-- a couple of the top Tier 1s. But the ones I think that are really going to explode or really going to be that couple hundred that typically service the middle to lower tier that are going to start to fall out, so those are, kind of, the areas where I think we'll start to see a lot of growth.

David Larsen - Leerink Swann LLC, Research Division

And then just one more and I'll stop, I promise. How about on the inpatient side? I mean, are you selling mainly to the small hospitals, 100 beds and less? How is that pace of sales going? And are they integrated sales that you're working on with the ambulatory and inpatient products?

Gary Voydanoff

Yes. So the pace is probably a little less, just like ambulatory in that they had a lot of pressure to, in the hospital side, to get to their Stage 1 Meaningful Use sooner. So the last couple of years where there is a lot of activity, I'd still say the pace is fairly, again, similar, maybe just a tad less right now. But the thing that's been interesting is we really haven't done much at all in terms of marketing. And so just in the past couple of quarters, we're doing some just ground-level kind of marketing, specific campaigns around some replacements, some vendors that we think are, again, at risk. We're starting to see some activity there that I think, again, translate into this year. So in terms of cross-selling, yes, many more opportunities where ambulatory and inpatient are sold together in that under 100-bed space. And that's been an area of focus for us in the last year. We had to look at how we are compensating our field reps. We've got a big group of field reps out there, and we had to compensate them to go out and find that business. So use the feet on the street to cross-sell.

Steven T. Plochocki

And if I could -- since we have our Chief Medical Officer here and our government liaison officer, this whole idea of the replacement market, the movement from Stage 1 to 2 to 3 from ICD-9 to 10 to 11 is, obviously, creating some complexities not just in the market but in Washington as well. Could you get the microphone? Could both of you make maybe some comments on that? What you've seen in Washington, what you think it's coming out and, perhaps, what even -- what CMS has been seeing? I mean, because we believe there's going to be a major washout in a lot of the small players because these standards are becoming more complex to achieve. Charlie?

Charles W. Jarvis

Sure, Steve. What we're seeing going on in D.C. right now is a combination of the efforts of health reform coming together with the efforts of high-tech and leading to major changes in the market. Several people, Gary, in particular, have mentioned the replacement market and the fact that some of the smaller vendors are falling off the pace. We've -- we're going to see that on a regular basis now that many vendors will not be able to invest in Meaningful Use 2 and, as a result, will have to kind of stand by the wayside. But more importantly than that, I think what we're also seeing is a more sophisticated need out there by, whether it's hospitals or these large physician groups, or even the health care payers that are now getting engaged, and they're demanding of the providers a higher capacity of their technology to be able to meet these needs. Everybody is looking at those organizations that are data-driven. And providers that have that capacity and can move more aggressively to be able to address their patient needs are the groups that are going to be more sophisticated. Where that translates back to us is that they are looking to us to step up the pace both with our products, and you've heard a lot of discussion around population management, but everything else that we are doing ties back into that as well. Couple that with the fact that CMS is looking to be much more specific around areas such as usability of product and patient safety, and I'm going to let Sarah comment on patient safety in just a minute. In that, as a result, our product is much more in line with some of those areas. Gary alluded to the fact that there have been some of our competitors out there that maybe haven't made the investments in their products to be able to meet these needs. We have and are continuing to make those investments. And I am very comfortable as I interact with the leadership in Washington and the leadership in the states, which is taking much more of a role, then we can turn around to our providers and say, "Here's an opportunity and here's how our product can meet that," or "how about if we look to partner with a health care payer who is getting much more aggressive with the government now?" and here's how our product can meet that or "have you looked at this major delivery change coming down the pipe?" and our product can meet that. So we're very comfortable in that area.

