NextGen Healthcare (NXGN) CEO Rusty Frantz on Q4 2019 Results - Earnings Call Transcript

NextGen Healthcare (NASDAQ:NXGN) Q4 2019 Earnings Conference Call May 28, 2019 5:00 PM ET

Company Participants

Rusty Frantz - President and Chief Executive Officer

Conference Call Participants

Sean Wieland - Piper Jaffray

Jeff Garro - William Blair & Company

Westley Dupray - SVB Leerink

Sean Dodge - Jefferies

Anne Samuel - JPMorgan

Yueli Zhang - Citi

Steve Halper - Cantor Fitzgerald

Mike Ott - Oppenheimer

Donald Hooker - Keybanc

Gene Mannheimer - Dougherty & Company

Stan Berenshteyn - SunTrust

Operator

Welcome to the NextGen Healthcare Inc. Fiscal 2019 Fourth Quarter and Year End Results Conference Call. Hosting the call today from NextGen are Rusty Frantz, President and Chief Executive Officer and Jamie Arnold, Chief Financial Officer. Today’s call is being recorded. All lines have been placed on listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions]

Before we start, I would like to remind everyone that the comments made on this call may include statements that are forward-looking within the meaning of the federal securities laws, including and without limitations, statements relating to anticipated industry trends, the company’s plans, future performance, products, perspectives and strategies. Risks and uncertainties exist that may cause results to differ materially from those expressed in these forward-looking statements, including among others, those risks set forth in the company’s public filings with the U.S. Securities and Exchange Commission, including the discussion under the heading Risk Factors in the company’s most recent Annual Report on Form 10-K and any subsequent quarterly reports on Form 10-Q. Any forward-looking statements speak only as of today. The company expressly disclaims any intent or obligation to update these forward-looking statements.

Our remarks on today’s call include both our earnings results and guidance, which contains certain non-GAAP financial measures. For our earnings results, the GAAP financial measures most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measures can be found within our latest quarterly earnings press release that was filed with the SEC and is posted to the Investors section of our website. This release also provides qualitative descriptions of how we have calculated non-GAAP financial measures contained in our guidance.

At this time, I would like to turn the call over to Mr. Rusty Frantz, President and CEO of NextGen. Sir, you may begin.

Rusty Frantz

Thank you, operator and thank you to everyone for joining us this afternoon to review NextGen Healthcare’s fiscal fourth quarter and full year 2019 results. Before I guide into the numbers and news, I would like to take a moment to address last week’s press release. Jamie Arnold, our CFO was admitted to the hospital last Wednesday for 5 days of treatment for a sudden illness. He has been discharged, is in a recovery facility and is expected to make a full recovery. Jamie continues to contribute professionally and will get a bit of extra support from me and from a strong finance and operating team until he returns to full strength. We are cheering for his speedy recovery. Today, Jamie will not be on the call and I will be handling the CFO messaging.

Turning to the call itself, we ended fiscal 2019 with solid performance delivering at the top end of our original earnings guidance and within our revised revenue guidance. Under ASC 605, our full year revenue of $527 million compares to $531 million in fiscal 2018 and our FY ‘19 non-GAAP EPS of $0.76 compares to $0.70 in the prior year. Our full year bookings came in at $133.5 million representing significant and meaningful growth over FY ‘18’s $116.9 million.

Turning to the fourth quarter, our revenue came in at $134 million compared to $136 million a year ago and our non-GAAP EPS of $0.19 compared to $0.16. Bookings for the quarter came in at $35.4 million versus $36.8 million in the same quarter last year. As we move into this year, we will leave ASC 605 behind and report exclusively under ASC 606, including year-over-year comparisons. Under ASC 606, revenue for FY ‘19 came in at $529 million and non-GAAP EPS came in at $0.86. At the start of fiscal ‘19, we committed to driving meaningful bookings growth throughout the year leading to revenue growth in FY ‘20.

We are pleased with the great full year bookings performance delivering a 14% year-over-year increase in bookings. However, we saw more muted growth in the back half of FY ‘19 and Q4 came in slightly down at 4% year-over-year. As we look to FY ‘20, we expect another full year of bookings growth though slightly more muted than the mid-teens growth rate in FY ‘19. The strong bookings growth in FY ‘19 and our expected FY ‘20 bookings will enable us to deliver organic revenue and earnings growth as we move through FY ‘20, more on that later. Legacy maintenance retention formally called out as attrition came in at 90.5% over the trailing 12 months continuing up from 87.9% last quarter and 86.2% at its highpoint in Q2. Clearly, the changes we have put in place are working and we are gratified to have raised the number above our 89% modeled level as we move into FY ‘20. We anticipate some volatility in the retention rate as we move forward and believe our modeled level is appropriate.

