NEXTGEN HEALTHCARE,

NXGN
Verzögert Nasdaq - 22:00:00 27.01.2023
18.35 USD -1.24%

Transcript : NextGen Healthcare, Inc., Q3 2023 Earnings Call, Jan 24, 2023

24.01.2023 | 23:00

Presentation Operator Message
Operator (Operator)

Welcome to NextGen Healthcare Fiscal 2023 Third Quarter Results Conference Call. Hosting the call today from NextGen are David Sides, President and Chief Executive Officer; and Jamie Arnold, chief Financial Officer. Today's call is being recorded. [Operator Instructions]

I would like to turn the call over to James Hammerschmidt, Senior Vice President of Finance and Investor Relations of NextGen. James, you may begin.

Presenter Speech
James Hammerschmidt (Executives)

Before we start, please note that we will be making forward-looking statements during the presentation in the QA part of the call. These statements are based on management's current expectations and assumptions and are subject to risks and uncertainties. Factors that may cause actual results to materially differ from expectations are detailed in our earnings release and SEC filings. This call will also reference certain non-GAAP financial measures. Information about non-GAAP financial measures, including reconciliations to U.S. GAAP can be found in our earnings release, which is available on our Investor Relations website.

At this time, I'd like to turn the call over to our President and CEO, David Sides.

Presenter Speech
David Sides (Executives)

Thank you, James. In May of last year, we described our multiyear journey to deliver double-digit revenue growth, operating leverage and disciplined capital management, and I'm pleased to report strong execution and solid results across all 3 fronts in the quarter. But before I go into my prepared remarks, I'd like to address an important topic. On January 6, we became aware of unauthorized access to a limited part of the NextGen network. Upon investigation, we learned the company was the target of a sophisticated cyberattack.

We immediately executed our internal response procedures and contained the threat, secured our network and have returned to normal operations. Our forensic review is ongoing, and to date, we have not uncovered any evidence of access to or exfiltration of client or patient data. Based on our investigation to date, this incident impacted select administrative nonclient files within our network.

In total, this affected less than 1% of the devices used by our employees. Out of an abundance of caution, as soon as we noticed the threat, we severed connectivity to some systems and notified clients who are impacted in a timely manner. The vast majority of clients continue to operate as usual without any disruption. Those systems have all been securely restored and operations have returned to normal.

While unfortunate, we are happy to note that previous investments in cybersecurity paid off. We will continue to invest in keeping our systems safe and secure for our employees, clients and the patients they serve.

Now back to our progress in the quarter. I'd like to start with growth. Our integrated solution creates a foundation to deliver insights at the point of care, which allows for us to partner with clients to improve outcomes. This differentiation is resonating in the market, especially among leading integrated care organizations looking for a holistic platform to deliver medical, behavioral and dental care.

Our bookings in the quarter reflect this differentiation where despite the macroeconomic environment, we continued to see success in gaining new logos and cross-selling our Surround solutions. There were 6 deals over $1 million, spanning both inside and outside the base. Bookings from net new clients represented approximately 30% of sales in the quarter, bringing our full year average back above 25%.

We continued to see opportunity to help our clients address the problems they face in today's environment such as staffing shortages, wage increases and higher patient volumes. These challenges create demand for our managed cloud services, revenue cycle and patient engagement solutions as our clients look to gain practice efficiencies and improved financial outcomes while continuing to deliver quality care. These factors, in addition to strong client retention have resulted in continued growth acceleration across our diverse revenue streams.

This is especially clear in our recurring revenues, which has been building momentum and exceeded 10% growth in the quarter. While our commercial efforts are focused on delivering growth in fiscal year '23, our solutions and development organization are innovating to build new offerings that drive growth in fiscal year '24 and beyond. We believe there is tremendous opportunity to expand our platform, especially when we look at the patient intake process and other front-end offerings that are currently in the early testing with clients. We see strong proof points that our solutions are delivering value and a clear return on investment. I look forward to updating you all on the progress the team is making when we approach the start of our new fiscal year.