Sarah Corley

So it's a real time of change right now for providers who are moving from the volume-based payment to quality-based payment, but we're neither here nor there right now. So it's a time of transition. And if you add to that ICD-10 transition, providers have a lot on their plates right now. So they're looking for their EHR vendors to take a lot of the pressure off of that so they can continue to do what they want to do which is take care of patients. So with the new quality models that we're seeing, they're going to rely more on data and interoperability. What we're seeing for Stage 3 Meaningful Use is a lot more interoperability requirements so that, that data can be shared towards quality and we'll expect to see a movement towards more than just the reimbursement, the additional incentive for quality. So taking the burden off the providers by not worrying about their billings so their Revenue Cycle Management is going up. Helping them to analyze the -- do they want to be part of this ACO or that ACO? That's where consulting services businesses are going to help provide them with that. And then they're going to look to their vendor for the topics of patient safety that Charlie brought up. We, as vendors, are responsible for making sure that our products are safe but we also have to help our physicians with the HIPAA requirements. They've been around for a long time but now they're doing random audit. So we have to help from that standpoint with our providers meeting those requirements, so there's a lot of challenge out there and a lot of opportunity for us as a vendor to help our clients through that.

Steven T. Plochocki

Do we have any other questions? Yes, please. We need a mic over there, too, please.

Michael Cherny - ISI Group Inc., Research Division

Mike Cherny from ISI. Gary, you talked a bit about the pipeline efforts and the focus on growth. Particularly as you guys look to do more multiproduct sales, do you see any changes in the closing from conversion of pipeline to actual sale and is there any elongation of sales cycle now, particularly some of these larger deals, and maybe compare/contrast that as you focus on growing the small group practice and maybe talk about the sales convergence cycle from pipeline to sale.

Gary Voydanoff

Sure. I'd say the sales cycle, again, when it comes to the replacement market is a tad longer. Again, I think a little bit more detailed due diligence that's going on there and in some of those cases, I think isn't good for us actually. I mean, I don't like a longer sales cycle but the more, again, savvy buyer that takes a real look under the covers is going to kind of like what they see and it gives us more opportunity to do things like site visits to existing clients and use our references and those types of things. Also, when we -- with some of these replacement sales, we've been doing more, as I mentioned, gain share type of agreements, which in the end are great for us, but they take a little bit more time and you have to do a lot of due diligence upfront looking at financial information and really taking a look at where you can help them grow. So those things do take a little bit more time. In the small practice market, I don't think the sales cycles are really any longer. They're still -- those are still mainly new sales. We can get a few replacement, ones at the small end, but probably about the same conversion cycle for those.

Michael Cherny - ISI Group Inc., Research Division

Great. And then, a question for Monte or, at least, even Steve. You talked about the whole theme of growth. And...

Steven T. Plochocki

To what? I'm sorry.

Michael Cherny - ISI Group Inc., Research Division

Of growth.

Steven T. Plochocki

Okay.

Michael Cherny - ISI Group Inc., Research Division

And the expansion of the product portfolio, the build-out in R&D investments. As you think particularly going forward, looking at the overall product portfolio, are there areas we think it makes more sense to try and build inorganically through M&A? You guys have done a lot of deals recently. Any areas that you think the core competency makes more sense to go outside your [indiscernible] versus your focus on the internal development efforts?

Steven T. Plochocki

We've long said that. We've said that there's 2 components to our acquisition strategy. We've done 9 in the last 4 years. One, we want to buy great products and then use our large installed base as a process by which to gain revenue through that product. Or if we can get something to market faster rather than build it, we use that as a consideration point as well. I mean, Monte's done a great job of growing the RCM business and the physician base. He is slowly expanding into potential areas and the hospital areas as well. But we still have a great appetite to want to do the hospital piece in a bigger way for RCM. But we've got to find the right deal, the right price. Everybody has inflated views of what they're worth these days so we have to be very cautious and careful there. But the same thing, in technology, I mean, Steve Puckett, our Chief Technology Officer, he is constantly weighing the mindset of how long does it take us to make this versus what would it take to buy times the market issues. We're constantly looking at that. So -- but I think right now we have a pretty good array of products. I think the initiatives that Gary and his team are engaged in to build that pipeline again. You got to remember everything -- the reason we show things like leads and web hits, et cetera, because if you look at our historical pattern, it's like railroad tracks. When leads, web hits, all of those activities are going up, that translates into pipelines built. I mean, they just follow like rails, when they're down, they both go down. And so we're now on a pattern where by putting the sales and marketing organization together and having it driven under Gary and Kelli is to ensure that we get that pattern in place again. Because until you get the leads in place, you're not going to have the lead flow, you're not going to have the deal flow, you're not going to have the pipeline, et cetera, et cetera. So we see the pattern reversed, the pattern is going up. So we think that's going to lay great groundwork for us in our upcoming fiscal year. And that's why we look at our fiscal year that we're heading into is the year to restore the growth because everything else is there, our margins are there.