Our story is more than just numbers. In FY ‘19, we accomplished quite a lot. And on the call today, I would like to touch on a few of the many accomplishments since the beginning of FY ‘19. We had a very successful User Group Meeting, UGM 2018, where we launched our integrated ambulatory platform, bringing the breadth of our solutions and services together into one unified solution. After 2 years of most improved in KLAS, this year we won Best in KLAS for NextGen Enterprise Practice Management. We were also highlighted for best product functionality for NextGen Office. We are also noted by KLAS for achieving significant improvement in interoperability against all other vendors. This resulted from bringing hundreds of clients into the care quality framework throughout the year enabling the exchange of millions of clinical records.

We are recently awarded the 2019 North American Enabling Technology Leadership Award in the ambulatory revenue cycle management services market by Frost & Sullivan. This validates the significant increase in client performance and satisfaction driven by continuous improvements in process and technology to support our managed financial services offerings, of which RCM is one. We saw the emergence of all-in deals where we are delivering the entire ambulatory platform to clients under a single recurring business model. Our new offering also had a significant effect on deal size increasing the efficiency of our sales production and helping to drive bookings growth. We also saw success with this model in competitive takeaways. We feel like our integrated ambulatory platform is enabling success in the competitive replacement market. As we see increasing signs of success in the replacement market, this continues to bolster our confidence as we increase investment in sales and marketing as we move through this year, FY ‘20.

While we saw a dip in retention in the early part of the year, we moved quickly to address it through both investment and leadership and significant process improvement and we are able to quickly bring retention above our modeled levels. In Q4, we have partnered with Veradigm to allow seamless integration of our clients with lab vendors, life insurance companies and to provide data for life science research without us having to make incremental investments. One of the qualitative dynamics I am most proud of, we continue to see strong and growing satisfaction from our clients. We have accomplished so much for and with them over the last 4 years. This satisfaction is foundational for our organic growth. Our clients and some other’s clients are viewing us as a trusted partner they want to invest with to drive their success in this transforming healthcare landscape.

Now, let’s turn to FY ‘20. As we move into more meaningful organic growth, we are conscious of our need to continually expand our delivery while simultaneously improving efficiency. To that end, we are planning some moves that will increase capabilities while also lowering our cost of operation. In both FY ‘20 and ‘21 we will continue to restructure the business as we make a few significant evolutions to position us for a more efficient, effective and capable future. Let me give you two examples of these changes. The first example centers around our managed hosting services. We will migrate all of our client and internal environments from their current hosting to AWS. We already have a significant client footprint on the AWS platform and by standardizing on it we will see improved manageability, scalability, security and uptime. In addition, we will see an annual savings of roughly $3 million when fully realized for a one-time investment of approximately $3 million. We talked about investing to both increase capabilities and decrease cost, this is a great example.

The second example centers around R&D. We see the need to expand and transition our R&D capabilities striving to get the best leverage out of our R&D spend. Two primary dynamics are driving this need: an increase in regulatory intensity requiring additional development on our core platforms and second, burgeoning interest in new and enhanced capabilities to support our clients’ transformation to value-based care. These changes in the macro environment both increased necessary investment for compliance, but also increase the opportunity for net-new innovation to drive share gain and revenue growth. These dynamics are driving our need for expanded capabilities and bandwidth most notably on the modern cloud-based technology stacks that much of our enterprise platform is built upon.

We have evaluated where that expansion will occur by looking across the geographic sites in our organization. Based on our analysis, increased investment in our Bangalore development center will provide the best leverage. We are well established in Bangalore and our superb leadership and capable experience teams represent our broadest capacity across the vast majority of our product lines. Not only do we have productive teams that can consistently produce high quality, but we also have a strong talent pool for recruiting at a favorable cost of operation. Our expansion in Bangalore is not engineered for R&D cost savings, but rather to increase our yield per investment dollar by adding significantly more of the right skill sets. We believe this will be a win for our clients as we service the demands regulatory compliance and innovation in value-based care capabilities. While we are increasing investment in some areas as part of this transition, we will also be reducing investment in other area, which will incur one-time cost associated with these changes. These evolutions are fundamentally about delivering more value to our clients, while continuing to ensure that every investment dollar is efficiently used in that pursuit.

I wanted to take a moment on the 606 transition as well. As stated earlier, we will now move to reporting all numbers under ASC 606 both results and year-over-year comps. Due to the accounting transition in FY ‘19 we had an $0.08 one-time uplift on the EPS line due to the change in the accounting treatment of sales commissions. That favorability will then be a headwind in terms of driving margin expansion on each of the next three years forecasted to show up in FY ‘20 as $0.03 of EPS to the negative. I point this out as it is a material change to the optics of the P&L over multiple years and will finally settle out in FY ‘22. On the revenue line, pickup was more muted at $1.9 million in FY ‘19 and represents no material ongoing impact to the P&L.

