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Quality Systems, Inc. (NASDAQ:QSII)

F4Q 2014 Earnings Conference Call

May 29, 2014 10:00 ET

Executives

Steven Plochocki - President and Chief Executive Officer

Paul Holt - Chief Financial Officer

Dan Morefield - Chief Operating Officer

Monte Sandler - Executive Vice President, RCM Services

Gary Voydanoff - Executive Vice President, Sales and Marketing

Analysts

Liz Anderson - ISI Group

Jamie Stockton - Wells Fargo

Ricky Goldwasser - Morgan Stanley

George Hill - Deutsche Bank

David Larsen - Leerink

Ryan Daniels - William Blair

Donald Hooker - KeyBanc

Gavin Weiss - JPMorgan

Bret Jones - Oppenheimer

Greg Bolan - Sterne Agee

David Windley – Jefferies

David Francis - RBC Capital Markets

Garen Sarafian - Citigroup

Operator

Welcome to Quality Systems Incorporated Fiscal Year 2014 Fourth Quarter and Year End Results Conference Call. Hosting the call today from Quality Systems is Steven T. Plochocki, President and Chief Executive Officer. Today’s call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. (Operator Instructions)

It is now my pleasure to turn the floor over to Steven T. Plochocki, President and Chief Executive Officer. You may begin.

Steven Plochocki - President and Chief Executive Officer

Thank you, Maria, and welcome everyone to the Quality Systems’ fiscal 2014 fourth quarter and year end results call. With me this morning are Paul Holt, our Chief Financial Officer; Dan Morefield, our Chief Operating Officer; Monte Sandler, the Executive Vice President of our RCM Services; and Gary Voydanoff, our Executive Vice President of Sales and Marketing.

Please note that the comments made on this call may include statements that are forward-looking within the meaning of securities laws, including without limitation statements related to anticipated industry trends; the company’s plans, products, prospective and strategies preliminary and projected; and capital equity initiatives to the implementation of potential impacts of legal, regulatory, or accounting principles. I will provide some opening comments and then turn it over to the team.

Our revenues for the fiscal 2014 fourth quarter reached $115.2 million, up 4% when compared to $111.3 million for fiscal 2013 fourth quarter. Net income for the 2014 fourth quarter was $5.2 million, up from a net loss of $4.1 million reported in the same period last year.

On a GAAP basis fully diluted earnings per share was $0.09 in the fourth quarter of fiscal 2014 versus fully diluted loss per share of $0.07 for the 2013 fourth quarter. On a non-GAAP basis, fully diluted earnings per share for the fiscal 2014 fourth quarter was $0.12, a decline of 50% from $0.24 for the comparable quarter a year ago. During the 2014 fourth quarter, we saw increases in systems sales, revenue, bookings and pipeline when compared to the fiscal 2014 third quarter.

Revenues reached $444.7 million for the fiscal year ended March 31, 2014, a decrease of 3% when compared to $460.2 million for the 2013 fiscal year ended March 31, 2013. The recurring revenue base reached $357.9 million for the fiscal year ended 2014 where we now sit at 81% of our business as recurring. Net income for fiscal 2014 was $15.7 million, a decrease of 63% when compared with net income of $42.7 million for fiscal 2013.

On a GAAP basis, fully diluted earnings per share for the 2014 fiscal year was $0.26, down 64% from $0.72 reported in the 2013 fiscal year. On a non-GAAP basis, fully diluted earnings per share for fiscal 2014 year, was $0.70, a decline of 39% from $1.14 for the comparable period a year ago. Non-GAAP fully diluted earnings per share is reconciled to its corresponding GAAP measure at the end of this release. We ended this year with a strong liquidity position, including $113.8 million of cash investments.

We are greatly encouraged by the progress we are seeing this quarter, resulting from our dedicated marketing and sales efforts, which are now positively impacting our system sales, our revenue, our bookings and our pipeline growth. The improvement was also fueled by our new Mirth product line and our growth in revenue cycle management businesses, which both will be two growth drivers for us this upcoming fiscal 2015. We ended the year in a very strong cash position, which affords us opportunity as we look ahead to expand our business. We are confident that the programs and initiatives we put in place over the past several quarters will further enhance the company’s position as the next fiscal year unwinds. In other news, Jeffery H. Margolis was named to the Board of Directors as is effective May 28, 2014. He was also appointed to serve on the Board’s Transaction Committee.

Margolis is a seasoned healthcare executive, having dedicated more than 25 years to the industry. Currently he is Chairman and Chief Executive Officer of Welltok, Incorporated, an early-stage healthcare consumer engagement and platform-as-a-service enterprise. He founded and served as Chairman and Chief Executive Officer at TriZetto Corporation for 13 years and 12 years, respectively, beginning in 1997. TriZetto, a recognized leader in the provision of healthcare IT solutions to payers and providers, became a publicly traded company in 1999 and significantly grew revenues and profitability for approximately nine years before becoming a private entity in 2008, a transaction led by Apax Partners. Margolis concluded his role with TriZetto in 2011 and is Chairman Emeritus. During 2012 and 2013, he served as a senior executive advisor to the Oliver Wyman Health Innovation Center, an organization that identifies and disseminates ideas and best practices that aim to transform healthcare. He is also a published author, including his most recent book, The Healthcare Cure.

Margolis also serves on a number of for-profit and non-profit boards. For-profit boards include healthcare analytics company, Predilytics and an Irvine-based population health management company. Non-profit boards include Crohn’s and Colitis Foundation of America and Hoag Hospital in Newport Beach, California. Also serves as an advisory board member of the University of California at Irvine’s Center for Healthcare Management & Policy as well as at UCI’s Center for Digital Transformation. Additionally, he is a member of the board of governors at Cedars-Sinai in Los Angeles.

Jeff earned his bachelor’s degree in business administration and management information systems with high honors of the University of Illinois in 1984 and holds CPA certificates currently inactive in Colorado and Illinois. As a healthcare industry veteran, Jeff brings extensive expertise to our Board. His previous accomplishments and experience are going to bode well for our company as we continue to play a key role in the evolving healthcare information technology marketplace. We all of us on management welcome Jeff to the Board and we look forward to working with him in the future and looking forward to the contributions he will make in his new role.

Our Board of Directors declared a quarterly cash dividend of $0.175 per share on the company’s outstanding shares of common stock, payable to shareholders of record as of June 13, 2014 with an anticipated distribution date of July 3, 2014. The $0.175 per share cash dividend is pursuant to the company's current practice to pay a regular quarterly dividend on the company's outstanding shares of common stock, subject to Board review and approval, and establishment of record and distribution dates by the Board prior to both declaration and payment of each such quarterly dividend.

The company will hold its 2014 Annual Shareholders’ Meeting on Monday, August 11, 2014 at 1:00 PM California time. The meeting will be held at the Irvine Marriott, 18000 Von Karman Avenue, Irvine, California. And the Holders of record of June 16, 2014 are eligible to vote and attend. Proxy materials and the 2014 Annual Report will be made available to shareholders of record and will also be posted on the company’s website soon. So we are very positive with the progress that we have made to-date.

And I will turn it now over to Paul who will take you through deeper dive into the financials and then on to the rest of the team. Paul?

Paul Holt - Chief Financial Officer

Thanks Steve and hello everyone and just wanted to say I am looking forward to seeing many of you at our upcoming Analyst Day in New York next week. I am happy to report consolidated fourth quarter revenue of $115.2 million which as Steve indicated was up 4% over the prior year and 6% over our last quarter $108.9 million. The principal driver of the revenue growth both on a year-over-year and sequential basis came principally from recurring service revenue streams including maintenance, EDI and other services. This carries as a whole there is 7% versus the prior year to $93.5 million versus a $87 million a year ago.

