NXGN - NextGen Healthcare Sees Higher Growth Ahead Amid Operating Improvements

2023-07-18 17:02:08 ET

Summary

• NextGen Healthcare, Inc. provides a range of managed software and service solutions to the U.S. healthcare industry.
• Management has guided fiscal 2024 revenue growth slightly higher than the previous year, and operating profits are growing.
• I'm cautiously optimistic on the firm's prospects now that the false claims settlement is quantified, so my outlook for NextGen Healthcare stock is a Buy at around $17.00 per share.

A Quick Take On NextGen Healthcare

NextGen Healthcare, Inc. ( NXGN ) is a provider of a suite of healthcare system software and managed service solutions in the United States.

The firm’s top line revenue growth is expected to accelerate slightly year-over-year.

Given the just-announced false claims settlement, management’s higher revenue growth expectation for fiscal 2024, improving operating results and perhaps a bottom in its stock valuation, my outlook for NXGN is a Buy at around $17.00.

NextGen Healthcare Overview

Atlanta, Georgia-based NextGen Healthcare, Inc. was founded in 1974 to provide healthcare system participants with managed software and related services to streamline their clinical care, financial, and operational workflows.

The firm is headed by Chief Executive Officer David Sides, who joined the firm in September 2021 and was previously Chief Operating Officer at Teladoc Health and CEO of Streamline Health.

The company’s primary offerings include the following:

• Electronic Health Records

• Medical Billing

• Provider Experience

• Telehealth

• Practice Management

• Value-based Care

• Analytics

• Data

• API Marketplace.

The firm seeks customers via its direct sales and marketing efforts in small, mid-size or larger practice segments.

NextGen Healthcare’s Market & Competition

According to a 2023 market research report by Grand View Research, the global market for electronic health records software and services was estimated at $28.1 billion in 2022 and is forecast to reach $38.8 billion by 2030.

This represents a forecast CAGR (Compound Annual Growth Rate) of 4.1% from 2023 to 2030.

The main drivers for this expected growth are growing government initiatives to digitize health records and increase the adoption of electronic health records software and services.

Also, the chart below shows the historical and projected future growth trajectory of the U.S. Electronic Health Records market from 2020 to 2030 by end-use:

Major competitive or other industry participants include:

• Cerner Corporation (Oracle)

• GE Healthcare

• Veradigm

• McKesson

• Epic Systems

• eClinicalWorks

• Medical Information Technology

• Health Information Management Systems

• CPSI

• AdvancedMD

• CureMD Healthcare

• Greenway Health.

NextGen is active in other healthcare software and service markets with large addressable market sizes and significant competition.

NextGen Healthcare’s Recent Financial Trends

• Total revenue by quarter has grown per the chart below; Operating income by quarter has also risen recently.

• Gross profit margin by quarter has trended lower recently; Selling, G&A expenses as a percentage of total revenue by quarter have also moved lower in recent quarters.

• Earnings per share (Diluted) have dropped sharply in the most recent reported quarter.

(All data in the above charts is GAAP.)

In the past 12 months, NXGN’s stock price has fallen 4.78% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) rise of 31.48%, as the chart indicates below.

For the balance sheet , the firm ended the quarter with $238.3 million in cash, equivalents and short-term investments and $266.8 million in total debt, none of which was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $41.4 million, during which capital expenditures were only $2.3 million. The company paid $33.5 million in stock-based compensation ("SBC") in the last four quarters, the second-highest trailing twelve-month figure in the last eleven quarters.

Valuation And Other Metrics For NextGen Healthcare

Below is a table of relevant capitalization and valuation figures for the company.

(Source - Seeking Alpha.)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

NXGN’s most recent Rule of 40 calculation was 16.9% as of FQ4 2023’s results, so the firm is in need of improvement in this regard, per the table below.

(Source - Seeking Alpha.)

Commentary On NextGen Healthcare

In its last earnings call ( Source - Seeking Alpha ), covering FQ4 2023’s results , management highlighted the firm’s new quarterly bookings record and strong demand for its Surround solutions. Revenue grew by 18% year-over-year, exceeding expectations.

The firm has partnered with technology companies like Snowflake and AWS. Operations-wise, management has invested in building infrastructure and consolidated HR systems into a single integrated platform.

The firm experienced a security incident involving their NextGen Office system, but management said that patient health or medical information was not compromised.

Leadership said the integration of TSI, a recent acquisition, is progressing well.

NXGN continues to make investments in the enterprise data cloud, interoperability, value-based care analytics, and physician experience improvement.

The company is seeking to sustain mid to high single-digit revenue growth, and management is considering ongoing M&A opportunities to accelerate growth.

Management did not disclose any company, customer or revenue retention rate metrics but did characterize client retention as ‘strong’ without providing additional detail.

Total revenue for FQ4 2023 rose 18% year-over-year, but gross profit margin dropped 3.5%.

Selling, G&A expenses as a percentage of revenue fell 6.6% year-over-year, a positive development indicating greater efficiency while operating income more than tripled YoY to $15.9 million.

Looking ahead, top line revenue in fiscal 2024 is expected to grow at 9.8% at the midpoint of the range, which, if achieved, would represent a slightly higher growth rate than in fiscal 2023.

Non-GAAP earnings per share is expected to be at $1.07 at the midpoint of the range.

The company's financial position is reasonably strong, with almost as much cash as debt and material free cash flow.

NextGen’s Rule of 40 performance has been sub-par, with significant room for improvement.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Challeng[es][ing]" two times and "Macro" six times.

Analysts questioned company leadership about growth in its various segments. The larger segments of Enterprise and Office are growing more slowly, while the Data and Insights segments are growing more quickly.

Regarding valuation, in the past twelve months, the firm's EV/EBITDA valuation multiple has dropped precipitously by 39%, as the chart from Seeking Alpha shows below.

A potential upside catalyst to the stock could include a turnaround to growth for its Software segment.

The primary business risk to the company’s outlook is a slowing decision-making environment that could flatten the firm’s revenue growth trajectory.

Management is thinking the current environment may be a good time for acquisitions due to their relatively lower cost of capital, so we may see more activity there.

On July 14, 2023, the DOJ announced a $31 million settlement by NXGN to pay to resolve allegations that the company violated the False Claims Act [FCA] by "misrepresenting the capabilities of certain versions of its EHR software and providing unlawful remuneration to its users to induce them to recommend NextGen's software."

In my view, with the settlement now behind NextGen Healthcare, Inc., given management’s higher revenue growth expectation, improving operating results and perhaps a bottom in its stock valuation, my outlook for NXGN is a Buy at around $17.00.

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