Turning now to our view of FY ‘20 and beyond, all now under ASC 606, in FY ‘20 we expect revenue between $543 million and $559 million, the midpoint of which represents slightly over 4% growth or mid single-digits. While earlier in FY ‘19 we forecast a high single-digit rate the retention dip we expected – that we experienced early in FY ‘19 combined with a strong bookings number that fell a bit shy of our expectations in Q4 and with slightly different composition has softened that outlook a bit. On the earnings line, we expect to come in between $0.86 and $0.94 delivering approximately 5% EPS growth at the midpoint. Adjusting out the sales commission changes, this would have been closer to 8% under the old standards giving us confidence in the leverage strength of our revenue growth.

As we look farther out towards FY ‘22, we see continued mid to high single-digit revenue growth throughout the period. This continued organic growth combined with a roughly flat spend below the gross margin line enabled by the consistent focus on efficiency, all combined to get us to our 20% operating margin target in FY ‘22. I want to finish my CEO comments by commenting on our balance sheet. As we move into our growth phase, we look forward to the resulting meaningful increases in both our free and operating cash flow metrics. As we have shown over the last 3 years, we have the ability to invest both in R&D and through acquisition, while continuing to improve our balance sheet at the same time. As we look at some of the rapid changes in the regulatory and reimbursement environments, we see both challenges and opportunities and see our cash generation capabilities as creating valuable optionality in the future both organically and inorganically. With that, I will move into the CFO view of the numbers.

While the GAAP results for FY ‘19 are reported on a 606 basis, we have provided an exhibit in the earnings release, which gives that FY ‘19 disaggregated revenue on a 605 basis. We will now review revenue for the quarter on a pro forma or 605 basis to facilitate comparison to the same period in the prior year. Total revenue of $134.3 million declined 1% compared to that same period last year. Using the reporting format that we introduced earlier this year, recurring revenue of $120.4 million increased compared to a year ago due to growth in EDI and data services, offsetting declines in support and maintenance. Recurring revenue was 90% of our total revenue slightly higher than the 87% in the prior year. Subscription revenue of $27.8 million increased 2% compared to a year ago. The growth was primarily driven by our connected health and analytics solutions.

Support maintenance revenue of $38.8 million decreased 5% year-over-year due to a drop in retention in our legacy NGE clients. Managed services revenue of $27.9 million increased 2% compared to a year ago due to favorability in RCM, hosting and lower client concessions. We remained focused on driving RCM penetration in our client base as well as leading with it in proposals to new clients. Electronic data interchange revenue of $25.8 million increased 11% year-over-year largely due to the Veradigm deal signed in Q4. Non-recurring or one-time revenue was $13.9 million, a 19% reduction over the same quarter last year. Software license and hardware revenue of $8.4 million declined 15% year-over-year. Non-recurring services revenue decreased 24% compared to a year ago due to completion of large client engagements.

Bookings came in at $35.4 million in the quarter, down 4% on a year-over-year basis, but a bookings increase at 8% sequentially. The cost of goods and operating expense comments are based on GAAP 606 basis. Gross profit declined $72.7 million or 1% mostly due to lower revenue and higher expenses associated with the amortization of acquired intangibles and capitalized development cost. Gross margin declined by less than 1% and remained at 54% with the increased amortization driving the decline.

Taking a look at our operating expenses, SG&A of $44.7 million, excluding amortization of acquired intangible assets, impairments and restructuring, is in 32% reduction from $65.7 million a year ago. This decrease is primarily due to lower securities litigation expense from a prior year settlement of $19 million. R&D of $19.8 million decreased about 6% compared to a year ago mostly due to reduced salaries and benefits and increased software capitalization of $0.5 million associated with the upcoming releases. Our GAAP tax rate for FY ‘19 was 16.4% with a non-GAAP tax rate of 22%. For FY ‘20 we will continue to use the non-GAAP tax rate of 22%. To conclude my comments on the income statement, our Q4 GAAP EPS is $0.06 compared to a loss of $0.17 a year ago, our non-GAAP EPS on a 605 basis of $0.19 for Q4, increased by $0.03 year-over-year.

Turning to the balance sheet, we ended the quarter with $33.1 million in cash and equivalents and $11 million outstanding against our revolving credit agreement. DSOs in the quarter were 59 days, an increase of 2 days from last year and equal to last quarter all within our expected range of 55 to 60 days. Our CapEx, excluding capitalized R&D was $1 million. Capitalized R&D was $6 million. Overall, we are generally pleased with our performance in Q4 as we execute our strategic plan and are looking forward to continued progress in FY ‘20. This concludes my review of the fourth quarter financial results.