Unknown Attendee

What is the impact of the Affordable Health Care Act on your revenue from different services you provide going forward?

Steven T. Plochocki

What is the impact of the Affordable Care Act on -- I'm sorry, I missed the last one.

Unknown Attendee

On your revenue from different services, for the RCM and other sections.

Steven T. Plochocki

The impact of the Affordable Care Act on our different business lines? Guys?

Monte L. Sandler

I think we're going to see more demand and more need for our services and our products. I think there's going to be an influx of people that come into -- the covered insurance market, which is going to drive volume into providers. And that volume is going to demand our services and products. We also think it's going to become a more complex market. So as it becomes more complex, our services will help our customers navigate through that. And we think the demand is absolutely going to be there and fuel a lot of that growth.

Steven T. Plochocki

And Sarah or Charlie, you want to comment on that?

Charles W. Jarvis

Speaking up on what Monte was saying, and getting a little bit more granular, in the Affordable Care Act, there is a requirement for a full insured population in that these health insurance exchanges that Monte was just referring to are starting to ramp up. A bit disorganized, but nonetheless, they're starting to ramp up. What we're going to see, that coupled with the expansion of Medicaid, is that every patient is now going to be insured and is going to be going to a physician with a set of requirements from their insurer: annual physicals, screenings, and also the desire to be more engaged in their care. As a result of that, our providers need to be much more attuned to that. And it gets back to what I was saying earlier. The more data they have, the more ability they have to be able to assess trends in their populations and the ability they have to be able to better put their own products and services in place to care for those patients, the better they're going to be. So things like our population management tool are absolutely key. Monte's services in RCM. They're going to be now billing for an incredibly larger number of clients that they weren't billing for in the past. Many got written off in bad debt. Well, there's no reason for that anymore. So they can see some improvements in their own cash flows. Now couple that with the fact that the Affordable Care Act is also driving the growth to Accountable Care Organizations, which means the whole payment model shifts. Now instead of seeing just an influx of patients coming in in fee-for-service models, you're going to see that influx of patients coming in but also then being part of a capitated model where those physicians, either part of a larger network or network themselves such as Mike and Gary were referring to with some of our clients, are now going to have to be looking at different billing models where they're now be getting paid based on the number of patients that they're servicing, not on just on the patients that are sick. So our RCM model needs to be adept at looking at both sides of that, the capitated model as well as the fee-for-service model. So I think you're going to see incredible dynamics occurring in the market in the next 6 to 12 months based around the Affordable Care Act. And part of our goal, commenting on -- I believe it was Dan who talked about the professional consulting services, we see a major role in being educators in terms of getting our patients -- excuse me, our providers well attuned to a lot of the things I just talked about, which is going to be coming down the pipe very fast, and then helping them to pick up on our products at the same time.

Sarah Corley

I just want to add, with the Medicaid expansion, you're probably going to see growth in the community health centers which is really one of our sweet spots. So I would expect that that market is going to really grow because there really aren't enough primary care providers right now that are accepting Medicaid now. Certainly with increased reimbursement to Medicare levels, we expect that participation will increase. But right now the CHCs will probably be getting the bulk of those new Medicaid enrollments. And we are seeing more and more states signing up now, even ones with Republican governors.

Unknown Attendee

Monte, I have one more question about the revenue cycle business. As the government incentives wind down, it seems like you're seeing a lot of electronic health record companies start to focus more on revenue cycles. And I'd be curious if you had any thoughts on whether that had impacted the competitive environment. I know it's getting more intense. And then maybe as a follow-up question to that, what do you feel like really differentiates your revenue cycle product from what else is out there on the market? There are some that seem to be heavily automated. There are some that seemed to be taking more of a clinical approach, really focusing on the pay-per-performance and letting that drive the revenue cycle? Any thoughts there would be great.