Our other services revenue category has been bolstered by growth in Mirth-related subscription and SaaS revenue, as well as growth in other recurring revenue streams in NextGen such as patient quarterly subscriptions. Our system sales revenue of $21.7 million was down 11% on a year-over-year basis compared to last year’s $24.3 million. However, on a sequential basis, our system sales was up 13% from last quarter’s $19.2 million. Our total bookings of software and services, including RCM, was $43.1 million, which is up $41.6 million from last quarter and down from $47.6 million a year ago.

Our consolidated gross profit margin this quarter came in at 54% versus 57% a year ago. Year-over-year, gross margin was declined primarily due to combination of less higher margin software versus prior year, higher amortization cost related to prior capitalized software development that’s related to the release of our version 5.8 which happened last quarter, as well as negative margins in implementation and training tied to a build out of resources we performed in anticipation of higher demand for services related to upgrading our customer base on our ICD-10 compliant version of our software 5.8. Lack of demand for such services was partly due to an extension of time granted to convert to the new billing codes that resulting in less demand than anticipated. Beginning April, we have adjusted our internal resources to more closely align to current demand levels, which is expected to significantly improve profitability in this category.

Our SG&A expense increased slightly by $0.4 million to $38.7 million compared to $38.3 million a year ago. This increase was driven primarily by salaries benefits and marketing expenses, which has partially offset the majority offset by reduction in bad debt expense. Contributing to our lower bad debt expense is a significant improvement in the turnover of our accounts receivable as well as an overall improvement in our hospital unit in this area. Our turnover of accounts receivable days outstanding declined to 87 for the current quarter versus 122 days a year ago.

R&D expense increased to $15.1 million versus $8.2 million a year ago. This large increase in net expense primarily reflects reduction in the amount of development cost being capitalized, which declined by approximately $7.7 million compared to a year ago. The decline in capitalized software development cost is driven by several factors, including the use of agile software development methods, which are generally not capitalized, but with the timing of projects reaching technological feasibility after our major version release last quarter and the secession of capitalization of software development in the hospital unit leading impairment of intangible assets, which we recorded last quarter.

Our commitment to continued investment in product development is going to expand, along with our Mirth acquisition opening up emerging strategic opportunities to accelerate product development efforts. We are excited about the strategic opportunities around interoperability, population health management, and cloud-based applications. We would like to note that we believe in general analyst estimates for our company will likely fail to consider the extent of our current R&D investments and corresponding expense levels, which currently represent approximately 13% to 15% of revenue. This level of products exceeds the levels we have been recording in prior years. As a result, we think our earnings per share maybe overstated by consensus estimates in the near term. However, as we continue to execute from growth and technology strategies, we have outlined on this call we believe we will be able to deliver stronger results for shareholders in the long-term.

To be clear, these comments are forward-looking statements and not intended as guidance, the company does not have the practice of providing guidance to its investors or providing comfort with recent analyst estimates. These comments reflect our current expectations about business and we will not be providing updates to these comments or any forward-looking statements whether it’s about new information, future events or otherwise.

Moving to our taxes, our effective tax rate for this quarter was 20.5% compared to 19.1% a year ago. The increase in our effective tax rate relative to last year was primarily due to the impact of the reenactment of the only tax credit last year, which is retroactively reinstated last year, which significantly reduced our tax rate in that year ago period.

On a GAAP basis, our fully diluted earnings per share was $0.09 which is an increase compared to the loss of $0.07 per share we reported a year ago. Our year-over-year increase in earnings per share was primarily driven by the fact that we had an impairment charge in our hospitals unit in the prior year quarter, which was somewhat offset by lower system sales and increased R&D expenses.

On a non-GAAP basis, our fully diluted earnings per share for the fiscal fourth quarter was $0.12, decline of 50% from $0.24 we reported a year ago. This is principally related to the decline in system sales and higher R&D expenses partially offset by increased recurring services revenue.

Our cash and cash equivalents plus marketable securities ended the quarter over $113 million, which is up about $20 million from the $94 million we reported at the start of the quarter. This is principally a result of outstanding performance in driving our DSOs down this quarter, which is added to our cash flows from operations. Our turnover receivables improved 87 days versus 106 days last quarter and 122 days a year ago. I’d like to note that our cash flows from operations grew to $34.1 million this quarter compared to $23.3 million a year ago.

Moving on to our segment results going towards the each of our four segments, revenue and operating profit or loss, NextGen inventory $91 million and a operating profit of $31.4 million, our dental business unit $4.7 million in revenue, operating profit of $0.2 million, our hospital unit $2.9 million in revenue, operating loss of $5.9 million and our RCM unit as a whole $16.6 million, operating profit of $0.5 million.

And again, for those of you who are tracking this, I am going to provide our non-cash expenses for the quarter: amortization of capitalized software $3 million; amortization of intangible assets $2 million; depreciation expense $2.2 million; and stock compensation expense $0.7 million. Investing activities for the quarter are as follows: $1.9 million for capitalized software and $0.5 million for fixed assets.

So, thank you again for your interest in our company. We will see you next week. I will turn things over to Dan Morefield.

Dan Morefield - Chief Operating Officer

Thanks, Paul and good morning everybody. I am pleased to report that the Ambulatory Division finished Q4 with the highest revenue in five quarters before the inclusion of Mirth. Including Mirth, the total revenue increased over 8% quarter-over-quarter and over 6% over the prior year. All major revenue categories reported divisions were up quarter-over-quarter, mostly attributable to higher software sales, higher training and installation revenue combined with higher consulting and maintenance. In particular, the maintenance revenue was up 4% over the prior period and up approximately 5% over prior year.

Professional consulting group booked approximately $2 million in new engagements during Q4 and just over $9 million in new bookings for the year. That represents a 36% increase year-over-year. We believe the revenue in fiscal ‘15 will be positively impacted as we fulfill those engagements and the consulting sales continue to increase. During Q4, we saw the pace of clients upgrading to the latest version of the application, Netcelerate. We have not seen a material change in the pace of upgrades due to delay of ICD-10 or various meaningful use changes. As such, utilization rates of our implementation and consulting teams continued to rise.

In February, we announced a bilateral agreement with Cerner certifying that our systems will have bidirectional data interoperability. This agreement is one example of our commitment to creating a real data throughout the healthcare delivery organizations. Our investment in Mirth in our pursuit of close relationships with other vendors such as these are key elements in providing solutions that integrated that delivery integrated networks, ACOs and other healthcare providers require.

Regarding Mirth, during Q4 we completed a Mirth Connect project for Bio-Rad a global laboratory company servicing life science research and clinical diagnostic markets, which contributed over $700,000 implementation revenue for the quarter. Also during the quarter the Mirth team focused development efforts on achieving compliance as an ONC 2014 edition EHR module for hospitals. This certification was awarded just after the close of the quarter. Now that Mirth has been part of QSI for two full quarters, we are seeing the acceleration of the incorporation of their product offerings with ours. Those of you who attend our investor conference in New York next week will hear more on this subject from a number of customers.

On the separate subject we had previously announced our restructuring of the company operations to be more efficient and provide for the acceleration of investments into areas of growth and into our technology. As an example of this initiative over the last year we impacted well over 160 physicians. We continue to focus on cost rationalization throughout the organization.

Moving on to hospital solutions, we have four main areas of note regarding operations in the past quarter. First the division made good progress in upgrading current clients to NextGen Inpatient Clinicals version 2.6 as part of helping our clients to a test for Meaningful Use Stage 2. In addition to regulatory requirements version 2.6 also represents additional and improved functionality in several key areas of clinical work flow that will help physicians and nursing staff provide better care for their patients. Secondly, we have seen an uptick in bookings of approximately $2 million from additional products and services related to such upgrades. Each iteration of Meaningful Use program expand the level of functionality and data exchange needed and in many cases this has resulted in add-on sales for new software modules, interfaces and consulting.

