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Quality Systems Inc. (NASDAQ:QSII)

F1Q07 Earnings Call

August 7, 2007 6:30 p.m. ET

Executives

Louis Silverman - President and CEO

Paul Holt - CFO and Corporate Secretary

Greg Flynn - EVP and General Manager of QSI Division

Pat Cline - President of NextGen Healthcare Information Systems Division

Analysts

Atif Rahim - J.P. Morgan

George Hill - Leerink Swann

Sandy Draper - Raymond James

Richard Close - Jefferies & Co

Robert Toomey - E.K. Riley Investments

Jeff Smith - Sidoti & Company

Andrew Shapiro - Lawndale Capital

Doug Kinouse - Kinmar

Gene Mannheimer - Caris & Company

Joseph Craigen - Citizen

Charles Rhea - CIBC World Markets

Constantine Davides - SIG

Presentation

Operator

Good afternoon. My name is Natalia, and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter fiscal 2008 Quality Systems Financial Results. All lines have been placed on mute to prevent any background noise.

After the speaker's remark there will be a question and answer session. (Operator Instructions).

Thank you. Mr. Lou Silverman, you may begin your conference.

Lou Silverman

Thank you, Natalia and welcome everyone to our Q1 fiscal '08 earnings call. Paul Holt our CFO; Greg Flynn, our Executive Vice President and General Manager of the QSI Division; and Pat Cline, President of the NextGen Healthcare Information Systems Division. Once again you join me on this afternoon.

Please note that the comments made on this call may include statements that are forward-looking within the meaning of the securities laws including without limitation statements related to anticipated industry trends, the company’s plans, products, perspectives and strategies, preliminary and/or projected operating results, capital and equity initiatives, pending litigation and the implementation of or potential impact of legal, regulatory and accounting requirements.

Actual events or results may differ materially from our expectations and projections and you should refer to our prior SEC filings including our Forms 8-K, 10-K and 10-Q for discussions of the risk factors, management discussion and analysis and other information that could impact our actual performance.

We undertake no obligation to update any projections or forward looking statements in the future. Also, as I have mentioned on each and every call for the past many quarters, please continue to note that the company’s past performance is not necessarily indicative of future performance.

I’ll now provide some summary comments on the quarter. Paul, Greg and Pat will follow with additional details.

For the June quarter the company recorded revenue of $42 million. While our revenue did not set a record this quarter, those $42 million represents the second highest revenue total in our history. On a year-over-year basis total company revenue increased 17%.

NextGen's revenue for the quarter was $38 million. NextGen revenue was up 18% over the prior year and as was the case the total company revenue NextGen's performance for the quarter represents the second highest revenue for the quarter in the recent history.

QSI division revenue at $4 million was up approximately 2% over the prior year. Fully diluted earnings per share for the first quarter of fiscal '08 was $0.29 up from $0.28 from the year ago quarter. As I've mentioned regularly, in record and non-record quarters alike there are no guarantees that financial performance in ensuing quarters will meet or exceed the level of performance obtained in prior other quarter.

Regarding other items of potential interest, we have no updates on the previously disclosed and discussed licensing fee matter. Related expenses were somewhat lower than the June quarter than what was occurred in the March quarter though they remained into fixed figures during the June quarter and previously mentioned the company's internal investigation, the audit committees internal investigation was completed during the June quarter.

On a topic of dividends, our board recently approved our second quarterly $0.25 per share dividends to be paid to shareholders of record as of September 14, 2007 has followed the special dividend and a fourth quarterly dividend came in at $0.25 per share announced and paid to shareholders earlier in this calendar year.

There is already investor conferences during the quarter, the company presented at the Deutsche Bank, JMP, Citibank and Jefferies conferences. Investor meetings were also held in Boston and New York. Regarding acquisitions we are essentially where we have been prioritizing organic growth and continuing to review potentially interesting opportunities or acquisitions that come to our attention and now mostly it's in board meeting, the board indicated nominally extended interest considering acquisitions, though it is premature to anticipate that an acquisition of any kind is imminent or [technical difficulty] at this point in time.

Our annual shareholder meeting is scheduled for later on this week specifically August 8, 2007 here in Orange County, California. Shareholder and Director had filed the 13-D on July 30 concerning among other things in his position on certain items related to the settlement agreement find between himself and the company last August in response that Company filed and 8-K on August 1 addressing a number of materials and dispersions.

In closing, my prepared comments for this call, I want to once again clearly point out that there are no guarantee that the company or either of its divisions will meet or exceed past or expected levels of performance in future period. It is possible that investors and analyst will set new short, medium or long-term expectations for the company, and in response to this possibility, please continue to note that we do not give out financial guidance to the investment community and we do not comment on guidance advanced by members of the financial community. I will now turn things over to Paul Holt.

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Paul Holt

Thanks, Lou and hello everyone. Our consolidated system sales of $20 million this quarter represents an increase of 11%, compared to $18 million in the prior year quarter. Sales of add-on licenses included in the system sales grew 37% to $7.1 million this quarter versus $5.2 million a year ago.

Consolidated maintenance, EDI and other services revenues rose 22% to $222 million compared to $18.1 million in the prior year quarter. Our consolidated gross profit margin this quarter came in at 65.4%, down from 68.2% a year ago.

The decrease in our gross margin over the year ago period was due primarily to a shift to a relatively larger amount of recurring revenue as a percentage of total revenue, as well as a relatively higher amount of hardware and third party software costs as a percentage of system sales.