I will now say a few words to close the call and move to Q&A. As we move into FY ‘20, we are excited just be seeing the front-end of leverage revenue growth. We are grateful to start to see the results of the turnaround start to materialize and proud of how far we have come. However, pride in the past can lead to complacency in the present and decline in the future. Therefore, we continue to evaluate ourselves and our market both strategically and operationally always challenging ourselves to be more innovative, more effective and constantly more efficient. Expect that self inspection to continue as we look to capitalize on the optionality and opportunity to both our client satisfaction and our dry powder increasingly provide. Thank you. And now I will open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Sean Wieland from Piper Jaffray.

Sean Wieland

Thanks Rusty and best wishes to Jamie for a speedy recovery if he is listening on the webcast.

Rusty Frantz

I am sure he is listening on the call.

Sean Wieland

I am sure he is. So on the – as you put it the muted revenue outlook for this coming fiscal year just what – can you unpack that a little bit more in terms of the specifically around the composition of the bookings in the quarter and how that is contributing to your revenue outlook and as well as you know what was the delta, what you expected versus what actually came in?

Rusty Frantz

Yes, I mean what I’d say we had forecast a number that was probably $4 million to $5 million north of what we ended up realizing in Q4. Some things happened to deals. There is reasons I tend to find that there is always reasons. And so for me I feel like we had a good quarter, but we did not have the quarter we expected. When I looked at that and when we also looked at the impact of attrition, that attrition spike on the maintenance line put those two things together, but also looked at a better understanding of timings from booking to revenue, it made us pullback a little bit further than we expected to on the revenue line as we looked into next year. Is there upside? Yes, there is, but we really always try to hit kind of the center of our confidence interval. And so I’d say there is upside and downside from the number, but we feel good about the number that we have posted. That center point is at 5.51. It’s a little short of consensus and it’s definitely – it’s short of what our expectations were. That being said that as we look forward to this year, we expect another year of year-over-year bookings growth, but I would not say it will go year-over-year by quarter all the way through the year if that makes sense.

Sean Wieland

Sure. And is that $4 million to $5 million, does that go into loss category, does go into the push-out quarter or category, are there still opportunities remaining with that or are there lot of opportunities?

Rusty Frantz

I will give you a little bit of color on one of them. It was a deal that the CEO is about to sign before the governor of the state decided to change how funding happened in the state and the funding went away. And so in that case there maybe another – that deal may come up again when the funding returns, but as far as we are concerned that deal just went away. And I think that’s really what I would say is we ran into some slowness in signatures at the end of the quarter, but you know what if it doesn’t pop up in the first month of the next quarter, then I call it either a lost or gone away versus swept.

Sean Wieland

Okay. And did you have that big go-live in March that you are anticipating?

Rusty Frantz

Yes.

Sean Wieland

Okay, super. Thanks so much.

Rusty Frantz

And very successfully I might add.

Sean Wieland

Great. Thank you.

Rusty Frantz

Yes.

Operator

And our next question is from the line of Jeff Garro from William Blair & Company.

Jeff Garro

Yes, good afternoon guys. Thanks for taking the question. Want to follow-up on Sean’s discussion of the revenue expectations for next year and maybe you could parse out a little further some of the headwinds you have seen and help differentiate between what you have talked about over the last quarter or so and what you saw this current quarter whether it’s a lack of urgency from clients or whether it was from some of the hospital dominant vendors continued to push their clients to standardize, any color commentary would help there?

Rusty Frantz

Yes, I would say it was more based on – look we have actually been very, very good for the prior three quarters. This one we ended up off of forecast. As I looked at what made those up, it was generally not competitive losses, it was generally either cold feet at the last minute based on frankly some of the regulatory changes that are coming down and people starting to look at that and figuring out that they need to upgrade within this year. That changes a little bit of their priority roadmaps. And with some, it was just simply like I said before that for some reason the funding just went away on this one large deal, but as I looked at it overall and I look at the pipeline, the pipeline continues to increase in size and quality within the organization and that’s what gives us good confidence especially as we look at kind of the full year forecast, good confidence that we – while we won’t see the 14% to 15% bookings growth that we saw this last year that we will still see meaningful bookings growth, it will just be south of that. And that’s kind of where our expectation is. That’s really as I looked at my longer term guidance right as we indicated that is between mid and high single-digits that’s pretty much the sensitivity analysis. As we sit here today, we are at mid – we are still expecting to see some bookings growth. I think that will keep us in mid, but we could see more uplift in that at this point in time I think we are being appropriately conservative based on having a pretty long track record here and a good understanding of the dynamics within the pipeline.