Third, the division has had renewed success around its emergency department application (punctuated) by a large deal closed in the quarter with Aveda Health. Renewed focus on this application has resulted in an increased pipeline of opportunities both for existing clients and another competitor installation. Lastly as I mentioned before the company has made an investment this last year in personnel to accelerate the completion of preexisting backlog of implementation and improved client satisfaction. We made progress to the point where we announced our view point staff and new sources elsewhere.

With that I am going to turn the call over to Monte Sandler.

Monte Sandler - Executive Vice President, RCM Services

Thanks Dan. Good morning everyone. RCM services revenue for the fourth quarter was $16.6 million resulting in flat growth over the prior year largely driven by accounting treatment of certain revenue and an inordinate amount of inclement weather this winter and a continued shift to payment responsibility to patients thereby elongating the collection cycle of deductibles we said at the beginning of the calendar year. Fiscal ’14 revenue of $68.1 million represents a 6% growth over prior year. As we previously discussed we have managed through the loss of HMA, a historically large RCM client this past year. But for the loss of this account we believe that RCM growth would have exceeded 20%for the fiscal year.

Additionally, we realized 29% growth in fiscal ‘14 bookings and continued to see strong interest in the market for multiple product sales bundled as a part of our recurring RCM service offering. Our backlog of signed deals not implemented continues to grow over the prior year given the continued confidence in the direction of the business. And our RCM pipeline continues to grow as our customers and the overall markets learn about our comprehensive service offering. We continued to invest in the marketing of RCM services both to our existing Ambulatory customer base and the market at large and our overall company messaging now includes RCM as a key component of our products and services.

Finally, I am pleased to report that we are close to executing our first hospital RCM contract where we will be providing revenue cycle outsourcing services to our hospital customer base. I am excited to bring this service to market with the purchase on helping our hospital customers to optimize their revenue and maximize the use of our hospital software similar to what we have accomplished on the Ambulatory side. I remain optimistic about the direction of the RCM business and continue to feel confident that our tailored RCM services driven by people, process and technology made this a great solution to help our customers successively navigate the complex and ever changing healthcare environment.

Thank you for you time and interest in our company. I look forward to seeing many of you at our Analyst Day in New York on Monday.

I will now turn it over to Gary.

Gary Voydanoff - Executive Vice President, Sales and Marketing

Thanks, Monte. Good morning, everyone. I’d like to be with you all again. Fiscal year ‘14 presented variety of external challenges to vendors in the HIT space, but it’s exciting to see that our repositioning and focus on areas such as RCM population health and interoperability are having a positive impact on sales and marketing efforts in both net new deals and cross-selling into our client base.

Despite the delay in the adoption of ICD-10, our RCM and professional consulting services enjoyed solid results in the sales of those service lines in Q4. Our diversification of service offerings and the inclusion of our full line of software products in RCM sales have played a big part of our growth in these areas. With the ICD-10 deadline being pushed back, we still see the demand from clients from moving to our 5883 platform and MU2 related products such as patient portal, along with the consulting services related to the upgrades.

Our fiscal year end ended with a very positive Mirth growth story. The synergy between the two companies is even better than anticipated. Their teams are working closely now with the NextGen sales team talking about how the Mirth technology stack can solve interoperability issues for current NextGen clients in net new prospects. The Mirth tools were instrumental in helping close one of our significant NextGen ambulatory deals in Q4 that I will talk about shortly.

Within a few short weeks after we introduced Mirth to the Behavioral Health Information Network of Arizona, we are able to leverage the NextGen and Mirth technology to successfully power the first statewide Behavioral Health Exchange in the country. We are looking forward to a great NextGen Mirth story in fiscal year ‘15 as we drive new marketing campaigns to tell a story, the Mirth story, both the NextGen nation and net new prospects.

As we introduced our new cloud enabled solutions late this fall, what you all know currently is NG7. The importance of the Mirth technology will become even more evident as interoperability will be as integrated as practice management, EHR today. We are at the beginning of a move toward value-based medicine. And likewise, we are seeing the interest level on our population health in collaborative care tools on the rise. The underlying Mirth technology integrated with the NextGen EPM/EHR will give us the superior platform for collaborative care solving one of the major issues in the market, which is cross-platform interoperability. Mirth Care, along with the Mirth results CDR provides a vendor neutral enterprise class care coordination in chronic disease management platform that can be purchased standalone today.

NextGen Share powered by Mirth will be a general release in June. I will provide the ability to exchange the data between NextGen systems and non-NextGen EHRs that are MU2 certified and connected to a certified HISP. NextGen Share will solve the fundamental interoperability problem that currently plaques third-party population health vendors and you can’t collaborate if you can’t connect. With less than 1% of our client base using population health management tools today, we have a huge Greenfield opportunity that’s beginning to ramp up much like the early days of EHR deployment.

Our product roadmap for collaborative care is aggressive filled with new product releases for the fall in our fourth quarter. New beta clients are excited about their collaboration with us and the products they will be road testing toward a general release in the international user group event this coming November. Clients are learning of our roadmap now and making plans to budget for the new products.

Our marketing efforts continue to ramp up and support the brand awareness of all of our business units. Messaging and a variety of campaigns are underway are about to be kicked off to derive awareness of our collaborative care population health management solutions, the Mirth product line, our inpatient ED solution and increased RCM penetration, which is still at only 6% of our client base today. We continue to see solid lead activity fueling new opportunities as a result of the tireless work and creativity of our marketing team. The combined division pipeline is stable and sits at a $155 million today, an increase over Q3.

We finished our quarter with positive results. And I would like to mention a few of the notable success stories as we always do. The RCM sales effort resulted in signing important contracts with Centegra Primary Care, Cherokee Health Systems, and Growing Child Pediatrics. The Mirth team signed an order with the State of Utah, HIE. The sales team renewed our contract with the State of Michigan, Department of Corrections, signed new contracts Western Psychological and Counseling Services in Avita Health.

Avita Health is a system of two critical access hospitals of nearly 1,000 employees as well as over 50 physicians serving Crawford and Richland counties in Ohio. This deal was particularly significant and that it was a cross-sell of our ambulatory EPM and EHR as well as our ED solution was a strategic replacement sale and the Mirth Connect capabilities influenced the solution architecture.

Finally, the company executed 102 new arrangements on a consolidated basis versus 100 last quarter. 73% of the new arrangements are Greenfield and 27% were replacements. This counting did not materially change in the quarter. And as of 3/31/2014, there are 134 quota carrying sales and management positions. There was no material increase in the ambulatory staff over Q3.

With that, I would like to thank you for your time and continued interest. Maria, I would like to turn it over to you for questions now.

Question-and-Answer Session

Operator

Thank you. The floor is now opened for questions. (Operator Instructions) Our first question comes from the line of Michael Cherny of ISI Group.

Liz Anderson - ISI Group

Hi, this is Liz Anderson in for Michael Cherny. I was just wondering I know obviously with the start of 2015, if you could provide any color or things in line for 2015 on the gross margin line? Your comments on the OpEx were hopeful.

Paul Holt

Yes. Gross margin line really it’s again – this is Paul, that is quite a bit of a mix story as it typically is for us. Software has very, very high margins. Other services will have lower margins. So, as you know we don’t have a formal policy of providing guidance. So, we are not going to start doing that now, but just now that the important factors there are going to be mixed. And as really I would say mix is your number one piece, but the level of amortization and capitalized software that is we have reached that level that’s going to be somewhat consistent, but outside of that you are going to look at mix.

Liz Anderson - ISI Group

Okay, great. Thanks so much.

Operator

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

Jamie Stockton - Wells Fargo

Thanks. Good morning.