Monte L. Sandler

Yes, thank you. With respect to the competition, not significantly different. I mean, I think, there's a handful of major players that are typically in competition and we're not seeing major changes in that perspective. There is a big mom-and-pop market, right, that's local to the community. So in any given deal, we also see local mom-and-pop as well. So -- but I wouldn't say it's any different. What differentiates us? I think a few things. Certainly our products, right? I think our products are feature-rich and help providers navigate, both clinically and the financial piece of their business, and coupled with our best practice methodology, a prescriptive methodology that guides them to say this is the best way to configure it, this is the best way to use the workflow, this is the best way to optimize that revenue cycle. The other thing I would say is, and I touched on it in my presentation, our services are tailored. We're not a cookie-cutter solution. We're not Cloud-enabled that is restrictive that if you want to use our RCM services, this is the way we have to do it or we're not a fit for you. We have a very tailored approach that meets the needs of every customer. And just like in the EHR world, every practice is different. Every provider practices differently, payer mixes are different, specialties are different, there's a lot of dynamics in health care that we don't believe a cookie-cutter solution really solves. And so our model is very tailored. It uses our high feature function application to optimize process. So I think those are some key differentiators. Probably the last piece I would note is our model is an account management-driven model. So it's very partnership-oriented and it's a high touch relationship. So we -- every customer has a dedicated account manager that really is the liaison and a business partner, an extension of their practice they're working with. So we're financially savvy. And so we're looking at trends, we're looking at metrics, we're doing analyses and we're providing that data back to these practices in a way that they've never seen it before. They're learning more about their business than they've ever learned before and it's preparing them for the next phase of the reimbursement model. It's going to be awfully hard for providers to negotiate quality contracts if they don't really understand what drives their business. And those are the things that we do in our tailored account management model as a partner to our customers.

Gary Voydanoff

I'd maybe just add a couple of other things. Yes, we are seeing a few more of the traditional competitors trying to get into this. But it's kind of like legitimizing the business, it's bringing out more and more in the open. So now it's kind of top of mind. Physicians and practices are considering RCM upfront instead of you having to -- trying to say, "Hey, would you consider this?" It's something that they're saying, "Hey, I want to find a rev cycle solution." And the other part of that is a lot of those companies are getting into it. When we bring in folks like Monte's account reps to really talk about their business, we really rise to the top fast because it's pretty obvious that RCM is an afterthought to a lot of this other companies right now. They might lead with a real upfront, low-cost or something like that. When you dig in and look at what can they really do for their business, they don't show a lot of confidence in what they can do. So I'm pretty happy for what's happening there.

Unknown Attendee

It seems like this is RCM day. But I just wanted to touch on the RCM inpatient side. What's the strategy on the inpatient side? Is it to partner with companies like T-Systems where they'll do the service and it sounds like you'll provide the technology, if I understand that deal correctly, or is it to build up your own service capability on the inpatient side as well?

Monte L. Sandler

Well, I think the strategy is both. The T-Systems feel is unique, right? As many of us know, T-Systems, did acquire into the RCM space. They have really focused on the ED environment and not necessarily an environment that we do a lot of work in. They really liked our technology. They liked our best practice. They liked the idea of us being able to help them optimize the application and the technology for them to provide their services. So that is certainly -- I think that speaks to kind of the creative structure, the new pricing models and the creative structure of what we're doing. But with respect to growing out our RCM business, I think it's a combination. I mean, we're certainly looking at growing it organically in much the same manner that we've done it on ambulatory side, defining best practice and really being a partner to the facility. What's unique about our hospital business, as you probably already heard, many of them are smaller hospitals, many of them have ambulatory components. And as Sarah mentioned, the NextGen sweet spot is really in that rural health community health market and that's the same market where these hospitals are. And so there's really a nice fit there and a logical transition for us to continue to expand the services into that market. So we will build it organically and, certainly, are always open in looking for inorganic opportunities as well, so we'll see where that goes.

Unknown Attendee

And then if I could just ask one more. I guess I'll address this to Gary. On your slides, you had 3 payer deals, and I was wondering if you could kind of walk us through what those deals entailed, are these traditionally HR deals? Are they buying more of the community product? Or -- and how are they structured? Or are they standardizing across all of their own physicians?