Jeff Garro

That will make sense. Maybe another one, a little bit more on the margin front, but still generally speaking to the demand environment, you talked about the sales and marketing investments, it sounds like you have confidence continue to drive those investments, improve competitive positioning, but also the kind of market headwinds that we just discussed. I was hoping you could walk through the give and takes there a little bit more and that will help us quantify the sales and marketing investments in what’s devoted to net new accounts versus continuing to improve retention and customer satisfaction?

Rusty Frantz

Yes. So, there is a lot in there. Let me start at the end first. As we invest from a sales and marketing standpoint, the expansion areas are not around cross-sell, they are around a net new share gain. We feel like we are appropriately staffed for the cross-sell opportunity within our base, but as we started to see some net new opportunities come in, we feel like it’s a profitable move for the investors to expand sales and marketing to a degree. And then that’s really the way we look at it, the way we see it is there is more opportunity out there then we can get after with the sales team we have today, so we need to expand that a little bit prudently while still having good view to our operating margin target. That’s one – I am sorry can you add – prompt me with another point out of that question.

Jeff Garro

Yes, absolutely. Maybe just some follow-up on how the improved competitive positioning is driving those investments in what I would assume would be additional headcount for sales and marketing?

Rusty Frantz

It is additional headcount for sales and marketing. And it’s as we see areas where we have a favorable hand to play both across size, across specialty, across geography, where we see areas where we have a favorable hand to play we are investing in quota carrying reps to be able to execute on that hand. And I am not going to go in any deeper than that, because frankly that I am just telling my competitors where I am hunting, but we do see opportunities in that. This is kind of in keeping with our long-term message that as we look to continue to drive the bookings growth that supports the revenue growth we will make some targeted expansions in sales and marketing.

Jeff Garro

Great. Thanks for taking the questions.

Operator

And our next question is from the line of David Larsen from SVB Leerink.

Westley Dupray

Hi, good afternoon. This is Westley Dupray on for Dave. Thanks for taking my question. I was just wondering if you guys could provide a little more color on the Veradigm partnership and just kind of what you are seeing there and how we can expect to see them move going forward?

Rusty Frantz

Yes, it’s early days. I mean right now I think the vast majority of activity has been simply around linking our ecosystem to the Veradigm ecosystem. And so it’s really been more of an R&D project than anything at this point in time. Look, we have optimistic expectations for the Veradigm partnership, but at this point in time, we have no numerical track record to be able to judge it by. We have built in what we feel is an appropriate and conservative number into our plan. And at the point in time when we start to see acceleration which we are excited about that gives us comfort in expanding that number until that point in time we are kind of sit where we are and rather than focus on telling people about it, we are going to focus on working with Veradigm to deliver the intrinsic value that will help both P&Ls.

Westley Dupray

Okay, great. And then just one quick follow-up, you have previously called out the number of deals that you signed in a quarter that are over $500,000 just wondering if that was still a metric that was being tracked?

Rusty Frantz

My apologies, we did not get that put together this time. We will return to that next quarter, but given Jamie’s challenges that go out this quarter or so, my apologies.

Westley Dupray

Thank you very much.

Operator

And our next question is from the line of Sean Dodge from Jefferies.

Sean Dodge

Hi, good afternoon. Thanks for taking the questions. Maybe starting with your comments around the R&D transition and just to make sure it sounds like it’s really just more of a reallocation of dollars and less of a step up in the amount you are going to be spending, it sounds like bigger investments in the core and on innovation, but that’s going to be funded by project you are unwinding elsewhere or do I have that wrong and this will be higher R&D dollars?

Rusty Frantz

This is about getting more value out of the current roughly $100 million of gross spend we have. And so this fits well within the messaging that we have been consistent on, which is expect R&D to be flat throughout the period and will continue that way unless we come back with a strategic reason to increase it.

Sean Dodge

Got it, okay. That’s good. And then you mentioned the initial success you are seeing with the new integrated offering, one of the benefits there being larger deal sizes, can you give us a sense of the size of lift the integrated platforms having on average deal size?

Rusty Frantz

I am sorry, does that what?

Sean Dodge

So, this integrated platform that you are selling you said having a benefit of increasing the average deal size, can you give us an idea of how big of an increase it is on an apple-to-apple or same store basis?

Rusty Frantz

Yes, on an apple-to-apple basis, let me come back to you with that one as well, but what I would say is if you think about this last year, we had not only a lot of deals within the $500,000 to $1 million. We have a number of deals over $1 million. We had a deal as large as 4 and we have a deal that came live in March that was $7 million. And so that starts to give you an understanding an order of magnitude, I would say the smallest all-in deal we have signed is probably somewhere in the neighborhood of $400,000 to $500,000.