Paul Holt

Good morning.

Jamie Stockton - Wells Fargo

Thanks for taking my questions. I guess maybe the first one just on the inpatient business, it seems like the system sales line there is probably still negative given where the revenue shook out. And my question is basically how long should we expect that to continue? It seems like there is a lever for profitability to improve once that bounces back if you could give us some color on that? That would be great.

Dan Morefield

Hi, Jamie, this is Dan. Regarding the system sales line, clearly that is the components of the system sales line include true system sales, implementation sales, hardware sales and various returns either for goodwill or return reserves. So, it’s the combination of all of those that drive that particular line over time. As I mentioned before, there are pieces that would drive that to a great extent are the additional add-on sales, the emergency department sales that we are seeing more and more of and the continued or the increased client satisfaction with the existing product mix. Some of the things that might offset that a little bit is as we continue to work down the backlog of training and implementation and the offset of course to that is the pickup of new business associated with training implementation, consulting for upgrades to the current version of Meaningful Use software.

Jamie Stockton - Wells Fargo

Dan, is there any bucket of reversals that is potentially going to be emptied at some point?

Dan Morefield

That would be speculation at this point. That would be something as we continue to see client satisfaction that would be a possibility, but more than that, Jamie, it would be speculation.

Jamie Stockton - Wells Fargo

Okay. And then maybe one question for Gary just on the ambulatory business, it seems like there is going to be a pretty healthy replacement market that heats up I think from the numbers that you guys gave. Two-thirds of your deals are still Greenfield at this point. Any sense for when some of these physicians that are using a product that they weren’t able to ultimately test with are going to be coming back to market in droves looking for replacement system? Are we going to see that maybe later this year or is that a 2015 phenomenon? Any color will be great.

Gary Voydanoff

Yes, thanks Jamie. Well, I can certainly tell you that there is increased interest out there. So, as our reps are out talking to potential prospects, a number of them are definitely on existing systems where they have concerns about their current vendors’ ability to meet the guidelines. So yes, as you noted we were up a little bit this quarter in replacement sales and that’s been probably about the average for the year somewhere in that 25% to 30% range for quarter. When the – when is the Spigot going to start go on full blast, it’s still hard to say. I would expect later this year we will continue to see more of that activity the ICD-9 portion has probably held it off just a little bit. So I would expect a little later this year and to next year that we would see more of that.

Jamie Stockton - Wells Fargo

Okay, that’s great. And then maybe one last one for Monte, the RCM business what is going on with the profitability there, maybe you are not going to give us any forward looking commentary, but if you could just help us understand what’s been putting pressure on the gross margin, obviously the revenue came down a little bit sequentially and the cost continue to build, that will be great?

Monte Sandler

Yes, this is Monte. Thanks. So there is not really one particular thing to focus on. A couple of things to note inclement weather I mean we had a tough winter so that certainly impacted our numbers for the quarter. The first calendar quarter of the year also has an impact on us historically, especially as we see more and more of payment responsibility shifting to the patient. It pushes off collections a little bit. We also have a pretty rigid credit worthiness process where we only recognized revenue on a cash basis for customers if certain criteria are met.

And so I think the important thing to note there is the expenses are in the financials. So you see those. If we have deferred revenue on the top line you still are seeing the expense and the cost of sales as well as SG&A. And then finally we were making other investments in the business that are having an impact at the bottom line. So sales and marketing expenses have increased as we continue to ramp up our efforts to grow the business, reported our entry into the hospital RCM space, we ramped up some of those expenses over the last quarter or two in preparation for that. And all of those things are contributing to the quarter that we reported.

Jamie Stockton - Wells Fargo

Okay. Thank you.

Operator

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

Ricky Goldwasser - Morgan Stanley

Hi, good morning. You highlighted population health is a significant Greenfield opportunity, can you just share with us more color on your population health tools, what are you selling to your clients and how should we think about the contractor revenue model and the contribution there?

Gary Voydanoff

This is Gary. It’s a multi-tiered kind of product, so we have base line features that many of our clients over the past nine months or so since the inception have been looking out and purchasing, so basically what we would call kind of cohort management identifying patients with gaps in care and doing outreach to those patients and integrating that back in with our core applications. Some of the new development has to do much more with taking the Mirth products and then embedding those together with the current architecture so that you can have for example a clinical data repository with a longitudinal view of the patients not only within the NextGen world, but from external systems as well, so it could be a hospital information system or third party EHRs. And all of that data combined into the CDR and then our ability to manage those patients on a much more broader scope. So those are some of the additional tools that are coming downstream along much more powerful analytics and some additional things that we are working on today. In terms of the revenue model there are different revenue models out there that we support today. We can deliver it on the SaaS model. We can deliver it based on a used model and then also a license model.

Ricky Goldwasser - Morgan Stanley

Okay and where do you think kind of longer term the market will settle in terms of revenue model or is this too early to determine?

Gary Voydanoff

I think it’s too early to determine. We have seen a combination of those in the past year, most of them a little more focused on the licensing in our traditional license model right now.

Ricky Goldwasser - Morgan Stanley

Okay. And then I am not sure that you mentioned that in the prepared remarks, but can you share with us how much did Mirth contributed in the quarter I know it was around $2.6 million last quarter?

Paul Holt

Yes. This is Paul. We have really integrated the Mirth product suite along with signs of NextGen product suite. So, to that end, we are just considering the Mirth line as inclusive of our NextGen segment. And so we are not going to do that at this time. We will make specific references as if we see some contributions out of certain product lines like I did mentioned that we had some nice growth in subscription revenue included in the other services revenue line and a fair amount of that was related to department. So, to that end, we will make commentary on that, but we are not going to get into breaking out the Mirth like it’s a separate segment. But thanks for the question.

Ricky Goldwasser - Morgan Stanley

Okay, thank you.

Operator

Our next question comes from the line of George Hill of Deutsche Bank.

George Hill - Deutsche Bank

Hey, good morning guys and thanks for taking the question. I want to follow-up on Ricky’s question a little bit and maybe see if there is any other color that you can give us in the software revenue segment, I guess inpatient versus outpatient I guess practice management in Mirth versus the EHR product. And I caveat that with if you look at the Class 4s on the NextGen Ambulatory EHR product, the product doesn’t seem to be fairing well with consumers. So I guess any other color that you can tell us that what’s driving kind of stability or growth in that line would be helpful?

Gary Voydanoff

Well, this is Gary Voydanoff, I will take that one George to begin with. So, it’s important that we are – to note that we are very early in the lifecycle of our 5883 release. So, a very small portion of our clients still have that. And we see kind of the cycle of upgrades in those implementation scheduled throughout the rest of the year. So, we expect that to impact the client SAT scores. So, that’s going to be important. We also – it’s important to note that our clients, our Executive Advisory Board and our large client user group are really helping us with those user SAT issues. So, we understand that fundamentally right now we have to really focus on physician satisfaction, their experience using the software and that’s what the 5883 release is really geared towards. And again, we also believe it’s the cleanest release that we have had in a number of years. And so we think that will also contribute. And some of the early returns have been very positive from our clients there.

George Hill - Deutsche Bank

Okay, that’s pretty helpful. And then just quick follow-ups, one for Paul and one for Steve. Paul, historically the company, if you thought about Quality Systems before getting the inpatient business, you didn’t really breakout the difference between bookings and revenue because the conversion time was so fast. I guess, can you think about what we should think of is the timeframe from bookings to revenue conversion now? And just quickly, Steve, congrats on getting Jeff on the board, maybe just talk a little bit about what you expect them to contribute?

