NEXTGEN HEALTHCARE, INC. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Report") and certain information
incorporated herein by reference contain forward-looking statements within the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. All statements included or incorporated by reference in this Report, other
than statements that are purely historical, are forward-looking
statements. Words such as "anticipate," "expect," "intend," "plan," "believe,"
"seek," "estimate," "will," "should," "would," "could," "may," and similar
expressions also identify forward-looking statements. These forward-looking
statements include, without limitation, discussions of the impact of the
COVID-19 pandemic and measures taken in response thereto, as well as our product
development plans, business strategies, future operations, financial condition
and prospects, developments in and the impacts of government regulation and
legislation and market factors influencing our results. Our expectations,
beliefs, objectives, intentions and strategies regarding our future results are
not guarantees of future performance and are subject to risks and uncertainties,
both foreseen and unforeseen, that could cause actual results to differ
materially from results contemplated in our forward-looking statements. These
risks and uncertainties include, but are not limited to, our ability to continue
to develop new products and increase systems sales in markets characterized by
rapid technological evolution, consolidation, and competition from larger,
better-capitalized competitors. Many other economic, competitive, governmental
and technological factors could affect our ability to achieve our goals, and
interested persons are urged to review any risks that may be described in "Item
1A. Risk Factors" as set forth herein and other risk factors appearing in our
most recent Annual Report on Form 10-K for the fiscal year ended March 31, 2020
("Annual Report"), as supplemented by additional risk factors, if any, in our
interim filings on our Quarterly Reports on Form 10-Q, as well as in our other
public disclosures and filings with the Securities and Exchange Commission
("SEC"). Because of these risk factors, as well as other variables affecting our
financial condition and results of operations, past financial performance may
not be a reliable indicator of future performance and historical trends should
not be used to anticipate results or trends in future periods. We assume no
obligation to update any forward-looking statements. You are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the
date of the filing of this Report. Each of the terms "NextGen Healthcare ,"
"NextGen," "we," "us," "our," or the "Company" as used throughout this Report
refers collectively to NextGen Healthcare, Inc. and its wholly-owned
subsidiaries, unless otherwise indicated.
This management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to the condensed consolidated
financial statements and notes thereto included elsewhere in this Report in
order to enhance your understanding of our results of operations and financial
condition and should be read in conjunction with, and is qualified in its
entirety by, the condensed consolidated financial statements and related notes
thereto included elsewhere in this Report. Historical results of operations,
percentage margin fluctuations and any trends that may be inferred from the
discussion below are not necessarily indicative of the operating results for any
future period.
Company Overview
NextGen Healthcare is a leading provider of software and services that empower
ambulatory healthcare practices to manage the risk and complexity of delivering
care in the rapidly evolving U.S. healthcare system. Our combination of
technological breadth, depth and domain expertise makes us a preferred solution
provider and trusted advisor for our clients. In addition to highly configurable
core clinical and financial capabilities, our portfolio includes tightly
integrated solutions that deliver on ambulatory healthcare imperatives
including: population health, care management, patient outreach, telemedicine
and nationwide clinical information exchange.
We serve clients across all 50 states. Our approximately 100,000 providers
deliver care in nearly every medical specialty in a wide variety of practice
models including accountable care organizations ("ACOs"), independent physician
associations ("IPAs"), managed service organizations ("MSOs"), Veterans Service
Organizations ("VSOs"), and Dental Service Organizations ("DSOs"). Our clients
include some of the largest and most progressive multi-specialty groups in the
country. With the recent addition of behavioral health to our strong medical and
oral health capabilities, we continue to extend our share not only in Federally
Qualified Health Centers ("FQHCs"), but also in the emerging integrated care
market.
NextGen Healthcare has historically enhanced our offering through both organic
and inorganic activities. In October 2015 , we divested our former Hospital
Solutions division to focus exclusively on the ambulatory marketplace. In
January 2016 , we acquired HealthFusion Holdings, Inc. and its cloud-based
electronic health record and practice management solution. In April 2017 , we
acquired Entrada, Inc. and its cloud-based, mobile platform for clinical
documentation and collaboration. In August 2017 , we acquired EagleDream Health,
Inc. and its cloud-based population health analytics solution. In January 2018 ,
we acquired Inforth Technologies for its specialty-focused clinical content. In
October 2019 , we acquired Topaz Information Systems, LLC ("Topaz") for its
behavioral health solutions. In December 2019 , we acquired Medfusion,
Inc. ("Medfusion") for its Patient Experience Platform (i.e., patient portal,
self-scheduling, and patient pay) capabilities and OTTO Health, LLC ("OTTO") for
its integrated virtual care solutions, notably telemedicine. The integration of
these acquired technologies has made NextGen Healthcare's solutions among the
most comprehensive and powerful in the market.
Our company was incorporated in
26
--------------------------------------------------------------------------------Industry Background, Regulatory Environment, and Market Opportunity
We believe that the trends and events described below have contributed to our consolidated results of operations and may continue to impact our future results.