Total SG&A expense increased by approximately $2.4 million to $12.6 million this quarter that compares to $10.2 million a year ago. The increase in SG&A expense as compared to the prior year was primarily due to a $1.7 million increase in compensation expenses, due to increased headcounts, as well as $0.7 million in higher corporate expenses.

Looking on a sequential basis at SG&A, SG&A expense decreased by approximately $1.9 million. The decrease included approximately $0.9 million in lower commission expenses, due to the sequential drop in system sales, $0.4 million in lower compensation expenses related to the company's incentive plans, 'approximately $0.3 million in trade show and advertising and finally a drop of $0.3 million in legal expenses. SG&A expense as percentage of revenue this quarter increased to 30.1% and that compares to 28.3% in the prior year period that's due to a faster year-over-year growth in SG&A expenses just mentioned.

The company's effective income tax rate declined compared to the year ago quarter at 37.9% compared to 39.9% in the prior year quarter. The reason for the decrease in the effective tax-rate was primarily due to the fact that an increase we benefited from the increase in the statutory deduction activities, this mainly effect that fiscal year. Also the prior year tax provision did not include a benefit for research and development tax credit.

The federal research and development credit statutes were not reactive in December of 2006 and such the company did not record any benefits in the June 30 '06 quarter.

In terms of divisional performance, system sales in the NextGen division rose 12% to $19.5 million this quarter compared to $17.4 million a year ago, continued growth in NextGen state of installed users drilled maintenance, EDI and other revenues at NextGen 26% higher than last year at $18.6 million versus $14.8 million a year ago. Operating income in the NextGen division was up 4% at $13, 903,000 compared to the $13,394,000 year ago. The QSI division reported a year-over-year increased of 2% reporting revenue was $3,918,000 compared to $3,890,000 a year ago. Operating income for the division was $1,056,000 million.

Moving onto our balance sheet, our cash increased by approximately $10.5 million this quarter to $70.5 million or $2.58 per share that compares to $60 million or $2.21 at the end of the prior quarter. Note that the company paid a dividend of approximately $6.8 million or $0.25 per share in July of 2007. The Board of Directors has also declared an additional $0.25 per share dividends, the shareholders of record on September 14th, 2007 to be paid early October 2007.

This quarter our DSOs increased by 16 days and 145 days compared to 129 days last quarter. DSOs in the year ago quarter was 122. The increase in DSOs was primarily due to the sequential drop in revenue combined with a sequential $1.2 million increase in unpaid deferred revenues, which is included in accounts receivables. The significant customers, who represented $12.0 approximately 12.5% of total growth accounts receivable as of March 31, now represents less than 10% of growth account receivable as of June 30th.

DSOs net of amounts included in both the accounts receivable and deferred revenues grew to 91 days compared to 81 days last quarter. Our DSOs by division this quarter was 83 days for the QSI division and 152 for NextGen division.

Deferred maintenance and services revenue at $14.5 million was up approximately $1.2 million from the prior quarter and up $3.6 million compare to the prior year. The primary drivers of the growth in deferred revenue compared to a year ago, is deferred implementation and training in the NextGen division.

And for those of you who are tracking this, our non cash expenses for the quarter break down as follows. Total amortization expense $1,010,000. That’s $32,000 for QSI division and $978,000 for NextGen. Total depreciation expense $553,000. That’s $62,000 for QSI division and $401,000 for NextGen. Total stock option compensation, $1,076,000. And our investing activities for the quarter were as follows, Capitalized software, $1,473,000. That’s $53,000 for QSI division and $1,415,000 for NextGen divisions. Investments in fixed assets were $598,000. That’s $41,000 for QSI division and $557,000 for the NextGen divisions.

I’d like to again thank you all for being on our call and your interest in our company, and I’ll now turn things over to Greg Flynn who will update you on the QSI divisions.

Greg Flynn

Thank you Paul, and thanks to all of you for showing interest on our call. As always, the QSI division in EDI numbers have been addressed in detail by Lou and Paul, so I’ll focus on continued product enhancement achievements for the division, and then other historical areas of interest for these calls.

We continue to enhance our CPS (Clinical Product Suite) software package, the equivalent of EMR for demo. In particular, we focused on developments that further improve practitioner efficiencies as not further increase the central use of CPS and practice. I won't bore you with the details of these developments. They are fairly technical in nature. We also enhance the integration to CPS product with the NextGen EPM product, improving the interchange of data between these two products. Now following the line of historical questions, I'll comment on our sales staffing and in pipeline.

Our sales staff remains unchanged from last quarter, and our pipeline is approximately $3.8 million. Our pipeline is to find a sales situation where QSI is in the final three purchase choices and we believe that the sale will occur within 180 days. Now, I'll turn the call over to Pat Cline, as you know, President of our NextGen division.

Pat Cline

Thanks Greg. Hi everyone. During the quarter NextGen executed over 70 new customer agreements. Its within our recent historical range, we had a number of seven figure deals forecasted that for the quarter that we weren’t able to wrap up. As far as I know, none of these deals have been lost and at least a couple of these should fall into the current quarter.

From a pipeline perspective, I am pleased to report a substantial increased to over 80 million. Our sales force also grew, sales force now number 63 people. We think this number positions us well for the next few months, although we'll be upgrading at a few areas along the way. It remains our goal to be at 70 sales people by the fiscal year end.

The market for our products remains strong and continues to grow, and we are happy with the way we are positioned. In closing, I'd once again thank NextGen’s employees for their hard work and dedication to customer service, and I'd like to thank our customers for the confidence that they placed in our company. Operator, I think we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Atif Rahim with J.P. Morgan.