Paul Holt

Yes. So let me take a shot at your first question. There is no simple easy answer to that one, because bookings number is inclusive of some component services that we have sold that could be implementation training, it could be some RCM services as well as software licenses, which we would be quoting revenue right away on. So, there is not a silver magic bullet there. I think the thought that we have been providing that is to give some additional color beyond just what we are calling the revenues from our GAAP basis. That gives you some indication of the trajectory and selling activity that’s going on in our business as a whole, but that’s – that as far as we can go, go with that, but please thanks for the question. I will let Steve.

Steven Plochocki

Yes. George, as far as Jeff goes, I have known Jeff for 12 years. I think many people wonder who followed the TriZetto story, which was a more recent story understand what he did over there and how we brought that company along. And it had a very nice exit with the Apax Group. Jeff is another example of our Board continually rounding out the Board efforts with talented personnel who are from our sector. The input from some of the folks that we brought on last year as well as now, Jeff, brings us a series of 5-star athletes that give us as the management team the capability to have great sounding boards for the things that we are doing from individuals who are very near term experienced in the sector that we are engaged in. They understand we are going through a reinvention. They understand that the EHR adoption curve is only probably two or three years out in terms of fully automated and that we have to reinvent and move our ways into other areas like accountable care organizations, data monetization, analytics and other areas. So, Jeff is just going to be an incredible asset to us as a management team and we are really looking forward to working with him. And I think those of you who know him know what I am talking about.

George Hill - Deutsche Bank

Yes, I have known Jeff a long time, I appreciate taking the question.

Steven Plochocki

No, you bet. Thanks, George.

Operator

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

David Larsen - Leerink

Hi. Can you talk about the NextGen 7 platform maybe describe what exactly it will do and any commentary around when it might become generally available? And then does the 5883 solution have to get deployed throughout your entire client base before they can convert to the NextGen 7 platform or could they go right on to the NextGen 7 platform? Thanks.

Dan Morefield

Hi, David. This is Dan Morefield. Let me take those questions separately. Let me first talk about NG 7 and then I will talk about the 5883 platform. As our 83 product, as we have mentioned before NG 7 is a platform or a technology. I am pleased to announce that we expect the first product to come off that platform to be a full EHR positioned for the small doctor practice. We expect it to be cloud-enabled good market with the SaaS pricing. We expect that we will demo the product at our user group in November. It will be powered by a combination of NextGen and Mirth technologies. We will be in beta this year. We will have limited availability in 2015 with full general lease and mid 2015. The full general lease product will be meaningfully used compliant and ICD-10 ready and will support our RCM initiatives.

So, that’s the story on the new product coming off the NG 7 platform. You asked a question about upgrades. Again, we consider this a product and the issue of upgrading is one that we will look at in detail over the next 12 months or so, but the key will be is that we will be previewing two of our existing clients with the look feel functionality by future of the organization, the future of our existing 83 core EHR product will look like over time. I wouldn’t consider this as a notion of having our clients convert over, but over time we will merge those platforms so that the benefits associated with the products on the new platforms will be transformed into the existing platform that our customers have today.

David Larsen - Leerink

Okay, that’s very helpful. Thank you. So, the NextGen 7 platform will pull data in from obviously your ambulatory EMR, Mirth rep cycle and inpatient is that correct?

Dan Morefield

Again, what we are willing to announce today is that the first product coming off that platform will be a fully HR position for the small doctor practice.

David Larsen - Leerink

Okay, great. And then Dan you mentioned that some resources will be reallocated away from inpatient in my mind that’s good, because it seems like maybe they achieved what they wanted to achieve and they can move it into a new direction within the business. Can you sort of give a little more color on that? Thanks.

Dan Morefield

Sure. The major areas of expansion associated with the hospital solutions are include areas of training implementation, technology. So as an example we have done a lot to integrate our training implementation teams of our hospital and our ambulatory organizations and so we are seeing the ability to reallocate some of those resources into ambulatory projects as the demand has increased there. Technology is very much the same story. We are able to reallocate resources away from the hospital solutions. It helps support for instance the NG7 platform.

David Larsen - Leerink

And I am sorry just one last one. I think you were reluctant to go and sell new inpatient products previously because you wanted to work through some of the integration, are you now back aggressively selling inpatient product back in the market? Thanks.

Dan Morefield

We have always been willing to sell products within that marketplace. I think what we wanted to make sure everybody understood is that even though our overall sales of our core clinical and financial modules continue to be down there are other modules that we are effectively selling such as our emergency room solution and our surgical scheduling product all of which have good client satisfaction and good demand in the marketplace.

David Larsen - Leerink

Thanks a lot. I appreciate it.

Operator

Our next question comes from the line of Ryan Daniels of William Blair.

Ryan Daniels - William Blair

Hi guys. Thanks for taking the question. Let me start with a follow-up on NextGen 5.8, 8.3 I think that’s been in the field for six months now, so maybe a three fold question. Number one, how much of the base has been upgraded to-date. Number two, you mentioned that could be a driver of improved satisfaction, did you have any more color you can provide or internal metrics on that. And then third, how much of the base should we expect will be upgraded by the end of the fiscal year?

Gary Voydanoff

This is Gary Voydanoff. I will take that one. So 5.8 and 8.3 can be updated separately. So on the 5.8 front the application side that is probably moving along at 30% of our base right now. So that is coming along and going very well and the response from the user is very good on that one. As I mentioned before its very clean release and those upgrades have been going well. 8.3 is the clinical content side, so that has been going a little bit slower so clients tend to do the 5.8 piece and then follow-on with 8.3. And a lot of them are retiring a lot of their old customizations and moving to the new platform. So that takes a little bit of time – of more time and lags behind the 5.8, so a smaller percentage is on 8.3 right now. In terms of the pace I mean I think it looks pretty steady over the balance of the year. I don’t think we know exactly what percent is going to be done by the end of the year. I think we would hope that it’s a significant percentage but a few other clients have held off now because of some of the regulatory things pushing and so they don’t feel quite the need to do it as fast. But we still expected significant percentage by the end of the year.

Ryan Daniels - William Blair

Okay, that’s helpful. And then a follow-up I think on the regulatory changes front you indicated that in April you adjusted some resource levels and we will see some cost reduction, can you talk a little bit about number one what levels of reduction we might see there, what you did internally. And then number two I am curious if you anticipate having to ramp that backup next year or can you just reallocate existing resources, so you won’t need to rehire or re-staff?

Dan Morefield

Hi, this is Dan. Let me see if I understand your question correctly. And it goes back to the comment I believe I made during the opening remarks about during the last year I gave an example of some of the cost savings associated with restructuring of the organization. And as I have mentioned in prior earnings calls our intent has always been to reallocate expense savings into areas of growth and into our technology initiatives. I don’t think that has changed in anyway. We continued to look at restructuring and operation efficiencies for the principal purpose of investing into other higher growth areas of the organization.

Ryan Daniels - William Blair

Okay, I had some clarity. And then last one I had I know you have talked a lot about Mirth and the momentum there, I think one of the capabilities you want that you are excited about was NextGen Share, so I am curious how widely that’s been rolled out and if you have gotten any feedback or utilization metrics there on some of the capabilities that offers you can share with us?

Gary Voydanoff

This is Gary, I will take that one. So, it goes into general release in June. So, we are very close to getting that out into general release. So, we don’t have a lot of feedback or metrics from the client base. I can tell you that a lot of them are very, very interested as we just completed our large client user group meeting a couple of weeks back. There was a tremendous amount of interest there. And the excitement there is we are providing that as a free service to our clients. So, what they are happy about is that we are providing an interoperability platform with a high feature set that isn’t going to increase their costs. And that has been an area in this industry in general, where there has been a lot of frustration. Regulations have just caused the increasing amount of cost to the practices, whether large or small. So, I would anticipate that within a couple of more quarters out, we would have some more ideas as to the utilization rate and feedback from our clients.

Ryan Daniels - William Blair

Okay, thanks guys.