Gary Voydanoff

Yes. A couple of them are just traditional, EHR ambulatory deals. And then one of them with OptumHealth was kind of non-traditional. Optum has a large group of nurses that go out and then take care of patients out in the field. So, they had a need for the ability to be disconnected from the main server environment and then reconnect and essentially synchronize all of that information. So they have about 700 nurses that go out in the field. So that one's a little bit different. The other one that we're working on, again, is more of a traditional. The one that we're working on right now, traditional now. All of these groups, I think, are kind of interesting in that why are the payers acquiring them or getting interested in it? In one of the cases with CareMore that is owned by WellPoint, WellPoint really believes that they're a great model to kind of franchise across the country because they've really found a way to reduce the cost, particularly around end-of-life care where costs are typically the highest. And so their particular model that's high care coordination and working with the patients and family, they think is something that if they can franchise and take it across the country, that it can significantly alter the cost curve. So in general, they're fairly traditional but the reasons behind buying them are kind of unique.

Unknown Attendee

Just one more follow-up on the next-generation platform. You said you would phase that in with a few specialties and it sounds like a gradual approach. But can you provide more detail, in terms of timing, when that might be? When that might start hitting the end user?

Gary Voydanoff

Yes, we talked about this on a couple of calls. Where I'm shooting for right now is at the beginning of our fiscal year next year that we would start to have that, so it's a little bit less than a year from now. And we have already started to share with some of our, what, call them franchise clients. They've -- under an NDA, we've gotten them involved. There's been some excitement there and there's been also an openness to maybe take some of their peripheral physicians right now that are either coming onboard, or some specific specialties that we may focus on to start having them be some of our pilots. So -- but the focus right now, I think, for new sales, at that time frame, is going to be a much smaller segment of the market. We're trying to get in, this will be version 1, so we go forward.

Daniel J. Morefield

I just want to add one thing on that is that the statement was made earlier protecting our existing clients' investments. And so the finesse here is launching under new architectures, new platforms while maintaining the investment both of our existing systems for our clients. Because while you show the client something new and different, get that spent $15 million, $20 million on your existing platform, their next question is how much are you going to spend on what you've got and enhancing it? So the real finesse here is to bring it out in such a way that we protect the investments of our clients. And that's something that we will do and manage very, very aggressively. Because at the end of the day, the franchise clients, the clients that are on our books today are really the bread and butter and will be for years and years and years. So this is, again, something we're a little reluctant to talk a lot about because at the end of the day, our intent is to continue to aggressively invest into our existing systems.

Steven T. Plochocki

Do we have any other questions?

Unknown Attendee

Gary, a quick question on the Inpatient Solutions. The small hospital segment seems to have a lot of hospitals that need to buy the system but there seems to be no rush in there. Some of your competition is essentially giving away the software until they get the stimulus check. What are you seeing in the market? What are you -- is there any rush at all for the small hospitals to buy?

Gary Voydanoff

Well, demand's still there. I wouldn't say it was the rush than it was a couple of years ago or 1.5 years ago. And yes, there's some interesting things that competitive vendors are doing, too, because there are some cases where they have financial challenges, but so they're trying to address it that way. And if we need to do some of those things, we can be flexible, too. But again, I think, our history has been just, kind of, stay the course. Adapt as we need to, not do anything that would really put us in a bad position financially or take on any risk that we shouldn't with some of these clients because we have to pay attention to their financials and make sure that they're going to be kind of a sound investment for us as well.

Steven T. Plochocki

Any other questions from anyone? Shelly, do you want to make any comments? Our chairman happens to be here with us today. I always like to give him an opportunity to make comments, if you'd like.

Sheldon Razin

I apologize, I'm a little bit under the weather. I went to Mexico, where I keep a boat in Cabo San Lucas, and somehow I got infected on the way, so I'm not my usual self. So -- but I would like to say that our company is nearing our 40th birthday. We'll be 40 years old April of 2014 and I remain extremely confident in what our future is and share the dream that Steve Plochocki said. And our next step is how do we grow this company from about $450 million to -- $470 million to $1 billion, and that's what we're looking forward to trying to do for our customers and our shareholders. And we appreciate all of you being here today and hope that you'll meet with us at lunchtime. Thanks.

Steven T. Plochocki

Great, thank you. Okay, no other questions. Thank you very much. Hopefully, this was helpful. We have lunch down on the third floor, so please proceed down to the third floor. You'll have an opportunity to just sit with all of us and ask any other further questions you might have. Thank you again. Appreciate it.

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