Atif Rahim - J.P. Morgan

Hi. Perhaps if you could just elaborate on the seven figure deal that you said you weren’t able to close. And perhaps give us a specific number? Okay, and then I have a follow up question.

Pat Cline

I think there were four or five of those that sized deal in a pipeline at the end of the quarter that we weren’t able to wrap up by that time.

Atif Rahim - J.P. Morgan

Okay, and what do you think the revenue impact for those might have been during the quarter?

Pat Cline

I'd rather not get into that exactly but again four or five seven figure transactions. The revenue impact, and so, the positive impact would have significant.

Atif Rahim - J.P. Morgan

Okay, now on the gross margin side, just a applicable for the next individual is gone through the numbers pretty fast, but I think revenues are up about 17% and operating income was just about below 4%. Where does this difference arise from in terms of the operating margin overall, not just the gross margin, but what are the cost rising?

Pat Cline

Well, this is Pat, I will answer that, and Paul maybe you can follow on for my perspective costs. The biggest cost is in payroll expense, as the company has grown we've hired people both in sales and marketing and in implementation and training and good number of customer service people as well. As I've mentioned on prior calls, it's important to us in order to protect our premium pricing to render top quality customer service so we do make investments in those areas, and we stand by those investments.

Atif Rahim - J.P. Morgan

Okay, alright. Thank you.

Pat Cline

Thank you.

Operator

The next question comes from George Hill with Leerink Swann.

George Hill - Leerink Swann

Okay. How's it going and I guess Pat I understand you sounded it sounds like a couple of deal slipped out of the quarter I guess I just want to circle back and say that I guess that you don't feel like do you are seeing any type of slowdown in the macro environment or I guess if anything changed in macro environment which would force customers or make them choose to delay contract signings?

Pat Cline

Well I don't see any slow down George in the macro environment. I think the market is continuing to grow, the market is strong and I think we are very well positioned to take advantage of that. I personally don't believe that what you see there with these couple of contracts not being able to be closed by the end of the quarter represents anything but out of luck.

George Hill - Leerink Swann

So there is nothing out there that’s strengthening the sale cycle?

Pat Cline

No. With one possible exception Gorge and that is, as we've talked about on prior calls the relaxation of the stock rules, the anti kickback rules have caused, we think an up tick in the interest part of the larger system sales and hospitals and as I have also mentioned on each call some of those sale cycles tend to be a bit more protracted, but outside of the things that we have discussed in the past to get to the root of your question there is no big change in the last couple of months at the macro level.

George Hill - Leerink Swann

Okay. And one question for Paul, Paul you eluded to in your prepared comment on an the increasing of recurring revenue in the quarter can you give us a little more color on what caused that maybe the rate at which had occurred?

Paul Holt

Well what caused that is that the recovery revenue stream grew with a faster rate than the system sales revenue grew. And recovering revenues tend to have lower margins than we get on our system sales. So when you got a bigger chunk of revenue coming from your recurring type of revenue, you are inevitably going to have a impact on your gross margin.

George Hill - Leerink Swann

With that recurring revenue, because you are selling more maintenance or back selling more maintenance or because you are selling licenses on an ASP basis?

Paul Holt

No, maintenance is coming from our license sales and then we also have EDI revenue, which were selling into our base, and that we had a nice pick-up there as well, but those specially EDI, they have lower currency margin.

George Hill - Leerink Swann

Okay thanks.

Operator

Your next question is from Sandy Draper with Raymond James.

Sandy Draper - Raymond James

My question actually has been answered or has been unanswered, but may be just a follow-up for I guess maybe Paul you gave the total number for the QSI revenue. Can you just repeat the system sales versus maintenance for QSI?

Paul Holt

I historically don't give that number out on the call, but (inaudible) stay tuned we are going get our Q file here shortly so you'll se it right there.

Sandy Draper - Raymond James

Okay great. Thanks.

Operator

Your next question is from Richard Close of Jefferies & Company.

Richard Close - Jefferies & Co

Yeah really quick, you guys mentioned with the systems sales up 11% I guess in the quarter, you mentioned something that, I don't think you touched on before in that add-on sales. Maybe I'm mistaken there, but did you say that was up 37% year-over-year?

Paul Holt

Yes.

Richard Close - Jefferies & Co

And I guess question there is, is that, maybe if you could look back on recent history is that an acceleration on existing customers coming back to purchase more or is that I guess you've thrown that out there just because of the new sales were somewhat delayed in the quarter.

Paul Holt

Well, you know add on license sales does tend to fluctuate from quarter-to-quarter and that's just a function of the existing customers who are coming back to us buy additional licenses, which we certainly appreciate, that maybe a little cause of that.

Greg Flynn

Sure 37% is a nice gain, but its one quarter over one other quarter. We do like to see add-on licenses grow and accelerate. I think its evidence that our systems are working for our existing customers and that's a good thing and the add-on orders are a good thing. We sell a lot of systems to large organizations some national scope that might start with a 100 or 200 and then get them deployed and as the systems work, they will hopefully come back and order many more licenses from us, so we hope to see a continuation of the growth in add-ons as we move forward.

Richard Close - Jefferies & Co

Okay. As a follow up to that, I would think that if you are selling more add on sales that would be possible higher margin business, am I wrong in thinking that that much of the implementation and the services side they already been taken care of?

Greg Flynn

You are correct. Add-on licenses are very high margins business.

Pat Cline

Although a lot of the add-on licenses can carry additional implementation services as well.