Gary Voydanoff

Thank you.

Operator

Our next question comes from the line of Donald Hooker of KeyBanc.

Donald Hooker - KeyBanc

Great, good morning, thank you. I think I may have missed it scribbling down notes from your comments, but did Europe provide a pipeline number?

Gary Voydanoff

Yes, this is Gary. The pipeline sits right now at a $155 million.

Donald Hooker - KeyBanc

Okay, got it. And I assume is there a piece of that that is Mirth, is that included in there?

Gary Voydanoff

Yes, two quarters back, we began including the entire, the pipeline of all the divisions.

Donald Hooker - KeyBanc

You don’t break that out?

Gary Voydanoff

Correct, no.

Donald Hooker - KeyBanc

Okay, got it. That’s fair. And just maybe a reminder here did you also breakout the Mirth, it sounds like Mirth is building up nicely, did you give us the Mirth revenues in the quarter? And I know there is some funky stuff going on there with deferred revenues as well, maybe for Paul, if you can talk to us I mean just how do we think about those deferred revenues rolling off and how it is do in terms of revenue in the quarter? I am sorry if I missed it.

Paul Holt

No, that’s okay. This is Paul. So, we did not provide a Mirth consolidated number. What we did do or what I did say was Mirth clearly contributed to some of our growth in subscription and SaaS services. That’s included in the other services revenue category. So, we will just make some color around that going forward around certain product lines that are doing well or contributing, but not talking about when all inclusive Mirth revenue number. And yes, we did – we are seeing some growth in deferred revenue over time that’s contributing to some of the growth that we are seeing on our balance sheet related to Mirth subscriptions and SaaS and those kinds of things. So, I think beyond that though, that’s about that’s as far as we are going to go on the level of detail.

Donald Hooker - KeyBanc

Got it. And then quick last question, two real quick questions and I will jump off and let other people ask questions. With regards to the Mirth revenue to keep bugging you, are you going to put that in the 10-K I would assume you would break that out? And then in revenue cycle, I think you all mentioned that there were some accounting changes there, if you could comment on that please as well? Thank you very much.

Paul Holt

Okay. So, the 10-K is going to be released very shortly here in the next couple of days at the latest. So stay tuned for that K, okay. And answer to your other question around accounting, that was Monte was providing some color around the RCM numbers. And he was mentioning that we do have requirements for us to recognize revenue that we have reasonable assurance of collectibility. So, we are assessing customers that on an ongoing basis to make sure that they meet that requirement. And if we don’t have good confidence that they are meeting that requirement, we will put those customers on a cash basis revenue treatment, which does have negative impact on your revenue, because you are still reporting expenses, but you are delaying the revenue, but that’s nothing new, that’s been a policy we have had in place for quite sometime. So, I would not characterize that as any kind of change in policy, it’s just continued adherence to our policy.

Donald Hooker - KeyBanc

Thank you.

Paul Holt

Thank you.

Operator

Our next question comes from the line of Gavin Weiss of JPMorgan.

Gavin Weiss - JPMorgan

Hi. I am just continuing on Mirth. I wanted to get some color on what type of customers are purchasing the Mirth solutions? Are they from primarily outside the NextGen days? And can you also remind us the structure of the sales force is it a dedicated Mirth team and do the NextGen sales force also sell it?

Gary Voydanoff

Hi Gavin, this is Gary. So, I will take that one. So, yes, primarily the Mirth sales are outside of the NextGen base yet today. So and it’s a very diverse healthcare audience out there. Everything from HIEs to hospitals to just a variety of different folks buying the Mirth solutions independently and it’s exciting to see the RFP growth and things like that coming into the organization really still about us having ramped up a lot of marketing campaigns by the NextGen team. Now, we are beginning to cross-sell. So, I had mentioned significant sale we had with Avita Health System. And what was important there was we could use the Mirth Connect tools to really help us satisfy a lot of their internal requirements. So, how were they going to connect the NextGen solutions to all of the other IT solutions they already had. So, it was really a fundamental part of their purchase.

And so now the NextGen sales team has been training for over the last month or so on their Mirth products, so that we can begin to get out with feet on the street and campaigns to our NextGen client base, particularly the larger group practices, the midsize practices and our hospital based clients. And there is about 300 of those to tell the Mirth story and to find opportunity from Mirth Connect to CDR, a number of different solutions. So, that’s just beginning to ramp up. We also just added a couple of enterprise Mirth sales people over the last I believe at the beginning of last quarter we just added those. So, their headcount is starting to ramp up and those folks are out there looking for opportunities again outside of the NextGen base in other hospital systems. So, that’s kind of the makeup today. We think we are still very early in that integration process and we are excited about the possibilities.

Gavin Weiss - JPMorgan

Okay, that’s definitely helpful. And then just a quick one on the NG7, I think I was under the impression that with GA earlier than mid 2015, has that development timing changed or is it just you have more clarity now in terms of the rollout?

Gary Voydanoff

I think in previous announcements we had always talked about it at some point in calendar 2014. I think the biggest change is that we look at and have incorporated the Mirth technologies along with NextGen. And that particular change is one that drove us to delay the implementation. We just felt it was more important to come out having it powered by both the combination of our existing technology and Mirth technologies and that would be the reason for the slight delay.

Gavin Weiss - JPMorgan

Okay, that makes sense. Thank you very much.

Steven Plochocki

Thank you, Gavin.

Operator

Our next question comes from line of Bret Jones of Oppenheimer.

Bret Jones - Oppenheimer

Good morning and thank you for taking the questions. I wanted to go back to the inpatient segment for a minute, because I don’t feel like I got my head wrapped around that? And maybe I am just misinterpreting what’s been said in the call so far. So, if we could just summarize, it does sound like the software component of that was still negative? And so I am wondering if you can just, but Dan said that it would be speculative to identify when that would reverse? And yet on the other hand, we are also talking about reallocating resources. So, I just want to understand where are we in terms of getting the inpatient solution fixed and getting the implementation backlog cleared and how much work is left to be done?

Dan Morefield

Sure. Let me again address those in pieces. First of all, I remind everybody that the definition of within total system sales includes the sales for actual system implementation sales, some hardware sales, but there is also contra revenue associated with returns and returned reserves. The question about the buckets that Jamie brought up really specifically was focused I believe around the returned reserve and whether or not that would be returned or that would be reversed over time. And I’d ask that point that I really focused on speculation. The piece that we had been fairly overt about or fairly direct about was the issue surrounding that our bookings and sales have increased and especially in the area of implementation training, software sales to especially our emergency department software. So, we see those as positive trends. We today have still a number of clients that are in implementation stage. So, we will continue to focus on those. And as I said before, key driver of this is client satisfaction. We see that increasing both with the stability of the software, with the upgrade to 2.6 with the investment in new training and customer service that we have provided to-date.

Bret Jones - Oppenheimer

It’s very helpful. And then but just to kind of close loop there, can you talk at all about the implementation backlog, is that something you think you will clear in the next quarter or two or are we talking about a year from now?

Dan Morefield

No. I really – we haven’t materially said that, but again, the key indicator of how much of our backlog is the issue of how many new large system sales we had. We haven’t reported many of those over the last couple of quarters. So it wouldn’t be a bad assumption to assume that we should be able to take care of that backlog over the next few quarters.

Bret Jones - Oppenheimer

Okay, thank you. And then just one clarification also on the implementation side of the house, I kind of got mixed messages, again I felt like Paul was saying with the MU2 delays and the ICD-10 delays, that’s going to allow for resources to be reallocated. Dan, it sounded like you said you are not seeing a slowdown in the upgrade cycle, maybe I am just parsing words here, but I would just want to get your sense for is MU2 and ICD-10 are those delays going to have any kind of implementation issues on your side that you are seeing for upgrades or is that not the case?