Sean Dodge

Okay, that’s good color. Thank you.

Rusty Frantz

Yes.

Operator

And our next question is one of Ricky Goldwasser from Morgan Stanley.

Unidentified Analyst

Hey, it’s actually Raymond for Ricky. So I had a quick question about previous guidance that you gave. So on the third quarter call, you lowered your expectations for revenue to the bottom half of previous range of 525 to 535, but your full year revenue actually came in around the midpoint of that range. So, was there anything between January and now that you saw that caused revenue to come in above the bottom half?

Rusty Frantz

Well, I think what happened is when you think about it under 605, our full year revenue was at 527, 606 it was 529, we were guiding the 605 which was 527 and 527 is kind of squarely in the middle of the bottom half of the range.

Unidentified Analyst

Got it. So, it’s actually just an accounting thing?

Rusty Frantz

It’s an accounting, yes. Trust me I am trying to figure out the 605, 606 that just go back and forth, I am looking forward to putting 605 in the rearview mirror.

Unidentified Analyst

Got it, okay. And then just to your commentary around the efficiency initiatives around R&D, would you say that like the initiatives you have talked about today are in addition to what you were suggesting on the previous quarter or is this kind of what you are contemplating when you guided towards flat R&D year-over-year into FY ‘20?

Rusty Frantz

Well, anytime you guide towards multiyear flat R&D, you are signing up for efficiency, because you have COLA, cost of living adjustments and everything that falls within that. And so you are already signing up for efficiency. The change here is that we are actually getting to a much greater level of capacity by lifting and shifting capabilities than we would be by simply driving efficiency. And so this is really – as we start to look and we look at demands on our clients’ base, we have to be more efficient, we have to be more effective with delivery. And so that’s really what’s driving this part of it, which is a long-term commitment to hold it flat, because the reality is we brought investors in to see the benefits of revenue generated EBIT growth that has leverage in it. And so in bringing that pieces to the table we made a commitment under the current strategy with the current outcome that we would hold R&D flat, the only reason we would change that is because we are pivoting or expanding our strategy.

Unidentified Analyst

Got it. That’s is very helpful. Thanks so much.

Rusty Frantz

And let me just weigh in just from the last call the question, this quarter we did 8 deals over 500 – we entered into 8 arrangements that were greater than $500,000. Next question please.

Operator

Our next question is from the line of Anne Samuel from JPMorgan.

Anne Samuel

Thanks for taking my questions. I was hoping maybe you could help us how to think about the cadence of when some of the restructuring items are going to benefit the margins versus the timing of the investments that you are making. It seems like just on the quick math of the earnings guidance, it seems around 14% margins this year, so that implies about 600 basis points of expansion in the next year, just want to understand kind of the cadence of that?

Rusty Frantz

Yes. I mean, if you think about the revenue growth and the – if you think about the revenue growth that we have modeled in and you hold R&D flat and you bring sales and marketing up a little bit, then pretty much all of the gross profit dollars generated by the revenue growth are falling straight to the bottom line. And so that is really how we get the expectation of give or take 250 to 300 basis points a year, which gets us up to that 20% operating margin level.

Anne Samuel

Okay, great. Thanks. And then maybe just one on the regulatory environment and we have been hearing kind of different things about – and you spoke about a little bit about you know customers getting nervous about Medicare for All and things like that, what are you seeing out there and how is that impacting the demand environment?

Rusty Frantz

In our client base, I don’t think they are as much nervous about Medicare for All, I think they are nervous about the transition to value and how they are going to take off risk. We haven’t seen as much concern around Medicare for All from our client base, but folks are being pushed into risk-based arrangements that they don’t have the technical capabilities nor the business process framework to be successful in that out of the box. And so that’s definitely driving our clients to kind of stop and pause a little bit and think about how they are going to transition their business models or be able to support these multiple business models. And I think that is certainly putting pressure on the client base as they are looking at a diminishment of fee for service which has been forecast to die for the last 20 years, but it’s still very alive and well. But I also think when you think about some of the other regulations coming down the type around data blocking and data sharing, that’s also pushing clients to move into an upgrade cycle to make sure they are at the release that enables seamless interoperability to the care qualify framework as if they are not there, then perhaps they are not participating in these data exchanges and might be at risk. And so I think it’s a little bit of – it is both the change in business model, but it’s also a strengthening of some of the regulatory compliance requirements. And I think it’s both that are actually, they are definitely waking the clients up and people are looking around a little more than they did as little as 6 months ago.

Anne Samuel

Great. Thanks very much.

Rusty Frantz

Thanks, Anne.

Operator

And our next question is from the line of Stephanie Demko from Citi.