Richard Close - Jefferies & Co

And would that be because you are maybe going to a large clients, another clinic or another facilities so as to speak or?

Pat Cline

Yes, we have four examples, one customer that has facilities in 50 different markets across the country and they made purchases for a couple markets and if things go well, we’ll start rolling out additional markets, where they would contract back with us for training and project management services.

Richard Close - Jefferies & Co

Okay. And then, I guess on a different note, you mentioned several large, seven figure deals, and then also talking about the stock and maybe that lengthening some sales cycle a little bit. Would you say versus the March quarter, your fourth quarter, that the level of large deals has increased overall that you are seeing in the market?

Pat Cline

I think the number of large deal opportunities has increased somewhat over the last three or four, five months.

Richard Close - Jefferies & Co

Okay. Thank you very much.

Pat Cline

You are welcome.

Operator

You have a question from Robert Toomey with E.K. Riley Investments.

Robert Toomey - E.K. Riley Investments

Hi. Good afternoon.

Pat Cline

Good afternoon.

Robert Toomey - E.K. Riley Investments

Kind of new to your story here, just to learn a little bit more about this and I just have one question and that is, can you talk about what you view as the key forward indicators for the health of your business and how you think those are looking right now or how they look in the first quarter?

Pat Cline

Give me a little help with what, just try to help me characterize your question in a response relative to forward indicators. Are you looking at financial indicators? More fundamental market, macro indicators?

Robert Toomey - E.K. Riley Investments

Yeah. I would say both. The macro and fundamental market.indicators as well as just your own internal, just as a help, but you see it is healthy in your business.

Pat Cline

Okay.

Robert Toomey - E.K. Riley Investments

To your customers?

Pat Cline

Well, obviously, revenue growth over a period of time is a key indicator, revenue growth relative to both new customer business and the existing customer. As we’ve discussed, the number of new licenses again not so much on a quarter-over-quarter basis, but over a period of time might be also used as an indicator. Relative to the market, I think there are lots of things going on, we discussed briefly the relaxation and the Safe Harbor regulations. There is also the certification of systems that has been a little bit of a driver there is a movement toward paper performance that is being physicians and health organizations more for rendering and reporting better quality, I think the results that are being achieved by our customers and by customers of others in the marketplace continues to be a driver and something that we want continue to achieve and continue to watch. Does that help?

Robert Toomey - E.K. Riley Investments

It does, I would cross the question with the comments you made about some of your costs going up in the quarter relating to payroll, training, and those sorts of things. Is that an indicator or reflection that you are confident enough in your business to continue to stand at relatively higher levels to grow the business?

Pat Cline

Certainly, we are confident in the business, the company, its people, our products and we're also confident in the market. The market as I mentioned strong and growing, we are going to try to spend where our spending is prudent and make sure that we have a reasonable foundation to be able to scale revenue and be able to scale the profits in the future. And certainly, if we wanted to report a better quarterly profit number of year-over-year increase in profits or those types of things we couldn't scale back expenses not high or quite as many service people, trainers, implementation people and that would be -- we'd see a short term gain and it would be a very short sighted move, so as I mentioned we stand by the investments that we are making and we think we are positioning the company for sustained growth of top and bottom lines.

Robert Toomey - E.K. Riley Investments

Okay. Great and just a follow-up to that, did you see any significant changes in the competitive landscape in your view in the quarter?

Pat Cline

No not at all.

Robert Toomey - E.K. Riley Investments

Okay. Thank you.

Pat Cline

Thank you.

Operator

The next question is from the Jeff Smith with Sidoti & Company.

Jeff Smith - Sidoti & Company

Hi guys just hoping you just clarify the pipeline, what size and just the mix in there, what size practices are you typically seeing there, has anything shifted there?

Pat Cline

No major shift a few as I mentioned few more larger deals in the pipeline, a few more seven figure type deals in the pipeline than were in the pipeline three or four months ago. The pipeline continues to represent those deals that we feel are 50 where we are likely 50% or more likely to close the deal within a 120 days. We are happy with the up tick in the pipeline I don't think it was any one thing, we had some leads coming from the spring trade show season that I think are maturing at this point I think as I mentioned our market is getting stronger and I also think that we've improved our internally management processes a little bit over the last few months but we are happy with the increase in the pipeline.

Jeff Smith - Sidoti & Company

Okay. And just a follow-up. Besides from the larger deals that it swept for the next quarter. Was there any smaller deals do you see an increase on number of smaller deals that might have run in the quarter?

Pat Cline

No, no real change that we can see on the smaller side. And to clarify one thing that you just said it's certainly our hope that these deals swept to the current quarter but there is no guarantee. I feel confident that a couple of them at least will close in the current quarter, but I want to staff sure of saying that they'll welcome us.

Jeff Smith - Sidoti & Company

Okay thanks.

Paul Holt

Thank you.

Operator

Your next question comes from the line of Gene Mannheimer with Caris & Company. Gene your line is open.

Paul Holt

Next question.

Operator

Your next question comes from the line of Andrew Shapiro with Lawndale Capital. Andrew your line is open.

Andrew Shapiro - Lawndale Capital

No it's not.

Paul Holt

I can hear you now Andy.

Andrew Shapiro - Lawndale Capital

Okay, great thanks. Forgive me everybody to the call, if Lou had touched on this, but I noted that your second [largest] shareholder and Director Hussein and you're largest shareholder Razin, I guess, they're at it again, I wanted to understand what the nature of the current dispute is that you guys formed the special committee to deal with litigation and voting matters at this weeks annual meeting and the same amended is 13-B filing, I guess alleging or threatening some type of dispute can you summaries this for me?