Over the last decade, the ambulatory healthcare market has experienced significant regulatory change, which has driven the need for improved technology to enable practice transformation. Recognizing it was imperative to digitize the American health system to stem the escalating cost of healthcare and improve the quality of care being delivered,Congress enacted the Health Information Technology for Economic and Clinical Health Act in 2009 ("HITECH Act"). The legislation stimulated healthcare organizations to not only adopt electronic health records, but to use them to collect discrete data that could be used to drive quality care. This standardization supported early pay-for-reporting and pay-for-performance programs. In 2010, the Affordable Care Act ("ACA") established the roadmap for shifting American healthcare from volume (fee-for-service) to a value-based care ("VBC") system that rewards improved outcomes at lower costs (fee-for-value). This was followed by the Medicare Access and CHIP Reauthorization Act of 2015 ("MACRA"), bipartisan legislation that further changed the way Medicare rewards clinicians for value vs. volume. Initially focused on government-funded care, the domain of theCenters for Medicare & Medicaid Services ("CMS"), these programs are now firmly established on the commercial insurance side of the industry as well. VBC created the need for a new category of healthcare information technology ("HIT") tools that could be used to identify and treat groups of patients, or cohorts, based on risk. Population Health Management ("PHM") tools support these needs by identifying patient risk, engaging patients, coordinating care, and determining when interventions are needed to improve clinical and financial outcomes. According to estimates fromFrost & Sullivan inMay 2020 , the United States PHM market is expected to reach$9.4 billion in total revenue by 2022, representing a compound annual growth rate ("CAGR") of 28% from 2017. Importantly, the introduction of VBC programs was only an element of the broader approach to reducing healthcare expenditure. It was also accompanied by significant reductions in Medicare spending with a projected reduction of$253 billion in payments by 2029, as reported by RevCycle Intelligence inOctober 2019 . The drive to reduce costs initially led to consolidation in the healthcare system that was followed by a significant shift of care from the inpatient to lower cost outpatient setting. Ambulatory surgery centers (ASCs) have become an essential component of comprehensive, low cost distributed care. According to anOctober 2019 report from ResearchandMarkets, ASCs continue to perform more than half of allU.S. outpatient surgical procedures and are expected to see greater volumes as the number of outpatient procedures increases by an estimated 15% by 2028. From 2015 to 2022, the proportion of outpatient cases performed in ASCs is expected to increase across most service lines with the largest jump (10%) to occur in spine procedures. Among other factors, consumerism is set to play a major role in driving ASC volume increases, as procedures performed in ASCs cost an average of 58% less than the same procedure in a hospital outpatient department. The need to sustain revenue has made it extremely important for practices to secure their patient market share, elevating patient loyalty to a significant determinant of provider success. In addition to being loyal, groups participating in value-based contracts realized that patients also needed to be engaged in their care and interested in improving their own health. The need to attract, retain and engage patients has made patient experience one of the most important aspects of evolving care delivery inthe United States . Capturing patient market share and thriving in a market driven by VBC requires both an integrated platform and a full view of the patient population's clinical and cost data, neither of which could be accomplished without new technologies to collect and analyze multi-sourced patient data. Effectively implemented, these new technologies allow organizations to enhance financial viability while exercising the freedom to join, affiliate, integrate or interoperate in ways that maximize strategic control. Although the HITECH Act led to the successful adoption of electronic health records, many in the healthcare industry were dissatisfied with the level of exchange of health information between different providers and across different software platforms. With the passing of the MACRA law in 2015, theU.S. Congress declared it a national objective to achieve widespread exchange of health information through interoperable certified EHR technology. Then, inDecember 2016 , the 21st Century Cures Act ("Cures Act") was passed and signed into law. Among many other policies, the law includes numerous provisions intended to encourage nationwide interoperability. InMarch 2020 , theHHS Office of the National Coordinator for Health Information Technology ("ONC") released a final regulation which implements the key interoperability provisions included in the Cures Act. The rule calls on developers of certified EHRs to adopt standardized application programming interfaces ("APIs") and to meet a list of other new certification and maintenance of certification requirements in order to maintain approved federal government certification status. The ONC rule also implements the information blocking provisions of the Cures Act, including identifying reasonable and necessary activities that do not constitute information blocking. Under the Cures Act, HHS has the regulatory authority to investigate and assess civil monetary penalties of up to$1,000,000 against certified health IT developers found to be in violation of "information blocking." The new regulations will require significant compliance efforts for healthcare providers, information networks, exchanges, and HIT companies. However, CURES also creates opportunities for improving care delivery and outcomes through increased data exchange between providers, and easier patient access to their own health information. Key to unlocking these benefits is the introduction of new Fast Healthcare Interoperability Resources ("FHIR") standards. ONC's goal is for certified HIT companies to adopt FHIR-based API standards. Meanwhile, CMS is requiring hospitals to provide electronic admission, discharge and transfer notification to other healthcare facilities, providers and designated care team members. 27
-------------------------------------------------------------------------------- Through the expansion of our NextGen® Share interoperability services platform and API partner marketplace, we will address the increased demand for moving and sharing patient data from the EHR easily, quickly and securely. Interoperability improves patient experience and care coordination, enhances patient safety, and reduces costs. We are also expanding resources such as educational webinars, blogs and videos on interoperability to help educate and support healthcare providers. In recent years, there has been incremental investment to improve the delivery of behavioral healthcare. One of the central drivers of this investment has been the opioid epidemic which claims more than 70,000 lives a year inthe United States . The integrated care model previously prevalent mainly in FQHCs, a model which calls for integration of behavioral health and primary care in single care settings, has also gained momentum. Both behavioral health and the integrated care workflows require broad, purpose built, tailored HIT capabilities, many of which are supported by the NextGen platform.