Dan Morefield

Well, I think we said last quarter that we saw a delay in the expected upturn in professional services demand. And that surprised us a bit. Since that time, we have seen an acceleration of demand as well as we have done cost rationalization associated with the resources there that will lead or that is leading to increased profitability of training implementation. We certainly have seen some clients take a pause though we haven’t seen a material decrease and the uptake of our 5883 platform. And while the changes in Meaningful Use regulations and proposed changes certainly have clouded of the future for our clients. We have been very clear with those clients that they still need to get upgraded. And while there is some noise there, we still continue to see a full pace of upgrades going forward.

Bret Jones - Oppenheimer

Alright, great. Thank you.

Operator

Our next question comes from the line of Greg Bolan of Sterne Agee.

Greg Bolan - Sterne Agee

Hey, thanks for taking the questions. So, did I hear you right that, that NextGen Ambulatory revenues were up 8% year-on-year excluding Mirth?

Dan Morefield

No, this is Dan. I reported that the numbers were 8% year-over-year including Mirth.

Greg Bolan - Sterne Agee

Including Mirth?

Dan Morefield

I am sorry, including Mirth, the total revenue increased 8% quarter-over-quarter and over 6% over the prior year.

Greg Bolan - Sterne Agee

Got it, okay. Great, thanks. Paul, just your comments regarding Street estimates for EPS and not taking into account maybe higher operating cost, I understand that, but can you maybe comment on and I know this is probably a little bit more difficult to comment on, but on the revenue side, I mean, if you look at consensus estimates, it’s around mid single-digit revenue growth over the next say four quarters. How do you feel about that?

Paul Holt

Yes. So, this is Paul, that’s quite a loaded question there given that we have been trying to be clear about not providing guidance. So, I think I would pay attention to quite a lot of the statements that you have heard on this call and you are going to have to take all those into account and sort that out in terms of the future and our revenue. But I think we believe that we have good opportunities. We believe if there are definite opportunities out there that we need to execute on. However, I am going to have to be carefully hear about talking specifically about the analyst estimates in revenue. I think the qualification that we intended to give was really more limited to what’s going on in our R&D expense line.

Greg Bolan - Sterne Agee

Okay, that’s fair. And then Steve, kind of following on George’s question on the addition of Director Margolis, so I guess if you just think about the fact that he started a company, he sold a company, obviously and it’s kind of interesting that you guys are adding him to the Transaction Committee, I mean is there a message here for the investor community whether it would be more restructuring or maybe there is something else that we should be thinking about in the future?

Steven Plochocki

No I think the – as I have said the Board, it’s always been the Board’s motivation to keep top grading the Board and bring in experienced and talented individuals who can aid and assist in our efforts as our sector not only continues to grow, but continues to reinvent as we started moving from fee per service to value based modeling and as we all know from paper to automation. So I think the great value Jeff can provide to us in that area is that he understands intimately all the different aspects of the business including all the aspects of our business directionally where things are going. And he is going to be a great addition to the transaction team because as we have always said and we will say again on Monday, we are always interested in doing the right types of acquisitions that can complement or supplement our existing base and keep putting us in a position to make sure that our customers continue to stay at the fore front of all the trending that’s going on in this sector. He gives us the strong element in all those areas. So we are anxious to work with him highly supportive of him and we know he will be an incredible addition to the team.

Greg Bolan - Sterne Agee

Alright. Thanks Steve. And then last question for Gary. Going back to Jamie’s earlier question with regards the replacement market, how do you – I mean how do you see it unfolding just in terms of the type of replacement opportunities, do you see it as more going after those PHOs that are plugged into an acute system and are basically forced to use the incumbent acute IT vendors ambulatory solution. So kind of moving away from it (indiscernible) choke to a more best of breed approach or is it maybe more so kind of on the independent physician side those independent physicians that maybe attach their wag into the wrong vendor and need to make a change?

Gary Voydanoff

I think it’s a little of both because you have got – you have certainly got those that you just mentioned. They just – they made the wrong decision it was a vendor that’s not going to be able to materially improve their software because they have either got to worry about regulations and those investments or they just can’t keep up anymore. Also understand that many of our clients are group practice clients continue to grow and if there is good license sales there for us and so they are acquiring a lot of those practices that have other systems and they want to put them on a single enterprise platform, so some of the replacements are going to happen there. So again it’s still a mix. I think there are a lot of those ACOs that are continuing to either form or maybe changing their roadmap a little bit many of those would like to get on a single platform as well. So again those will be replacement opportunities. But so it’s really a mix bag not one particular area right now that really stands out Greg.

Steven Plochocki

Just to add a little color to what Gary just stated which – and he is absolutely correct is that we have wrong said that those of us who came into this automation period and healthcare this EHR move, those of us who came in with large installed bases would ultimately be the major benefactors as we move through this entire process. And so the replacement market as you know there is over 500 vendors that provide EHR. And if you follow the class reports or any other third party assessment group, they pretty much are all in agreement that there will be a major washing out smaller players over the next two to three years as we move through Stage 2 and then Stage 3 and then ICD-10 and ICD-11. And so those of us with large installed bases will be double benefactors in the sense that our install base would be gathering up many of these physician groups hence they will be going on our software.

And then the general replacement market will be another area for us to get our fair share of the business. So I can’t underscore the fact that those of us with large installed bases as we continue to move through this automation period continue to be major benefactors. And in terms of new product and service offerings that we can feed into the system and in the system that’s really growing and you will hear a little bit about that on Monday. Those of you that are at our Analyst Day on Monday we are going to have four panelists, for our customers who are in varied stages with us. All of them are on our baseline software, but all of them are expanding into our existing product and service offerings. And they are going to tell you the reasons why and we think that will be an important part of our session on Monday morning.

Greg Bolan - Sterne Agee

That’s great, thanks Steve.

Steve Plochocki

Thank you.

Operator

Our next question comes from line of David Windley of Jefferies.

David Windley - Jefferies

Hi, following up on an element of Greg’s question there, in terms of common platform and installed base, could you comment on kind of the sense of your installed base, the activities there and situations where the acute system that controls your client hospital or excuse your client group practice wants to rollout a common system, to what degree are you still facing that kind of defense of the installed base and perhaps even incorporate Mirth comments on how that is changing that conversation now that you have that under roof?

Gary Voydanoff

Yes, this is Gary, Dave. Good question. So what’s important to know is we have got really seen very low attrition in our client base right now and again many of those group practices are growing. And so that’s been very positive sign for us. So you asked does Mirth contribute to that low attrition. And absolutely we think it does. There are a number of our larger hospital based clients that we have spent a lot of time with just in the last four to five months talking to them about the Mirth technology and how it will help them to be able to continue with the best of breed approach and not have to rip and replace all of the systems that they have currently. And so that has been a very important part of the story and what we think is going to help us maintain high retention rate. So we haven’t seen any kind of real attrition from ramping up of that attrition related to hospital based docs.

Steven Plochocki

And then if I could just add – if I could I would just add to that. This is Steve. The – it was always the intention of the government when it rolled out Stage 1, Stage 1 was basically okay healthcare get automated. Stage 2 is now okay, all of you automated healthcare that are certified start interoperating and interacting. And it was always the view of the government is that nobody has to be on a singular platform to be successful. We had to be on a certified platform and Stage 2 is all about interoperability and connectivity. And if you remember early on in our prepared statements Dan Morefield was talking about our relationship with Cerner, which we announced, which basically says we interoperate with Cerner, they interoperate with us. There is no need to go on one or the other. And so I think that’s what Stage 2 is going to solve. It’s going to solve all of that historical rhetoric about having to be on one platform.

David Windley - Jefferies

Can you put a number on your attrition, you say it is low, can you give us the percentage?

Steven Plochocki

Immaterial.