Lou Silverman

Yes Andrew this is Lou, I would -- a couple of clarifications I would make to your questions. It is factual that Mr. Hussein filed a 13-B. You mentioned he had amended it, I am only aware of the one that he filed, but there's an amendment to that I haven't seen at what he filed.

Andrew Shapiro - Lawndale Capital

But there's technically is an amendment to his prior 13-B?

Lou Silverman

Thank you for clarification, to suggest that it's, Mr. Hussein going out with Mr. Razin that your characterization and one that …

Andrew Shapiro - Lawndale Capital

Or it's the company, you've got some dispute again?

Lou Silverman

Yes and I think that -- he filed his 13B, we filed an 8-K a couple of days later, Mr. Hussein on the Tuesday. I don't make it a habit of speak for Mr. Hussein, nor need to for that matter, but he has issues seem to revolve around these settlement agreement and certain elements of the settlement agreement that was executed between himself and the company about a year ago. Principally, it seem to revolve around the retention of Board Council which is truly laid out the issues, specifically laid out in the settlement agreement that was publicly filed at the time of assigning. And that's as good as summary I can give you, it's -- you know he put out a 13-B D, and we put out an 8-K to try clarify a couple of items and provide at the company's response, towards 13-B and we have our annual shareholder meeting later on this week on Wednesday.

Andrew Shapiro - Lawndale Capital

That's right. If your expectation at else notice and given the cumulative voting rights are exercised by Mr. Hussein that he has nominated alternative candidates.

Lou Silverman

I am not aware of any announcement to that effect and therefore in terms of any expectation I have one way or the other and I am not aware of anything at this point of time. And I am going to be at the meeting, Mr. Hussein will be and the other board member will be and we will take it -- take that out, but I am not aware of any disclosure that Mr. Hussein has made in terms of any intentions that he has for this meeting.

Andrew Shapiro - Lawndale Capital

Alright. I would also call up.

Lou Silverman

The settlement agreement has made pages long as not, 50 pages long but its six or eight pages long and I would encourage those who are interested to review that, if you have particular questions about anything to do with that agreement, I think it speaks fairly clearly on a number of topics.

Andrew Shapiro - Lawndale Capital

Well thank you, didn't I say that would be on the same case one of your...

Lou Silverman

Thank you Andy.

Operator

Next question is from [Doug Kinouse from Kinmar]

Doug Kinouse - Kinmar

Good afternoon. I just noticed that the accounts receivable accounted in the deferred revenue account, I'm trying to continue to diverge on an absolute basis. And I was wondering (inaudible) expect better maybe a little bit more of a source of cash or how that's going to work.

Lou Silverman

When you say diverge, you mean, I am not sure.

Doug Kinouse - Kinmar

I mean deferred revenue is not going up nearly as fast as they are at.

Paul Holt

Well part of the AR that we have expensed over the last several periods have been during the course of the growth we've had in revenues. But I am not sure I can as much more to say better than what we have reported in our numbers.

Paul Holt

And [Wayne] You may know or may not know we don't give out forward guidance in terms of top or bottom line performance or really any other element to the about our income statement or balance sheet. So it is hard for us to project for you what the numbers are going to look like.

Doug Kinouse - Kinmar

Well I am aware that you don't give guidance and stuff but I am just curious to just the general nature of the trajectory because those counts on how they may work with each other. Is there – maybe it's a bigger deal they require the different booking or a different cash component upfront or.

Paul Holt

Just in general, when we -- on our system sale we were typically have, implementation services for example, that are deferred in and so you'll have them announced, they are included in both those categories, accounts receivable and differed revenue and in this past quarter you saw an increase in both account receivable and differed revenue.

Doug Kinouse - Kinmar

Okay. Thank you.

Operator

You have a question from Gene Mannheimer with Caris & Company.

Gene Mannheimer - Caris & Company

Thanks. Can you hear me now?

Pat Cline

Yes Eugene.

Paul Holt

Yes.

Gene Mannheimer - Caris & Company

Great, thank you. With respect to the revenue numbers, I noticed this is the first sequential decline in revenue since your December '05 quarter in which you had deferred some revenue out of the quarter related to Siemens contracts. Was this more of the same type of pattern this quarter? Thank you.

Paul Holt

No, I would say that quarter that you referenced has a much more unique situation and one that in general terms didn't repeat itself in the current quarter.

Gene Mannheimer - Caris & Company

Okay. So, it sounds like it was more of function of what Pat had talked about earlier, about some large deals getting differed.

Paul Holt

Not differed. I wouldn't suggest the word differed. I think he said we will forecast the close and didn't.

Gene Mannheimer - Caris & Company

Okay, very good. And in terms of the pipeline, you mentioned it's grown out to over $80 million within the NextGen division. Could you just remind us of what it was last quarter? Thanks.

Pat Cline

I think it was a little bit over $70 million in the prior quarter.

Gene Mannheimer - Caris & Company

Okay, and are you able to divulge to what percent of the pipeline is physician practices with under doctors?

Pat Cline

I don't have that information in front of me. I hope we would disclose it if I had it.

Gene Mannheimer - Caris & Company

Okay. Thank you.

Pat Cline

Thank you.

Operator

We have a question from Joseph Craigen with Citizen.

Joseph Craigen - Citizen

Thanks for taking my questions. First off in the seven figure deals, and so we don't get hung up on some metrics, whether it gets over the seven figure mark now on large deals. How many large deals closed this quarter versus last quarter?