Moving on to our operations and investments we're making to scale. Our ability to deliver operating leverage starts with the foundation of our employees and our culture. We just recently conducted our annual vote survey that is voice of the employee, which measures employee engagement across 14 dimensions. I'm pleased to say employment engagement has increased for the sixth year in a row and is well above the benchmark, with strong improvement in culture, working environment and client focus. We've been thoughtful in managing our headcount throughout the year from the expansion of our sales development rep program, creating the upgraded center of excellence and moving to a remote first, work from anywhere our organization, which allows us to access talent pools on a global scale while minimizing our facility footprint. The company is focused on making investments and taking the actions required to show operating leverage. We will continue to optimize our resource mix, rationalize vendor spend and rethink processes and technologies to improve our productivity as we close out the final quarter of fiscal year '23.

Now turning to our capital allocation effort. We believe total shareholder return is enhanced by taking a disciplined and deliberate approach to capital acquisition and deployment. Our strategy is focused on investing in innovation, accelerating growth through M&A and returning capital to shareholders through opportunistic buybacks. Following our last earnings call, we raised $275 million in convertible debt and concurrently purchased approximately 2.1 million shares for $40 million as part of the offering. These proceeds, in addition to our cash generation and credit facility provides ample capital to execute on our inorganic growth agenda.

We also announced the acquisition of TSI Healthcare, a long-standing partner and the first acquisition the company has done in almost 3 years. TSI expands the addressable market served by our enterprise domain, unlocking new attractive specialties such as cardiology, rheumatology and pulmonology. The company provides purpose-built clinical content in a differentiated service offering, which when paired with our strong commercial channel, will drive long-term sustainable top line and bottom line growth. Given the similarities in culture and an aligned strategy, I'm pleased to say the integration effort is going well as we start making foundational investments back into the business. Looking forward, we maintain an active M&A pipeline, and we'll continue to assess future acquisitions, especially as it relates to capabilities that accelerate our effort behind NextGen insights. We believe data analytics and value-based care enablement continue to be an attractive opportunity for the company to pursue.

Lastly, I'd like to acknowledge the passing of NextGen Healthcare's Founder, Sheldon Razin. Shelly was an intensely passionate and entrepreneurial innovator by digitizing health records and automating workflows decades before the HITECH Act mandated the use of EHRs, Shelly has improved the lives of thousands of clients, tens of thousands of providers and millions of patients. He will be missed. And building upon his legacy, the company is more focused than ever to innovate and deliver better health care outcomes for all.

And now I'll turn the call over to Jamie to provide details on our financial performance in the quarter. Jamie?

Presenter Speech
James Arnold (Executives)

Thank you, David. Now turning to the third quarter fiscal year '23 financial results. Total bookings came in at $44.8 million. This represents a 19% increase from the third quarter of last year and a 20% increase from last quarter, bringing year-to-date bookings growth to 9%. Software license bookings were below recent trends, which has an outsized impact on both quarterly revenue and earnings.

Total revenue for the quarter was $161.9 million, an 8% increase year-over-year. Recurring revenue accounted for $148.7 million or 92% of total revenue. This equates to 11% year-over-year growth. Excluding the impact of the TSI acquisition, our organic growth from recurring revenue was 8%, primarily due to the strong performance in transactional and data services and managed services. Most of the contribution from the TSI acquisition is reflected in the subscription revenue line.

Nonrecurring revenue for the quarter was $13.2 million and represents a 14% decrease compared to the same quarter last year and a 17% decrease from last quarter. While we expect Q4 software bookings will return to the prior 6-quarter trend, we are closely watching for changes in client purchasing preference that could be affected by the macroeconomic environment.

Gross margin of 47.3% was down approximately 310 basis points compared to the same quarter last year and down 94 basis points compared to the prior quarter. As noted in the discussion about nonrecurring revenue, software revenues are off recent trends, which had a significant impact on gross margin decline. Additionally, as discussed on last quarter's call, we have made significant investment in our upgraded center of excellence and professional services as well as a shift in product mix. Margin improvement will continue to be a focus and spend related to upgrades should start to moderate in the back half of fiscal year '24.