Based on these trends, successful clients must undertake the following imperatives:
1. Manage patient experience and engagement 2. Align incentives and energize clinicians 3. Maximize and shape financial outcomes 4. Assume risk and drive commercial advantage 5. Optimize workflows with data exchange
Our Strategy
We empower the accelerating transformation of ambulatory care by delivering solutions that enable groups to be successful under all models of care, including emerging value-based care in which providers assume risk while minimizing risk. We primarily serve groups that focus on delivering care in ambulatory settings, and do so across diverse practice sizes, specialties, and business constructs. In addition to traditional medical specialties, we participate actively with groups that deliver oral (dental) and behavioral healthcare, and with those that combine these in the emerging model for integrated care.
Our configurability enables groups to drive commercial advantage with creative workflows for patient access, patient-provider interactions, clinical workflows and care coordination. At the same time, our automation helps drive variability and cost out of the back office by accommodating exacting regulatory, billing and reporting requirements. We embrace both the art and science of delivering healthcare in the transformingU.S. healthcare system. We believe that the ability to interoperate in a complex, heterogeneous healthcare ecosystem is one of the keys to providing great care and healthy financial outcomes. Because we interoperate with the major stakeholders across theU.S. healthcare system and power many of the nation's Health Information Exchanges ("HIEs"), we help keep patient data more secure, promote continuity of care, lower the cost of care delivery and perhaps most importantly improve the patient experience. We recognize that patient experience drives patient engagement and that engaged patients have better outcomes. Consequently, much of our activity over the last few years has been informed by the emergence of the patient as an active, involved consumer. Our solutions help our clients create a holistic, personalized care experience that drive loyalty and satisfaction. We surround our technical solutions with implementation and optimization services and provide business process outsourcing with managed hosting and revenue cycle management services. With some of our most sophisticated clients, we have been asked to share the breadth of our experience as they shape their strategies. We believe that this sort of engagement, acting as a virtual extension of our clients' leadership teams, is an important step along our journey to becoming a trusted advisor.
As one of the leading healthcare information technology players in the
• Be a learning organization and transform ahead of the industry
• Be a trusted advisor for our customers and prospects
• Deliver breadth, depth and configurability to enable our clients to
effectively execute their strategies
• Use automation to drive variability and cost from our clients' operations
• Drive real innovation in patient experience and patient-provider interactions
• Help our clients be recognized as interoperability leaders in their regions
and areas of specialty
• Integrate new capabilities (whether organic or inorganic) more quickly and
successfully than others.
28
--------------------------------------------------------------------------------
COVID-19 Update
In late 2019, the emergence of a novel coronavirus, or COVID-19, was reported and inJanuary 2020 , theWorld Health Organization ("WHO"), declared it a Public Health Emergency of International Concern. InMarch 2020 , theWHO escalated COVID-19 as a pandemic. We proactively responded to the pandemic by creating an executive task force to monitor the COVID-19 situation daily and immediately restricted non-essential travel and migrated to a fully remote workforce while maintaining complete operational effectiveness. Shortly thereafter, and in line with guidance provided by government agencies and international organizations, we restricted all travel, mandated a work-from-home policy across our global workforce, and moved all in-person client-facing events to virtual ones. Since the COVID-19 pandemic began, millions of cases and hundreds of thousands of deaths have been reported globally. In addition to the socioeconomic disruption caused by the pandemic, both treatment and suppression measures stressed the very fabric of theU.S. healthcare system in some geographies, exacerbating some of the existing challenges with capacity, balance and reimbursement. Among the measures to slow the spread of the disease and flatten the curve in line with healthcare system capacity was social/physical distancing. The need to access care while still social distancing was addressed early on with the limited use of virtual visits and was energized when the federal government reduced regulatory barriers and addressed payment parity between virtual and in-person visits. With these tailwinds, telemedicine quickly became regarded as a safer way for patients and providers to engage each other while also relieving economic pressure on the medical practice. We believe that the uptake of telemedicine will transcend COVID-19 and that virtual visits will become a permanent and important change in the way care is delivered. Keeping patients out of the transit system, out of the waiting room and away from other sick patients is simply good medicine. We also believe that ambulatory practices will emerge from the pandemic with a clearer appreciation of the importance of business continuity and will turn to NextGen more often for managed services. Consequently, we expect to see increased subscription of our revenue cycle management services, managed hosting, and our emerging capabilities for managed clinical and administrative services. Since themid-March 2020 timing of government orders to shelter in place and restrict non-essential medical services, the COVID-19 pandemic has caused declines in patient volume. This has negatively impacted our revenue in the fourth quarter of 2020, most notably for purchases of software and hardware. The impact of the disruption has impacted the first half of fiscal 2021 primarily in managed services and EDI, which are volume driven. Assuming the impact of the pandemic and related restrictive measures begin to subside late in the fiscal first half, we expect that patient volume and thus revenue will likely return to more normal levels throughout late fiscal 2021. Based on our overall financial health and the opportunity in front of us, we have made some important decisions on how to approach the first two quarters of fiscal 2021, which include executing cost reductions with a primary goal of mitigating COVID-19 based impacts to earnings. Most of these cost reductions are temporary as we believe that preserving our employee base, organizational momentum, and robust capabilities for the near future will be a win for the Company and our shareholders. We believe we are well positioned as volume begins to return in the second half of the year. The broader implications of the global emergence of COVID-19 on our business, operating results, and overall financial performance remain uncertain and it depends on certain developments, including the duration and spread of the outbreak, impact on our clients and our sales cycles, impact on our partners or employees, and impact on the economic environment and financial markets, all of which are uncertain and cannot be predicted. We are conducting business as usual with certain modifications to employee travel, employee work locations, and marketing events, among other modifications. We have observed other companies taking precautionary and preemptive actions to address COVID-19, and the effects it has had and is expected to have on business and the economy. We expect that our customers and potential customers will take actions to reduce operating expenses and moderate cash flows, including by delaying sales and requesting extended billing and payment terms. We will continue to actively monitor the situation and may take further actions that we determine are in the best interests of our employees, customers, partners, suppliers, and shareholders. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 atSeptember 30, 2020 and through the date of this Report. The accounting matters assessed included, but were not limited to, our allowances for doubtful accounts and the carrying value of goodwill and other long-lived assets. While there was not a material impact to our consolidated financial statements at and for the quarter endedSeptember 30, 2020 , our future assessment of the magnitude and duration of COVID-19, as well as other factors could result in material impacts to our consolidated financial statements in future reporting periods. 29 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth the percentage of revenue represented by each item in our condensed consolidated statements of net income and comprehensive income for the three and six months endedSeptember 30, 2020 and 2019 (certain percentages below may not sum due to rounding): Three Months Ended September 30, Six Months Ended September 30, 2020 2019 2020 2019 Revenues: Recurring 89.8 % 89.8 % 90.5 % 90.2 % Software, hardware, and other non-recurring 10.2 10.2 9.5 9.8 Total revenues 100.0 100.0 100.0 100.0 Cost of revenue: Recurring 37.8 37.5 38.1 37.9 Software, hardware, and other non-recurring 4.3 4.9 4.5 4.8 Amortization of capitalized software costs and acquired intangible assets 7.1 6.6 7.3 6.5 Total cost of revenue 49.2 49.0 50.0 49.2 Gross profit 50.8 51.0 50.0 50.8 Operating expenses: Selling, general and administrative 30.0 29.1 30.5 29.8 Research and development costs, net 12.6 14.7 13.3 15.7 Amortization of acquired intangible assets 0.8 0.6 0.8 0.7 Impairment of assets 0.0 1.4 0.0 0.9 Restructuring costs 0.0 0.1 0.9 0.7 Total operating expenses 43.4 46.0 45.6 47.7 Income from operations 7.4 5.0 4.5 3.1 Interest income 0.0 0.0 0.0 0.0 Interest expense (0.8 ) (0.3 ) (0.8 ) (0.3 ) Other income (expense), net 0.0 0.2 0.0 0.0 Income before provision for (benefit of) income taxes 6.5 4.9 3.7 2.8 Provision for (benefit of) income taxes (0.9 ) 0.4 0.1 0.0 Net income 7.5 % 4.5 % 3.6 % 2.8 % Revenues
The following table presents our disaggregated revenues for the three and six
months ended
Three Months Ended
September 30, Six Months Ended September 30,
2020 2019 2020 2019
Recurring revenues:
Subscription services $ 36,867 $ 31,411 $ 72,227 $ 61,555
Support and maintenance 38,076 39,360 76,623 79,012
Managed services 26,218 25,219 48,711 50,900
Electronic data interchange and data
services 24,530 24,599 47,652 48,569
Total recurring revenues 125,691 120,589 245,213 240,036
Software, hardware, and other
non-recurring revenues:
Software license and hardware 8,014 8,258 12,754 15,353
Other non-recurring services 6,297 5,409 12,914 10,728
Total software, hardware and other
non-recurring revenues 14,311 13,667 25,668 26,081
Total revenues $ 140,002 $ 134,256 $ 270,881 $ 266,117
Recurring revenues as a percentage of
total revenues 89.8 % 89.8 % 90.5 % 90.2 %
30
--------------------------------------------------------------------------------
We generate revenue from sales of licensing rights and subscriptions to our
software solutions, hardware and third-party software products, support and
maintenance, managed services, electronic data interchange ("EDI") and data
services, and other non-recurring services, including implementation, training,
and consulting services performed for clients
Consolidated revenue for the three months endedSeptember 30, 2020 increased$5.7 million compared to the prior year period due to a$5.1 million increase in recurring revenues and a$0.6 million increase in software, hardware and other non-recurring revenues. The increase in recurring revenues was due to a$5.5 million increase in subscription services and a$1.0 million increase in managed services, partially offset by a$1.3 million decrease in support and maintenance. EDI and data services remained consistent with prior year. The increase in subscription services was primarily due to growth in subscriptions associated with patient experience and telehealth platforms, including the incremental revenues from the acquisitions ofMedfusion and OTTO, our population health and analytics, and core NextGen cloud-based solutions. The increase in managed services revenue was primarily due to an increase in patient pay services revenue from our acquisition ofMedfusion , higher revenues from managed cloud services related to an increase in bookings, and higher revenue cycle management revenues. Support and maintenance decreased due to client attrition and our transition to a recurring subscription-based model. The increase in non-recurring services revenue was primarily driven by the completion of professional services projects. Consolidated revenue for the six months endedSeptember 30, 2020 increased$4.8 million compared to the prior year period due to a$5.2 million increase in recurring revenues, partially offset by a$0.4 million decrease in software, hardware and other non-recurring revenues. The increase in recurring revenues was primarily driven by a$10.7 million increase in subscription services, partially offset by a$2.4 million decrease in support and maintenance, a$2.2 million decrease in managed services, and a$0.9 million decrease in EDI and data services. The increase in subscription services was primarily due to growth in subscriptions associated with patient experience and telehealth platforms, including the incremental revenues from the acquisitions ofMedfusion and OTTO, our population health and analytics, core NextGen, and NextGen Office cloud-based solutions. The decrease in support and maintenance was primarily due to client attrition and our transition to a recurring subscription-based model. The decrease in managed services and EDI and data services was primarily the result of lower patient volumes directly associated with the COVID-19 pandemic. The decrease in software, hardware, and other non-recurring services revenues was due to a decrease of$2.6 million in software license and hardware revenue, partially offset by a$2.2 million increase in other non-recurring services. The decrease in software license and hardware revenue was primarily due to lower volume and size of software bookings, partially attributed to impact of the COVID-19 pandemic and our transition to a recurring subscription-based model. The increase in other non-recurring services revenue was primarily driven by the completion of professional services projects. Bookings reflect the estimated annual value of our executed contracts, adjusted to include the effect of pre-acquisition bookings, and are believed to provide a broad indicator of the general direction and progress of the business. Total bookings were$31.2 million and$36.9 million for the three months endedSeptember 30, 2020 and 2019, respectively. Total bookings were$56.8 million and$69.2 million for the six months endedSeptember 30, 2020 and 2019, respectively. The decrease in bookings for the three and six months endedSeptember 30, 2020 compared to the prior year primarily reflect lower bookings of revenue cycle management, partially offset by higher subscriptions bookings associated with our patient experience and telehealth platforms.