Greg Flynn

Well, I don't want to get into that either, but we certainly would have liked to see a couple more of those deals, large ones close. I don't want to get into reporting the number of large deals or medium size deals, the small deals in any particular quarter. And frankly it's not a function where we are sort of lending off blame or a decline sequentially in revenue onto these deals. We had some deals that we thought that we would be able to close. We had a fair number of them, and we are in the unfortunate situation where $1 to $2 million deal can swing earnings by $0.04 or $0.05. In this quarter its unfortunate, another it maybe fortunate. To give a little more texture of there wasn't any particular reason that all these deals moved. It wasn't all stock related. It wasn't all longer decision making processes or those types of things.

One customer required funding related to a grant -- approval for funding related to a grant. Another one's contract negotiation was just more protracted than we had hoped for. We think that agreement will be in the door over the next couple of days, although, again there is no guarantee of that. It's an agreement where we've been awarded vendor of choice and we're just trying to reel it in. I think another one off the top of my head ran into some internal political headwind that we weren't able to overcome with that customer.

So it's not one situation like the Siemens revenue a year ago getting, roughly a year-ago getting moved from one quarter to another, it's just a lot of these kinds of things. Again, we would have liked to see more of these large deals come in and we'll have to get up the bed again this quarter and take our swings.

Joseph Craigen - Citizen

Still that one that you expect to come in, and actually did, that would be the first of the four or five deals that would come in this quarter?

Greg Flynn

I believe so.

Joseph Craigen - Citizen

Okay, and lastly just could to give us some ball park here. What typically are we talking about five large deals that go to 10 to 15, what roughly is the normal number of large deals that you close each quarter, understanding that but

Greg Flynn

Two to four.

Joseph Craigen - Citizen

I am sorry.

Greg Flynn

Two to four.

Joseph Craigen - Citizen

Two to four, thank you.

Lou Silverman

Thank you.

Operator

Your next question is from George Hill with Leerink Swann.

George Hill - Leerink Swann

Hey guys, back again. Pat, just a clarification, if add-on sales were up 37% in the quarter, does that mean sales to new customers in the quarter were actually down?

Pat Cline

Paul, do you have that information in front of you?

Paul Holt

Yeah, repeat the question please?

George Hill - Leerink Swann

Are add-on sales to existing customers worth 37% in the quarter? Does that detail to new customers or DENOVO customers who are actually down year-over-year? And I guess the next -- if the answer to that question is yes, the follow-up question would be, is there something, we saw this issue before, is there something in the sales compensation package that [incentifies] people to go back at low hanging fruit in the installed customer base?

Lou Silverman

We are about even, there are some moving parts there, but I would characterize this as being pretty close to even on the new front versus the -- the new systems sales front versus add-on licenses, as to you how people are compensated and Paul, can you elaborate a little bit, a bit more on that?

Paul Holt

The answer to that part of the question, no, there wasn’t any changes in the compensation program over the last few months that will cause our sales people to only go after low hanging fruit.

George Hill - Leerink Swann

Okay. And one more question. Of the four to five large deals that company Peter referred to, can you talk about how many of them are Stark related? So, I guess, how many of them are large, or do you characterize these as deals that are more specific for large standalone physician practices? Or are they, are you seeing larger deals that are more related to Stark related purchasing? And hospitals having influence over the practicing physicians?

Greg Flynn

I wish I could answer that question, but it’s tough for me to crawl inside the heads of the prospect being few levels of people removed from many of these to know that one customer was purchasing because of the Stark relaxation, in other words purchasing for another reason. Paying attention to the overall, the macro issues of market, again we see an uptake in the interest, we think it is more coming in to the pipeline, because of the relaxation of Stark, there has been a pickup in the interest coming from the seven figure sized deals or prospects, but of the four or five, it would be impossible for me to tell you how many are Stark related.

George Hill - Leerink Swann

Okay. So then the assumption that Stark is driving is really just an assumption though? Can you make it more?

Greg Flynn

I don’t think so.

George Hill - Leerink Swann

Okay. Thank you.

Operator

You have a question from Charles Rhea from CIBC World Markets.

Charles Rhea - CIBC World Markets

Yeah. Thanks. I just had a quick clarification regarding the pipeline for NextGen, you talked about the $80 million in a quarter, I think it was about one last quarter. Is it fair to say that the difference here is largely the deals that we are talking about? That kind of slipped?

Pat Cline

Again, without getting into a lot of detail and trying to characterize into small, medium and large, we see a couple more large deals in the pipeline, but a fair number of small and medium size as well.

Charles Rhea - CIBC World Markets

Okay. That and then maybe can follow-up just understanding mechanics of how you deal with your pipeline is that fair to say that as soon as you close, lets say some of these deals that you had hoped to close sooner, that comes out of the pipeline and impossibly you could see a sequentially down tick in pipeline?

Paul Holt

Well, that is periodically possible, it has not happen yet, we close deals every quarter and we haven't seen a big decline in pipeline in any given quarter in recent history. Theoretically possible, but we think what we are doing with our marketing campaigns and the way the market is going and as I mentioned continuing to grow that I personally would not expect a big downturn in the pipeline number.

Charles Rhea - CIBC World Markets

Okay. So that is that fair to say that just in generally your pipelines you look at it, there is been no real changes to the mix to your pipeline and other than to say that maybe there is been a little bit more interest on the large side, but it just happened, we are just seeing this four to five deals slip just because for whatever circumstances, but none like we had a bigger number of deal this particular quarter than previous quarters?

Paul Holt

I think that’s fair to say.