Yueli Zhang

Hi, this is Yueli Zhang on for Stephanie. Just circling back to the Veradigm question, I understand it’s early days like you said, but can you quantify what the revenue contribution with the ramping costs look like for 4Q and for FY ‘20?

Rusty Frantz

Yes, we are not going to get down to that level in the P&L at this point in time. When Veradigm becomes a meaningful part of the P&L that we will carve it out until then, it’s a partnership that we have optimistic hopes for.

Yueli Zhang

Got it. And if I could follow-up in your opening remarks, you talked about $0.08 EPS benefit from the 606 transition, how much of that benefit was in 4Q?

Rusty Frantz

That benefit, I don’t know. What I do know is that sales commission amortization piece represented $0.08 for the whole year. There are some other things at the margins, but that $0.08 represented the lion’s share of the benefit.

Yueli Zhang

Got it. Thanks.

Rusty Frantz

Yes.

Operator

And our next question is from the line of Steve Halper from Cantor Fitzgerald.

Steve Halper

Hi, Rusty. Do you have the operating cash flow number for the quarter?

Rusty Frantz

$17.2 million, Steve.

Steve Halper

Thank you.

Rusty Frantz

No problem.

Operator

And our next question is from the line of Mike Ott from Oppenheimer.

Mike Ott

Good afternoon. Thanks for taking my questions. Rusty, I appreciate your comments on clients moving to more value-based payments, are they being impacted yet by new primary care as payment model in Medicare that was recently discussed?

Rusty Frantz

I don’t they are being impacted yet by it, but certainly their thinking is. There is what we talk about on the policy side and then there is what actually shows up at the client side and so folks are starting to really think about it, but they haven’t – we haven’t seen any real reactions to it yet. I wish I could be more helpful, but that’s really – that’s my impression from talking to my – the clients that I have talked with.

Mike Ott

No, that makes sense. Thanks. And then also I am not sure if you could update on any of your fiscal year metrics, specifically the 80 clients I think that you are hoping to have on OpHealth for the 2000 on mobile?

Rusty Frantz

We don’t have those today and my apologies once again.

Mike Ott

No problem. Thanks for taking my questions.

Operator

[Operator Instructions] Our next question is from the line of Donald Hooker from KeyBanc.

Donald Hooker

Great, good afternoon. So you had commented some increased investments in I think value-based care as one of the areas you are investing in going forward. And the earlier question about the direct contracting model, are those two linked, are you now starting to invest around some of these new CMS models that are coming out, they are direct contracting models?

Rusty Frantz

We are not ye. We are waiting to really see how that comes out and how it really takes hold within the industry. I say when you look at the value-based arrangements, the areas that we have invested in most are with our population health capabilities and our outreach capabilities and then of course linking that directly into the HR. And so that’s really allowing our clients not just to think about value-based care, but actually to proactively treat the patients with the greatest need and prevent those costs from becoming bad facts, because the patient gets sicker. And so that’s really where our focus has been primarily to disappoint, which is I would say more of a broad-based solution and not as specifically focused on the direct contracting side.

Donald Hooker

And it sounded – scribbling the numbers down earlier in your commentary, but it sounded like the retention improved in the quarter. And I know one of the issues in the past was sort of getting everything to a latest version of your software, are you now kind of up to speed there kind of everyone sort of on the most modern version of NextGen?

Rusty Frantz

I would say all of the larger clients are on the modern versions of NextGen. When you get into like the 10, 8, 12 doc practices, there is still a tail there that we are still working through, but we have seen significant success in bringing our larger clients all forward. And frankly, they are enjoying a lot of the fruits of that by being able to seamlessly connect to interoperability by seeing a much more usable and higher performing platform as well as all of the integration work we have done across the broad platform. And so it’s still I would say that the primary intensity on it has passed, but as we move towards October and our clients needs and a number of our clients need to be prepared to do a 90-day reporting at the end of next year that will drive further upgrading.

Donald Hooker

Got it. Maybe one last mundane question, did you breakout the depreciation and amortization of capitalized software, I guess we will see that in the filings coming up, but if you happen to have that lot of us like to plug that in the model?

Rusty Frantz

We are looking for it, sorry, as I am an engineer and a finance person, okay, $3.6 million is the amortization of capitalized software costs.

Donald Hooker

Okay. And depreciation?

Rusty Frantz

2.6.

Donald Hooker

Thank you so much.

Rusty Frantz

Yes.

Operator

And our next question is from the line of Gene Mannheimer from Dougherty & Company.

Gene Mannheimer

Thanks. Good afternoon. I wanted to follow-up on the earlier question around operating margin in the path to 20%, can you just maybe difficult to tell, but can you tell us if this is a full year expectation for FY ‘22 or more of an exit run rate?

Rusty Frantz

That is a full year expectation for FY ‘22.