Turning to operating expenses. SG&A of $46.2 million decreased by 2% compared to the same quarter last year due to lower variable compensation as well as cost reduction actions we have been executing such as reducing facilities footprint. Net R&D expense was $19.6 million for the quarter and represents 12% of total revenue. This is a 1% increase compared to the same quarter last year. We had a GAAP tax provision of $1 million this quarter with a GAAP effective tax rate of 11.5%. Our non-GAAP tax rate remains at 20%. On a GAAP basis, Q3 fully diluted net income per share was $0.12 compared to net income of $0.08 per share in the fiscal third quarter of 2022. On a non-GAAP basis, fully diluted earnings per share for the fiscal third quarter of '23 was $0.26 compared to $0.24 in the year ago quarter.

Turning to the balance sheet. We ended the fiscal third quarter with $241.6 million in cash and equivalents and no balance outstanding on our line of credit. Free cash flow for the quarter was a negative $6.9 million. As David noted, in November, we issued $275 million convertible senior notes with net proceeds to the company of $266.5 million after debt issuance cost. Key terms include a 3.75% coupon rate, 5-year maturity period and a conversion price of $25.68. We can call them on or after November 20, 2025. For more detail, please refer to the debt footnote in our financial statements.

Concurrent with the convertible debt offering, we purchased 2.1 million shares for $40 million at an average cost of $19.02 per share. Since the authorization of our share repurchase program in Q3 of fiscal 2022, we have purchased a total of 4.8 million shares for $85.8 million at an average cost of $17.68 per share. As of December 2022, we still have $74 million remaining in the share repurchase authorization.

On November 30, we acquired TSI Healthcare. The acquisition provided minimal impact to our Q3 financial performance since it represents only one month of actuals. We expect the acquisition to contribute between $10 million and $12 million of revenue for fiscal year '23 and will be accretive to earnings within a year. As mentioned earlier in the call, the impact to revenue will be mainly in the subscription revenue line.

Turning to our fiscal '23 financial guidance. As noted in the press release, we are updating our prior guidance to account for the acquisition of TSI and the convertible debt offering. We now expect fiscal '23 total revenue to be in the range of $642 million to $650 million, which represents a year-over-year growth of 8.3% at the midpoint. Moving to adjusted EBITDA. We are maintaining our prior guidance range of $110 million to $115 million and our prior fiscal non-GAAP EPS range of $0.93 to $0.99.

In closing, I believe the company is well positioned to meet our long-term objectives based on our strong bookings performance in Q3, operational execution and disciplined deployment of capital for smart acquisitions like TSI. And now let me turn the call back to David for closing comments.

Presenter Speech
David Sides (Executives)

Thank you, Jamie. NextGen continues to execute with a focus on driving growth for both us and our clients, and we're making the investments required to deliver long-term profitability and scale. Our overall positive outlook reflects the tailwinds we created by solely focusing on ambulatory care, a resilient business model and our focus on driving shareholder value.

In summary, I am pleased with this quarter's results and it sets us up for sustainable double-digit revenue growth in fiscal year '24, which starts for us in April. This is 1 year earlier than we said at our Investor Day in May, which targeted double-digit growth in fiscal year '25. We will provide fiscal year '24 guidance in May after we announce our fiscal year '23 year-end results, and I am incredibly proud of the commitment and care shown by the NextGen family, both to each other and to our clients. This concludes my comments. Let's move to questions. Operator?

Question and Answer Operator Message
Operator (Operator)

[Operator Instructions] We'll take our first question from Stephanie Davis, SVB Securities.

Question
Stephanie Davis Demko (Analysts)

Just a quick one for me when I think about what takes up most of your guys' time. I think about the progress of NextGen. At first, your predecessor, David, he had to focus really on turning around user experience. It felt like your first priority was gaining to that double-digit growth target. Now that you're there, is it just pure execution? Or is there anything else in mind as your next big goal?

Answer
David Sides (Executives)

I think it's pure execution from here. So some of the new organic products that we're coming out with in the insight domain were seeing good, early client interest. And so we'll talk about those more. But some of the things we talked like behavioral health, last quarter, we had a really good sales quarter for behavioral health, which is a new organic area for us.