Charles Rhea - CIBC World Markets

Okay, thank you.

Paul Holt

Thank you.

Operator

We have a follow-up from Richard Close with Jefferies & Co

Richard Close - Jefferies & Co

Yes. You had mentioned adding sales people but you also talked a little bit about adding people on the implementation staff, I just curious if you could give us the headcount for the under the quarter or maybe talk a little bit about the state of your implementation team? And then as a follow-up to that would be if you can just sort to talk about the pricing environment whether customers are getting extra, I guess a difficult to deal with on price demanding lower prices and just how competitive the market is on price?

Lou Silverman

Richard this is Lou, I'll start here. In terms of the overall headcounts I am just looking at that here see if I have it, at the end of the quarter for the company as the whole headcount was 670. We have not broken that out on a department by department basis. Although as Pat alluded to, the company has tried and I think by and large succeeded in trying to make strategic investments in key departments of which sales and implementation and there were many other department as part of that mix. So we have not today taken out a number of people by department and I think we are going to continue with that practice on a forward basis. Pat why don't you pick up the rest of that if you'd like.

Pat Cline

Yes. I'll just repeat that we do continue to grow our implementation and training staff to keep up with present than what we hope will be future demand. On the last part of your question and that is do we see increased pricing pressure or pressure to lower our prices we as I have mentioned on a couple of prior calls have seen our competitors get more aggressive with pricing thus far we have not had to react to that pressure in any big way.

We try not to react, but rather to make sure that our sales people are trained to sell value and trained to talk about return-on-investment on those types of things. Fortunately for us there's a good upside of the market that is sophisticated enough to know that they should be looking at return-on-investment and not just cost and looking at the value of the system and not just the price of the system. We will lower the price of the system from time-to-time when we feel that it's strategically important to do so where a highly competitive situation a customer that makes good sense for us, but on an overall basis, no, we haven't seen a lot of need to drop our prices.

Richard Close - Jefferies & Co

Okay, thank you.

Pat Cline

Thank you.

Operator

We have a question from Sandy Draper with Raymond James.

Sandy Draper - Raymond James

Thank you very much. Just a quick follow-up to a couple of questions have gone I apologize for beating us force to death. But Pat I just want to be clear in the pipeline going from 70 to 80, these larger deals I would not anticipate would be deals that are coming in the pipeline and close in three months. And so I’m trying to make sure I understand correctly that you had big step-up in pipeline but it does necessarily mean that these deal jumped into the pipeline cause again the sales cycle what I would imagine we took too longer not within the quarter and said I just want to make sure the overall pipeline is building not that details of jump in?

Pat Cline

Two things, one the overall pipeline is building, as again the market heats up we had leads from the spring trade show season maturing in a couple of things that I have mentioned but one other clarification that is -- it is very possible for a couple million dollar deal to pop on to the pipeline and close within a months or two or three, and that would be deal to an existing another sale or add on license to an existing customer that again might want to roll out in other markets or has finished a pilot of 100 providers and now wants to move to something more substantial. So those can close relatively quickly.

Sandy Draper - Raymond James

Okay and then now just Paul can you give me bad debt number and also an up take I’ve got the unbilled or undelivered maintenance in services revenue? Thanks.

Paul Holt

Okay we -- I think I have reported on the growth – and then saw the absolute numbers on differed revenue that’s in accounts receivable but I have that number available, its 20 its going to be in the queue as well but 24,951 million is an undelivered software implementation made and what not. And the bad debt figure is $187000 is the net debt and our statement cash flow those two got in the queue as well.

Sandy Draper - Raymond James

Thank you.

Pat Cline

Thanks.

Operator

Your next question is from Constantine Davides, SIG.

Constantine Davides - SIG

Thanks, we’d sounded like you talked about maybe it's slightly more favorable interest in that acquisition. Can you maybe just add a little bit of color on your thinking behind that specifically are you looking at considering tuck ins or any reasonably priced deals of any size?

Pat Cline

Yes, thank you for asking for the clarification there. I did reference a nominally expanded interest expressed or I brought it in most recent meeting, and the reason that I put that into my comments and most, its not every quarter give people a little bit of a calibration on where we are because it’s a topic that people have been interested in quarter in and quarter out. I think it’s important to not have this become a bigger than it is type of a comment. We have been at a place where from our discussion with the board, the management team has been focusing almost exclusively on our organic growth, we certainly have looked in curiously and with interest any deals that have been brought by two of our investment western bankers, we haven't moved off of that all that much other than for the first time in a while there has been a little more positive discussion at the board level concerning the potential of subordinate members, the non management members of the Board in exploring potential acquisition opportunity.

In terms of what specifically that's going to mean to our acquisition pipeline and activities, I think it's a little early to be able to characterize that and again I think its moving from a very low level, to a relatively low level of focus on that particular area that includes the slight recalibration was worth noting and I mean I did that. As I have mentioned over many discussions with many investors, the type of acquisitions that could potentially be of interest to our company, very widely that it could be tuck-in acquisition, they could be product extension, market share acquisition there is a discreet list of types of things that would make sense for us but again I think the headline here is that it's bit premature to anticipate that any acquisition is evincing us within the near-term future.

Constantine Davides - SIG

Okay. Great. And then, Pat, just in terms of some of the new contracts you closed in the quarter. Anything notable in terms of mix, combination deals, Practice Management, EMR, is there anything in the like?

Pat Cline

No, notable change.

Constantine Davides - SIG

Thanks for the color guys.

Pat Cline

Thank you.