Gene Mannheimer

Okay, terrific. And Rusty can you talk a little bit about maybe comment around the RCM business, did it land where you expected it would for the year, how is retention in that in the quarter, and when we think about growth of that business going forward could it be a double-digit grower in light of the still low cross-sell penetration in your installed base there? Thanks.

Rusty Frantz

Yes. So, we came into the year with the client exiting, a large client exiting and so that was a top headwind. The great news is we exited the year with an equally large client onboarding and not just onboarding, but onboarding over a 6-month period, hundreds of providers and a full implementation of practice management EHR and then revenue cycle management and on the backend we cut that in, in March and frankly cut it in nearly flawlessly. And so when I look at – it’s interesting, I mean, if you look at the tale of two clients there, we have a client exiting at the beginning of the year that client was part of the larger hospital system, but more than that, that client was part of our very high-touch very manual RCM capability that we had in the past. When you look at the client that on-boarded, that client came in to a technology enabled managed financial services business that rather than relying on significant people, we are relying on both people from an interaction standpoint, but also technical infrastructure that we have now implemented in the back of RCM to make it more scalable, more consistent and frankly get better results for the clients. And so we are almost transitioning from the old style to this new, I think much more effective business. When you look at the Frost & Sullivan results, the award that we got, let’s remember that we have executed a tremendous amount of transformation in our RCM business and to be able to get through that change curve and get to the other side and have large clients coming onboard flawlessly to have continually improving clients support – the client satisfaction, all of these things along with a technical infrastructure that will allow us over the years to improve margin in that business gives me great confidence in the soundness of the business. And then as I look at the pipeline, we continue to see a robust pipeline in front of RCM as well. And so I would say that these still holds. It probably took a – there is probably a little more rework in the RCM business than we thought there was and it took us a little longer to really reimplement a much more technology enabled service business there, but now they are on the other side of that, we have got great confidence, we see the pipeline growing and it’s an area that we expect to see continued growth in.

Gene Mannheimer

Alright. Very good. Thank you.

Rusty Frantz

Thank you.

Operator

And our last question is from the line of Sandy Draper from SunTrust.

Stan Berenshteyn

Hi, this is Stan on for Sandy. Thanks for squeezing me in here. Just a couple of questions, maybe the first one, you mentioned Rusty, competitive takeaways, can you maybe provide some color on any – the type of takeaways that there were on any catalysts that drove the takeaways this year? Thanks.

Rusty Frantz

Well, one catalyst driving competitive takeaways especially when we are on a vendor’s older platform, when the clients on the vendors older platform, that vendor is not going to continue to advance regulatory compliance on that platform, it creates a switching moment. In addition, we have got some instances – we have had some instances where the vendors just provided a very poor support experience and it’s created a desire within the client to switch. We also have – we have a very broad integrated ambulatory platform with pop health, with outreach, with mobility. Sometimes we are bringing a broader capability than their current vendor can bring. And so it’s a number of different reasons, but most of the time it is because the clients’ current vendor is not delivering for them, one way or another and that forces them to go out into the open market.

Stan Berenshteyn

Got it. And I guess as a follow-up on so you talked about bookings being maybe a little bit muted having them to fiscal ‘20 can you maybe comment on any expectations in product mix, do you expect a similar mix as you saw in fiscal ‘19 or any changes going forward? Thanks.

Rusty Frantz

I think that this is probably going to be pretty similar right. I mean, this is the year we started to see the all-in deals really come forward which of course is the ultimate mix, because it’s everything right. And so my expectations are we have got a sales team that’s got a little more tenure. We have done some work from an innovation side that makes us even more attractive. And at the same time, we got good production from the sales team this year, I mean going from whatever was 118 to 133 give or take I mean that’s a nice jump in bookings. Frankly, it gets harder the next year. As the number gets bigger, the stretch gets little harder and so that’s why as we look at the pipeline as we look at – frankly as we look at our – as we look at what happened on back half of last year that really gets us to continued growth in bookings next year, but maybe not quite up in that mid-teens level.

Stan Berenshteyn

Great. Thank you.

Rusty Frantz

Thank you.

Operator

And at this time, I am showing that we have no more questions. Rusty, I turn the call back to you.

Rusty Frantz

Yes. Well I guess if we had Jamie here, everybody rather would have found another 10 minutes of questions, but I am sure he will be back on the next call with us. And I certainly wish him the best and just wanted to say thanks to everybody. Sorry to have to move the call, but it was the right thing to do. And I look forward to talking to you on the next call. So thanks everyone.

Operator

Ladies and gentlemen, thank you for joining us for NextGen Healthcare’s fiscal 2019 fourth quarter year end results conference call. This does conclude the call. You may now disconnect.

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