So those were part of the contribution to having a record sales quarter. So I think from here, it's just execution, getting those new products out, driving the margin expansion that we know is there now that we have the revenue growth and then continuing to be smart on how we deploy capital that we've raised and make really smart acquisitions. It's just doing that from here should get us where we want to go.

Question
Stephanie Davis Demko (Analysts)

Not a bad place to be. And just a quick follow-up then, when I think about the quarterly cadence of margins for the year. Is the uptick in 4Q, try to assume that's license sales shifting from 3Q to 4Q and helping the margins?

Answer
David Sides (Executives)

Yes. I mean that's basically it. And then I think next year, too, we think over time, as we've talked about this before, we sell more subscription. We're going to temper our expectations for recognizable in our next year plan and account for that by taking out some cost to allow for that reduction in kind of higher-octane revenue, so we can see the growth that we're looking from that next year.

But yes, it's mainly you'll see a rebound next year, as Jamie said in his comments -- or next quarter, I mean, in the recognizable license revenue and will be, as we talked about, on the full year number as we projected in the guidance.

Question and Answer Operator Message
Operator (Operator)

Next question comes from Jack Wallace from Guggenheim Securities.

Question
Jack Wallace (Analysts)

Just a quick question on the hacking incident. Has that had any impact to both your current and potential clients? And I've got a couple of follow-ups.

Answer
David Sides (Executives)

No, not so far. Unfortunately, it's more common than you would think nowadays. We were glad to contain it. There were no client systems affected at all, no client data, no patient data, no provider data. None of those systems were compromised at all. So we had a few, less than 1% of devices that were compromised. We quickly shut that down within a day of realizing that. So we contained it and then restored everything. Communicated with any clients who might have had a process disruption because we didn't answer a support call or other kind of ancillary things.

But overall, all the practice that we've done and all of our policies and procedures served us well during this. As you can imagine, we're speeding up some of our investments in cyber that we had planned. We implemented a number of those even in the last couple of weeks. And overall, we're fortunate it's not material. It doesn't affect our results financially.

We've had good conversations with our clients. They appreciate the honesty and transparency. And from here, we'll adopt a really strong culture, and we've learned from it. It's one thing to do the tabletop exercises. It's another to do it in practice. I think we're well-practiced now.

Question
Jack Wallace (Analysts)

Got it. That's helpful. And then in the last quarter, you talked about the application to become a QHIN. And just wondering about the time line for that to go operational. And then as a follow-up to that, the other participants or the other applicants, are you encouraged by the level of industry interest? And then as everyone goes live, can you just talk a little bit about how that can impact the business going forward?

Answer
David Sides (Executives)

So we're encouraged by the ability of our software to kind of scale to QHIN level. We have a number of opportunities there talking with clients about our Mirth Cloud Connect. So it's the offering that helps clients connect to any kind of any source at scale. And the application process hasn't come out for QHIN yet, but we feel like we're there from a technology perspective. We need to work through kind of the commercial terms, and we'll see what those guidelines are.

But when we talk with clients about it, I'm encouraged because the idea of doing an interface onetime for all clients. So for example, if you're in Phoenix, you connect to a hospital and then all of our clinics in Phoenix can be connected at hospitals through us without having to do that work. It's just so much more efficient that it's got to kind of both speed, interoperability and lower the price of health care because we did it one time. So from an effort perspective, it's just substantially better.

So we're encouraged that there are other people in the industry thinking about this the same way. It could be really straightforward to then just connect 2 QHINs, NextGen's QHIN to another supplier's QHIN, and all of a sudden, all of that is interoperable from one connection between us both. We're already connected to all of our clients. So if another supplier was connected to all their clients, that one connection could bring enormous advantages and defragmentation to the health care marketplace and the medical records as well as improve things like how you do care management across domains and across venues.

So in summary, right, we're really encouraged. I think we're in the right place. We have the right technology. And as the application process becomes clear, we'll work through the rest of it. But I think it's a good -- it's turning out to be a good move for us.

Question
Jack Wallace (Analysts)

And with, let's say, all the plumbing getting set up on the other end of this, do you suspect that this will eliminate some of the bad acting of the info blocking in the industry or just the information highway, the presence of that not necessarily guarantee a free flow of information from a decision-making standpoint.