Operator

We have a follow-up from George Hill with Leerink Swann

George Hill - Leerink Swann

Hey, guys. Maybe third times the charm here. Now, with the addition of deployment capacity, Lou, tell me if I remember the strength the often the company's cash collections are tied to deployments in [goal lines]?

Lou Silverman

Well we our payment terms often will have milestone event as low as the date so if the milestone is then occurs before the date then we will those monies come to sooner if not we have the date.

George Hill - Leerink Swann

Okay would it be reasonable for investors to assume that the increase in deployment capacity could lead to a reduction in DSOs?

Lou Silverman

There are many moving parts, this is Lou, George. Many moving parts to the DSO calculations George. So it will be sensitive to revenue levels, it would be insensitive to any deferred revenue totals there, I think it's fair to say that there are enough moving parts for that calculations. So that it would be a little bit just a genuine for us to say there is one factor that's likely to drive the calculation in one particular direction or another, again there is a lot of moving parts to that calculation its not a complex calculation, it's just a there's a lot of different inputs to it.

George Hill - Leerink Swann

Okay and last question would be regarding the company's I'll say M&A discussions at the Board level is there any chance that these discussion would ever involve the sale of the company?

Lou Silverman

We don't comment on that exactly George, I think the honest answer for that would be is there any chance I suppose there is some chance, but we haven't and won't respond to any of our merger any of that stuff but the Board is always only trying to do responsible job in carrying ourselves carrying themselves, carrying it's due share of the responsibility.

George Hill - Leerink Swann

Okay thank you.

Operator

We have a follow up from Atif Rahim with J.P. Morgan.

Atif Rahim - J.P. Morgan

Hi I am curious if you guys could provide any more detail on the relationship between your quarterly due fine and the profitability. So, for example if you have a million dollar deal, what the financial revenue would be recognized in the quarter, just generally speaking, and what's the earning of that from that is possible. Could you elaborate on that?

Lou Silverman

Yeah, that can vary somewhat. That really depends on what's included in that deal, how much of that deal will constitute services or perhaps frequent maintenance periods or what's in the mix? That can effect how much of a deal may be characterized as revenue. There's a lot of issues and factors and things to consider when you are looking at revenue recognition for a software arrangement. So, I guess the bottom line is that can vary quite a bit depending upon the nature of the transaction.

Atif Rahim - J.P. Morgan

Could you provide perhaps an average of maybe the larger deal you signed over last few quarters what that looked like?

Lou Silverman

Well, I have to give you a very large range if pushed; I mean it could anywhere from low end 30% to 40% of a deal to maybe 75%. I mean its going to vary quite a bit.

Atif Rahim - J.P. Morgan

Okay. And the cost associated with this revenue that you recognized in the quarter, is it just commissions or would there be other costs?

Lou Silverman

Well, its hardware, it includes -- if the deals include hardware we will have those costs and of course there is commission, later expenses that go in to that as well. Those are your big moving parts in terms of initial arrangement; of course there are implementation services, and those costs get recognized along with the revenue as the services get rendered.

Atif Rahim - J.P. Morgan

Okay. Well, thank you I appreciate the color.

Lou Silverman

Thanks.

Operator

(Operator Instructions) We have a follow-up from Richard Close with Jefferies & Company.

Richard Close - Jefferies & Company

Yes, just as a follow-up with respect to the large deal discussion, Pat, I think you threw out the example of a $2 million deal, is that fair to say that one of those is $2 million plus that are hanging out there?

Pat Cline

I don’t think I am going to go into that detail on this call.

Richard Close - Jefferies & Company

Okay.

Pat Cline

We will though typically have in our pipeline and deals that are $2 million plus.

Richard Close - Jefferies & Company

Okay, and then with respect to legal costs, just to go over the expense of that in the June quarter, did you give that exact number or I think you said 23 or something like that increase, was that in a sequential or maybe what are the lead flow costs in the fourth quarter, March quarter and in the June quarter?

Pat Cline

We don’t give the actual tally of our legal expense bill. We don’t go into that without a little detail, what I did mention was on a sequential basis, that part of the drop of SG&A was $0.3 million in legal expenses.

Richard Close - Jefferies & Company

Okay, part of the sequential drop, okay. And then, should we expect additional legal costs incurred, and I know you don’t give the guidance but should we expect a continuation of legal costs into the second quarter related to the SEC situation, and then with the board situation that's taken place?

Pat Cline

In terms of the overall legal expense number Richard, you painted the picture I think accurately, I mean, its very hard to forecast at any given point in time. What issues may or may not come up until what levels they may or may not come up. I think it is fair to say that we talked on the last call about the fact that the company has incurred in expense related to, our response to the SEC fees, as well as the company’s internal investigation of that matter.

We’ve talked about the fact that the company’s internal investigation was completed, I believe in June or sometime in the June quarter at least, but I think it was June. In terms of any going forward legal expenses, I think the conservative thing would be to say that we may have some, but in terms of and certainly big picture, we always have legal expenses and again what depends on, it depends on what issue comes up, or what issue come up that we are working on. So on any one particular item the expenses can go up or down obviously, but in aggregate and this is very hard to forecast with any certainty at all, in terms of exactly what are the quarterly expenses it can be higher or lower than another.

Richard Close - Jefferies & Company

Okay. I appreciate your help there.

Pat Cline

Thanks.

Operator

There are no questions at this time.

Lou Silverman

Alright. Thank you, operator and thank you to all of those joining us on today’s call. Good afternoon.

Operator

This concludes today’s conference call. You may now disconnect.

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