Cost of Revenue and Gross Profit
The following table presents our consolidated cost of revenue and gross profit for the three and six months endedSeptember 30, 2020 and 2019 (in thousands): Three Months Ended September 30, Six Months Ended September 30, 2020 2019 2020 2019 Cost of revenue: Recurring$ 52,906 $ 50,328 $ 103,335 $ 100,868 Software, hardware, and other non-recurring 6,083 6,563 12,124 12,841 Amortization of capitalized software costs and acquired intangible assets 9,961 8,843 19,860 17,256 Total cost of revenue$ 68,950 $ 65,734 $ 135,319 $ 130,965 Gross profit$ 71,052 $ 68,522 $ 135,562 $ 135,152 Gross margin % 50.8 % 51.0 % 50.0 % 50.8 % Cost of revenue consists primarily of compensation expense, including share-based compensation, for personnel that deliver our products and services. Cost of revenue also includes amortization of capitalized software costs and acquired technology, third party consultant and outsourcing costs, costs associated with our EDI business partners and clearinghouses, hosting service costs, third party software costs and royalties, and other costs directly associated with delivering our products and services. Refer to Note 8, "Intangible Assets" and Note 9, "Capitalized Software Costs" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information on current period amortization of capitalized software costs and acquired technology and an estimate of future expected amortization. 31
-------------------------------------------------------------------------------- As noted above, we announced inMay 2020 a move to reduce our perpetual license revenue in favor of recurring subscription revenue, which will impact our gross margin percentages as we will book less high-margin perpetual licenses than we have historically, but ultimately it will produce high-margin recurring revenue. When combined with incremental amortization of capitalized software costs and acquired intangible assets, it will further reduce our expected gross margin percentage. Share-based compensation expense included in cost of revenue was$0.6 million and$0.5 million for the three months endedSeptember 30, 2020 and 2019, respectively. Share-based compensation expense included in cost of revenue was$1.0 for both the six months endedSeptember 30, 2020 and 2019. Gross profit for the three months endedSeptember 30, 2020 increased$2.5 million compared to the prior year due to a$5.7 million increase in revenues as discussed above, offset by a$3.2 million increase in cost of revenue. Our gross margin decreased to 50.8% for the three months endedSeptember 30, 2020 compared to 51.0% in the prior year. Gross profit for the six months endedSeptember 30, 2020 increased$0.4 million compared to the prior year period due to a$4.8 million increase in revenues as discussed above, offset by a$4.4 million increase in cost of revenue. Our gross margin decreased to 50.0% for the six months endedSeptember 30, 2020 compared to 50.8% in the prior year. The increase in cost of revenue for the three and six months endedSeptember 30, 2020 compared to the prior year periods was due to higher cost of subscription services primarily related to higher hosting costs and higher salaries and benefits from increased employee headcount, higher cost of patient pay services related to the acquisition ofMedfusion , higher amortization of acquired intangible assets related to our acquisitions of Topaz,Medfusion , and OTTO, and higher amortization of previously capitalized software costs from the general release of development projects, partially offset by lower costs of revenue cycle management and EDI services due to lower transactional volume.
Selling, General and Administrative Expense
The following table presents our selling, general and administrative expense for
the three and six months ended
Three Months Ended September 30, Six Months Ended September 30,
2020 2019 2020 2019
Selling, general and administrative $ 41,950 $ 39,046 $ 82,687 $ 79,174
Selling, general and administrative, as
a percentage of revenue 30.0 % 29.1 % 30.5 % 29.8 %
Selling, general and administrative expense consist of compensation expense,
including share-based compensation, for management and administrative personnel,
selling and marketing expense, facilities costs, depreciation, professional
service fees, including legal and accounting services, legal settlements,
acquisition and transaction-related costs, and other general corporate and
administrative expenses.
Share-based compensation expense included in selling, general and administrative
expenses was $3.8 million and $3.0 million for the three months ended September
30, 2020 and 2019, respectively. Share-based compensation expense included in
selling, general and administrative expenses was $7.9 million and $6.4 million
for the six months ended September 30, 2020 and 2019, respectively. The increase
in share-based compensation for the six months ended September 30, 2020 compared
to the same prior year periods is due to increased utilization of share-based
awards to incentivize our executives and employees. Refer to Note 14,
"Share-Based Awards" of our notes to condensed consolidated financial statements
included elsewhere in this Report for additional information of our share-based
awards and related incentive plans.