Paul Holt

This is Paul. We haven’t provided that in the past. So I think the message that you heard from Gary is we haven’t seen any material change in that statistic to-date.

David Windley - Jefferies

Okay. Question on RCM. I think the comment was made that only 6% of your broader installed base, have you been able to address with your RCM services of that other 94%, can you give us the sense of what they do? Are they using another vendor for RCM or what percentage of those practices still have folks in the back room doing it in-house?

Gary Voydanoff

This is Gary. They have a very high percentage of folks doing it in the back room still, so very few years of third party RCM vendor of any kind. And overall I think people see in the industry today that there is move towards RCM outsourcing is going to continue marching along and it’s growing. It’s when we have any new opportunity the conversation is not around necessarily always licensing, it’s about RCM services. And if that’s the best solution, then that’s what we are going with. So, we are excited that, that pipeline continues to grow with us, particularly within our client base. And we have got a lot of opportunities still in client base. And even folks who maybe didn’t have real obvious problems with their back office, they just understand that they need to find ways to be more efficient than ever. And RCM certainly helps them with that.

David Windley - Jefferies

The last question on pipeline, coming back to that, if I hear the enthusiasm in your commentary about the growth on a number of metrics, including pipeline, I am looking at sequentially, it looks like it’s up a couple of million dollars. And if I look year-over-year, where last year didn’t include dental and didn’t include Mirth. If I kind of normalize for that, it looks like it’s also probably pretty close to flat. Are there timing issues or other factors, leakage hour or whatever that are maybe masking growth that would help to explain your enthusiasm, in other words, it really look better, but for something?

Gary Voydanoff

This is Gary again. So, I would say that the one thing that we have seen – so as Dan was talking about certainly on the hospital side, we have been focusing in the backlog of implementations. And so we have really slowed down the growth on the inpatient side in terms of new sales revenue and that’s probably been the biggest impact on that pipeline. So, if that was still where it had been previously, I think you would have seen much larger growth.

David Windley - Jefferies

That’s really helpful. Thank you for the perspectives.

Operator

Our next question comes from the line of David Francis of RBC Capital Markets.

David Francis - RBC Capital Markets

Good morning. Just very quickly, it’s circling back to the inpatient side of the business and trying to get things, I understand that the 2.6 release is we have got long way toward fixing a lot of the issues that you have been facing with the conglomeration product that you got there on to a single platform, but can you just talk a little bit more specifically as they talk around on this call, what else is left for both integration and functionality perspective to get that product suite competitive with other offerings and other competitors in the market?

Dan Morefield

This is Dan. I think there is two things to consider there. And your question specifically addressed the issue of product functionality. Client satisfaction is a combination of both the specific product functionality, but as well as the training that the client goes through the level of training, the level of support. So, one of the things we have done over the last three quarters has materially increased resources in the training implementation side, not only for those clients that haven’t been implemented yet in the backlog in many cases retraining clients where their use of the system has led to inefficiencies and lack of client satisfaction. And then these changes along with the product enhancements for 2.6, the hot fixes that we do along the way all take time to drive our client satisfaction. So, again, I think that the solution in the future is a combination of both product and service enhancements that really drive the results.

David Francis - RBC Capital Markets

Hi. I guess, I got to ask again, what is it specifically about the functionality or the integration of the products that have been acquired that were still needing to get done for the inpatient side to be competitive to ask us again? Something we are understanding is you are talking about satisfaction just I guess I am trying to get to what are the product issues that still remain to make the product competitive with others in the class?

Dan Morefield

So, I think if I take a look at and talk about sort of the roadmap associated with the product, the key issues of the roadmap going further is further integration on the modules that we currently have further functionality especially in clinical functionality, further enhancements on the financial software to make it more intuitive to use, better dashboards that would be rolling out. So it’s the combination of those kind of functionalities that will help to drive the competitive nature of the product suite.

David Francis - RBC Capital Markets

Okay, alright. Thank you for that. The other question I had was what drove the improvement in accounts receivable collections in the quarter, is that something that you are simply focused on a little bit more acutely from a financial operations perspective, is there a client satisfaction element for that with the cash that came in the day is going down so it certainly is – obviously something driving that, can you talk a little bit more to like looking on it? Thanks.

Paul Holt

Yes, this is Paul. I am going to just give you a couple of quick answers to that. We have deployed an ERP system called SAP. And we have really started to hit on some more cylinders there. In terms of leveraging those capabilities and driving improvement in our collections performance, there is one biggest piece I would put to that as well as the team that I have an organization they have been doing a tremendous job.

David Francis - RBC Capital Markets

Great. Thank you.

Steven Plochocki

Operator we will take one more question please.

Operator

Our next question will come from Garen Sarafian of Citigroup.

Garen Sarafian - Citigroup

Thanks for taking the questions. And maybe using the soccer analogy the World Cup we are well into injury time here, so I will only ask the tactical questions and leave the rest for Monday. Paul you mentioned on the expense line and R&D perhaps the sell side having not modeled correctly, can you give any clarification is that sort of maybe the mid-teens is that right number or should we stay constant with this last quarter or any other color you can give just to make sure that we get it right at this time?

Paul Holt

Well, I was hoping that range that I gave a percentage range was – would be enough to get folks thinking a little bit closely there to what – where that situation is going to be.

Garen Sarafian - Citigroup

We had a little bit of technical issues I missed that if you give a range and what was that range?

Paul Holt

Okay that range where we are currently at is between the 13% approximately 13% to 15% of revenue.

Garen Sarafian - Citigroup

Okay, well that certainly helps. And then just moving on it was asked a little bit differently before but if we – you had mentioned last call that lead generation was moving to the positive impact for the RCM pipeline but sales were down sequentially, so maybe what were maybe the top two things that were not as good as you have talked other than perhaps weather?

Monte Sandler

So, this is Monte. Again the shift to patient responsibility and the deductable reset in the first calendar quarter continues to grow every year continues to grow every year, consumer driven healthcare, more patient responsibility and so typically all of the resets in the first quarter. We also saw the affordable care act implemented in the first quarter. And then I also spoke about some of the deferred revenue.

Garen Sarafian - Citigroup

Should we take it in that order?

Monte Sandler

Well, I think those are just contributors. We didn’t really give any quantification in any order I think it’s a mix bag. The other thing I would say is our backlog continues to grow. Our bookings are up 29% year-over-year. So I think those trends as we look at the business moving forward continue to project it in a positive direction.

Garen Sarafian - Citigroup

Got it. And lastly I have probably missed this, what was bookings number and for this quarter and could you state it if it’s excluding RCM so we can do a more of an apples-to-apples comparison versus last year?

Monte Sandler

So we are providing that number which is inclusive of RCM and that was $42.1 million this quarter versus $41.6 million last year and $47.6 million a year ago.

Garen Sarafian - Citigroup

Okay. We are breaking it out again. Okay, alright, great. Thanks again. See you Monday.

Steven Plochocki - President and Chief Executive Officer

Alright, you bet. And not to extend injury time a whole lot further, I just want to thank everybody for being on the call. We look forward to having the opportunity to talk to many of you on Monday, where we can give you a broader view of our product roadmap. And I think you will enjoy the four panelists that we are going to have and their future plans and how those future plans expanding their product and service offerings with us. So, again, remember the large installed base is going to be a major benefit to companies like us. And we have a lot of tailwinds for RCM, Mirth and the replacement market, which we know is going to start beginning at some point later this year. So, again, thanks for your interest. Look forward to seeing many of you next week. Take care.

Operator

Thank you. If you would like to listen to the replay of today’s conference, please dial 800-585-8367 and refer to conference ID number 42101881. A webcast archive of this call can also be found at www.qsii.com. Please disconnect your lines at this time and have a wonderful day.

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