Selling, general and administrative expenses increased $2.9 million and $3.5
million for the three and six months ended September 30, 2020 , respectively,
compared to the prior year periods. These increases were primarily due to
incremental personnel costs from our acquisitions and higher commissions
expense, increased legal fees associated with our ongoing shareholder litigation
matter, partially offset by decreases in travel and conferences and
infrastructure expenses.
32
--------------------------------------------------------------------------------Research and Development Costs, net
The following table presents our consolidated net research and development
costs, capitalized software costs, and gross expenditures prior to
capitalization, for the three and six months ended
Three Months Ended September 30, Six Months Ended September 30,
2020 2019 2020 2019
Gross expenditures $ 24,163 $ 24,955 $ 47,997 $ 51,741
Capitalized software costs (6,471 ) (5,166 ) (12,083 ) (9,901 )
Research and development costs, net
Research and development costs, as a percentage of revenue 12.6 % 14.7 % 13.3 % 15.7 % Capitalized software costs as a percentage of gross expenditures 26.8 % 20.7 % 25.2 % 19.1 % Gross research and development expenditures, including costs expensed and costs capitalized, consist of compensation expense, including share-based compensation for research and development personnel, certain third-party consultant fees, software maintenance costs, and other costs related to new product development and enhancement to our existing products. The healthcare information systems and services industry is characterized by rapid technological change, requiring us to engage in continuing investments in our research and development to update, enhance and improve our systems. This includes expansion of our software and service offerings that support pay-for-performance initiatives around accountable care organizations, bringing greater ease of use and intuitiveness to our software products, enhancing our managed cloud and hosting services to lower our clients' total cost of ownership, expanding our interoperability and enterprise analytics capabilities, and furthering development and enhancements of our portfolio of specialty-focused templates within our electronic health records software. The capitalization of software development costs results in a reduction to our reported net research and development costs. Our software capitalization rate, or capitalized software costs as a percentage of gross expenditures, has varied historically and may continue to vary based on the nature and status of specific projects and initiatives in progress. Although changes in software capitalization rates have no impact on our overall cash flows, it results in fluctuations in the amount of software development costs that may be capitalized or expensed up front and the amount of net research and development costs reported in our condensed consolidated statements of net income and comprehensive income, and ultimately also affects the future amortization of our previously capitalized software development costs. Refer to Note 9, "Capitalized Software Costs" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information on current period amortization of capitalized software costs and an estimate of future expected amortization. Share-based compensation expense included in research and development costs was$1.0 million and$0.8 million for the three months endedSeptember 30, 2020 and 2019, respectively. Share-based compensation expense included in research and development costs was$1.9 million and$1.8 million for the six months endedSeptember 30, 2020 and 2019, respectively. Net research and development costs for the three months endedSeptember 30, 2020 decreased$2.1 million compared to the prior year period due to$0.8 million lower gross expenditures and$1.3 million higher capitalization of software costs. Net research and development costs for the six months endedSeptember 30, 2020 decreased$5.9 million compared to the prior year period due to$3.7 million lower gross expenditures and$2.2 million higher capitalization of software costs. The decreases in gross expenditures in the three and six months endedSeptember 30, 2020 compared to the prior year periods were primarily driven by lower salaries and benefits associated with lower headcount, as well as lower spend in travel and infrastructure expenses, partially offset by higher consulting costs. Capitalization of software costs increased due to higher rates of software capitalization. Our software capitalization rate fluctuates due to differences in the nature and status of our projects and initiatives during a given year, which affects the amount of development costs that may be capitalized.
Amortization of Acquired Intangible Assets
The following table presents our amortization of acquired intangible assets for
the three and six months ended
Three Months Ended September 30, Six Months Ended September 30,
2020 2019 2020 2019
Amortization of acquired intangible assets
33
-------------------------------------------------------------------------------- Amortization of acquired intangible assets included in operating expense consist of the amortization related to our customer relationships and trade names intangible assets acquired as part of our business combinations. Refer to Note 8, "Intangible Assets" of our notes to condensed consolidated financial statements included elsewhere in this Report for an estimate of future expected amortization.
Amortization of acquired intangible assets for the three and six months ended
Restructuring Costs and Impairment of Assets
InMay 2020 , we announced a decision to execute a reduction in our workforce of less than 3% as well as other temporary cost reductions in response to the COVID-19 pandemic. We recorded$2.6 million of restructuring costs, consisting of payroll-related costs, such as severance, outplacement costs, and continuing healthcare coverage, associated with the involuntary separation of employees pursuant to a one-time benefit arrangement, in the six months endedSeptember 30, 2020 within operating expenses in our condensed consolidated statements of net income and comprehensive income. These amounts were accrued when it was probable that the benefits would be paid, and the amounts were reasonably estimable. The payroll-related costs were substantially paid as ofSeptember 30, 2020 . In the three and six months endedSeptember 30, 2019 , we recorded$0.2 million and$1.9 million of restructuring costs, respectively, consisting primarily of payroll-related costs, such as severance, outplacement costs, and continuing healthcare coverage, associated with the involuntary separation of employees pursuant to a one-time benefit arrangement, as part of a business restructuring plan implemented inJune 2019 . In connection with theJune 2019 restructuring plan, we also vacated portions of certain leased locations and recorded impairments of$1.9 million and$2.4 million in the three and six months endedSeptember 30, 2019 to our operating right-of-use assets and certain related fixed assets associated with the vacated locations, or portions thereof, in Horsham,St. Louis ,Irvine andAtlanta based on projected sublease rental income and estimated sublease commencement dates. The impairment analysis was performed at the asset group level and the impairment charge was estimated by comparing the fair value of each asset group based on the expected cash flows to its respective book value. We determined the discount rate for each asset group based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the impairment date. Significant judgment was required to estimate the fair value of each asset group and actual results could vary from the estimates, resulting in potential future adjustments to amounts previously recorded.
Interest and Other Income and Expense
The following table presents our interest expense for the three and six months
ended
Three Months Ended September 30, Six Months Ended September 30,
2020 2019 2020 2019
Interest income $ 12 $ 36 $ 18 $ 115
Interest expense (1,135 ) (387 ) (2,242 ) (859 )
Other income (expense), net (18 ) 210 (2 ) 77
Interest expense relates to our revolving credit agreement and the related
amortization of deferred debt issuance costs. Refer to Note 10, "Line of Credit"
of our notes to condensed consolidated financial statements included elsewhere
in this Report for additional information.
The changes in interest expense is primarily caused by fluctuations in
outstanding balances under our revolving credit agreement and the related
amortization of debt issuance costs. As of September 30, 2020 , we had $64.0
million of outstanding balances under the revolving credit agreement, compared
to an outstanding balance of $129.0 million as of March 31, 2020 and nothing
outstanding as of September 30, 2019 . The fluctuations of other income and
expense compared to the prior year periods are primarily due to changes to the
India foreign exchange rates.
34
--------------------------------------------------------------------------------Provision for (benefit of) Income Taxes
The following table presents our provision for income taxes for the three and
six months ended
Three Months Ended September 30, Six Months Ended September 30,
2020 2019 2020 2019
Provision for (benefit of) income taxes (1,298 ) $ 509 $ 318 $ 129
Effective tax rate (14.2 )% 7.7 % 3.2 % 1.7 %
The decrease in the effective tax rate for the three months ended September 30,
2020 compared to the prior year was primarily due to an increase in the tax
benefit for research and development credits in which the research and
development credit remained consistent on a gross basis compared to the prior
year while the annualized estimated pretax book income decreased. This benefit
was partially offset by higher nondeductible officer's compensation.
The increase in the effective tax rate for the six months ended
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), signed
into law on March 27, 2020 , has resulted in significant changes to the U.S.
federal corporate tax law. Additionally, several state and foreign jurisdictions
have enacted additional legislation and or comply with federal changes. We have
considered the applicable tax law changes and recognized the impact in our
quarterly income tax provision, as applicable.
Net Income
The following table presents our net income (in thousands) and net income per
share and for the three months ended
Three Months Ended September 30, Six Months Ended September 30,
2020 2019 2020 2019
Net income $ 10,455 $ 6,081 $ 9,631 $ 7,325
Net income per share:
Basic $ 0.16 $ 0.09 $ 0.14 $ 0.11
Diluted $ 0.16 $ 0.09 $ 0.14 $ 0.11
As a result of the foregoing changes in revenue and expense, net income for the
three months ended September 30, 2020 increased $4.4 million compared to the
prior year period.
As a result of the foregoing changes in revenue and expense, net income for the
six months ended September 30, 2020 increased $2.3 million compared to the prior
period.
Liquidity and Capital Resources
The following table presents selected financial statistics and information for
the six months ended
Six Months Ended September 30,
2020 2019
Cash and cash equivalents $ 103,440 $ 42,930
Unused portion of revolving credit agreement (1) 236,000 300,000
Total liquidity $ 339,440 $ 342,930
Net income $ 9,631 $ 7,325
Net cash provided by operating activities $ 48,032 $ 40,764 (1) As of
Our outstanding borrowings under our revolving credit agreement was
35
--------------------------------------------------------------------------------Our principal sources of liquidity are our cash generated from operations, driven mostly by our net income and working capital management, our cash and cash equivalents, and our revolving credit agreement.
We believe that our cash and cash equivalents on hand atSeptember 30, 2020 , together with our cash flows from operating activities and liquidity provided by our revolving credit agreement, will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months. Due to the ongoing uncertainties of the impact of the COVID-19 pandemic on the industry in which we operate, we proactively implemented certain precautionary measures, including cost containment and strengthening our cash position by increasing the outstanding borrowings under our revolving credit agreement. We borrowed an additional$50.0 million under our revolving credit agreement inApril 2020 and subsequently paid down$115.0 million in the three months endedSeptember 30, 2020 based on the reassessment of our short-term cash flow and working capital requirements. The impact of COVID-19 is rapidly evolving and widespread, and therefore, it is not possible to fully identify, measure, and predict the various impacts that COVID-19 may have on our financial condition, results of operations, cash flows, and liquidity requirements. We will continue to assess the potential effects of the COVID-19 pandemic on our business and actively manage our response accordingly.
Cash and Cash Equivalents
As of
We may continue to use a portion of our funds as well as available financing from our revolving credit agreement for future acquisitions or other similar business activities, although the specific timing and amount of funds to be used is not currently determinable. We intend to expend some of our available funds for the development of products complementary to our existing product line as well as new versions of certain of our products. These developments are intended to take advantage of more powerful technologies and to increase the integration of our products. Our investment policy is determined by our Board of Directors. Excess cash, if any, may be invested in very liquid short term assets including tax exempt and taxable money market funds, certificates of deposit and short term municipal bonds with average maturities of 365 days or less at the time of purchase. Our Board of Directors continues to review alternate uses for our cash including an expansion of our investment policy and other items. Any or all of these programs could significantly impact our investment income in future periods.
Cash Flows from Operating Activities
The following table summarizes our condensed consolidated statements of cash
flows for the six months ended
Six Months Ended September 30,
2020 2019
Net income $ 9,631 $ 7,325
Non-cash expenses 42,991 40,950
Cash from net income, as adjusted $ 52,622 $ 48,275
Change in contract assets and liabilities, net (10,825 ) (67 )
Change in accounts receivable 3,505 2,116
Change in other assets and liabilities 2,730 (9,560 )
Net cash provided by operating activities $ 48,032 $ 40,764
For the six months ended September 30, 2020 , cash provided by operating
activities increased $7.3 million compared to the prior year period, of which
$4.4 million is due to higher cash from net income, as adjusted for non-cash
expenses, $12.3 million due to changes in other assets and liabilities, and $1.4
million from decreases in accounts receivable, partially offset by decreases of
$10.8 million from net changes in contract assets and liabilities. Net income
for the six months increased $2.3 million compared to the prior year period, as
described in the "Net Income" section above. Non-cash expenses increased
primarily due to higher amortization of intangible assets, higher share-based
compensation expense, and higher amortization of operating lease assets,
partially offset by lower asset impairment charges. The increase in cash from
net changes in other assets and liabilities is primarily due to higher payments
of cash incentive bonuses and commissions in the prior year and an increase in
the deferral of payroll taxes in the six months ended September 30, 2020 , offset
by an increase in income taxes receivable and a decrease in accounts payable due
to timing of invoice vouchering and payment of invoices. Accounts receivable
balances decreased due to continued efforts to collect and resolve aged
balances, resulting in a corresponding increase in cash from collections in the
six months ended September 30, 2020 . The decrease in cash associated with net
changes in contract assets and liabilities is primarily due to a lower level of
maintenance invoicing as a result of client attrition.
36
--------------------------------------------------------------------------------Cash Flows from Investing Activities
Net cash used in investing activities for the six months endedSeptember 30, 2020 was$13.1 million compared with$12.6 million in the prior year period. The increase in net cash used in investing activities is primarily due to$2.5 million lower proceeds of over-funded corporate-owned life insurance policies and$2.2 million higher additions to capitalized software costs in the current year, partially offset by a$4.4 million decrease in additions to equipment and improvements.
Cash Flows from Financing Activities
Net cash used in financing activities for the six months endedSeptember 30, 2020 was$66.5 million compared with$12.3 million cash used in financing activities in the prior year period. The increase in cash used in financing activities is primarily due to net principal repayments of$65.0 million in the current year, compared to net principal repayments of$11.0 million in the prior year. Contractual Obligations
We have minimum purchase commitments of
The following table summarizes our significant contractual obligations at
For the year ended March 31,
2021 (remaining 2026 and
Contractual Obligations Total six months) 2022 2023 2024 2025 beyond
Operating lease
obligations $ 41,654 $ 4,802 $ 9,785 $ 9,907 $ 8,623 $ 6,631 $ 1,906
Remaining lease
obligations for vacated
properties (1) 10,315 1,599 2,935 2,255 1,677 1,337 512
Line of credit
obligations (Note 10) 64,000 - - 64,000 - - -
Total $ 115,969 $ 6,401 $ 12,720 $ 76,162 $ 10,300 $ 7,968 $ 2,418 (1) Remaining lease obligations for vacated properties relates to remaining lease
obligations at certain locations, including
Louis, that we have vacated and are actively marketing the locations for
sublease as part of our reorganization efforts. Refer to Note 17,
"Restructuring Plan" of our notes to condensed consolidated financial
statements included elsewhere in this Report for additional information.
Total obligations have not been reduced by projected sublease rentals or by
minimum sublease rentals of
non-cancelable subleases.
The deferred compensation liability as of
The impact of our uncertain tax positions is not included in the table above as the timing of expected payments is not determinable. Refer to Note 12, "Income Taxes" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information.
New Accounting Pronouncements
Refer to Note 1, "Summary of Significant Accounting Policies" of our notes to condensed consolidated financial statements included elsewhere in this Report for a discussion of new accounting standards.
Critical Accounting Policies and Estimates
The discussion and analysis of our condensed consolidated financial statements and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors we believe to be reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. On a regular basis, we review the accounting policies and update our assumptions, estimates, and judgments, as needed, to ensure that our condensed consolidated financial statements are presented fairly and in accordance with GAAP. Actual results could differ materially from our estimates under different assumptions or conditions. To the extent that there are material differences between our estimates and actual results, our financial condition or results of operations will be affected. 37 -------------------------------------------------------------------------------- We describe our significant accounting policies in Note 1, "Summary of Significant Accounting Policies," of our notes to consolidated financial statements included in our Annual Report. We discuss our critical accounting policies and estimates in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report. We adopted Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective transition approach, which required the recognition of expected credit losses for our accounts receivable and our contract assets. Refer to Note 3, "Accounts Receivable" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information. There have been no other material changes in our significant accounting policies or critical accounting policies and estimates since the fiscal year endedMarch 31, 2020 . 38
--------------------------------------------------------------------------------
© Edgar Online, source