Answer
David Sides (Executives)

Yes. Jack, sorry, I misspoke on the QHIN application. It has come out, and we're going through it. But I agree with your premise that this will make data much more liquid than it was before. I think some of our other suppliers set up QHINs too. It should slow down any information blocking from any of those other suppliers or whether it's some aggregators like Commonwealth or others. So those are all, I think, good.

We can -- every one of the suppliers can kind of handle the volume of this and it is built too already. And like I said, we're already connected to all of our clients. So for us to take the next step is really, okay, how do we do this at national scale, how do we think through, how do we run the system and get value from it. So I think it's all good for the American health care system that these kind of regulations are coming into effect, and we intend to capitalize on them.

Question and Answer Operator Message
Operator (Operator)

Our next question comes from Jailendra Singh from Truist Securities.

Question
Jailendra Singh (Analysts)

I just want to better understand the top line growth and margin profile for TSI Healthcare longer term. It seems the deal is not adding any EBITDA in fiscal '23, which I understand is only 4 months. But you talked about the deal becoming accretive to EBITDA in next year -- in a year or so. Maybe talk about like what will drive that? Is it just the cost management, cost synergies? Like what are the key drivers which -- is that improving margins at TSI? Just maybe flesh out a little bit some details there.

Answer
David Sides (Executives)

Jailendra, it's a good question. So we're still making investments in our own internal technology this year. When we went to Investor Day, we talked about we'll get operating leverage from some of the ways that we're automating ourselves, meaning automating NextGen. So we've deployed systems to better automate how we handle our support process. We've deployed things like AI that one of our support staff talking with a client. It suggests here might be the possible answer.

So as we're hiring and scaling as we grow, we can bring people online to do their job more effectively and more productively quickly. We're also making a large investment in all the upgrades of spring '21, which we've talked about. And obviously, that will have an end date sometime this year. But -- that's been a big investment to set up that center of excellence. It's kind of a onetime to get through this Cures Act process, and then that will fade away or we'll turn that into another revenue-generating capability with those employees.

So there are some things that we're doing now to try to set ourselves up to scale for the growth. And that's why we said this year, we're going to have our EPS to be similar to last year as we take some of that margin and invest in our own business. And then that sets us up for operating leverage next year and the following years because we're planning on this being a multiyear journey. And I'll hand it to Jamie for further comments.

Answer
James Arnold (Executives)

I think that's it, David. We've laid out a multiyear plan, and we would expect I think of it more is our progress on the Rule of 40 score. So we will show some operating leverage. But as David indicated in his prepared remarks, we will also accelerate revenue growth next year.

Answer
David Sides (Executives)

And on the EPS EBITDA side, too, we can land that exactly with spend. So I feel like that's the easier part of the equation to work on. We, I think, worked on and are achieving the harder part, which is double-digit revenue growth. We'll certainly achieve that in fiscal year '24. I mean just the 92% recurring nature of our revenue, a record Q3. We can see fiscal year '24 very clearly now from a revenue perspective.

We'll give guidance in our call in May, but we're spending money this year to still hit our EPS guidance range. But we're using that money to improve our cyber profile to improve our productivity to do more robotic process automation and some of these things that will have a good NPV for us, the net present value, for years to take care of these things one time.

Question
Jailendra Singh (Analysts)

I'm assuming all those initiatives kind of apply to your TSI Healthcare transaction. That's what I was actually referring to, right?

Answer
David Sides (Executives)

Right. So taking TSI, which we've worked with for many years, really like the company, love the people, taking them from a privately owned organization up to a SaaS-compliant public company standard takes investment. And so we're working through those investments, whether it's on the IT side, the finance side, how we run. But we'll get through those. And then as we said, it will be accretive in the first year.

Question
Jailendra Singh (Analysts)

Okay. And then I know we have talked about this in the previous calls, and you guys made some comments on this call to about the impact of macro environment, but I don't know if maybe it's just me. I mean it looks like a little bit more cautious this time, like you're watching the trends and macro impact.

Have you seen any early indications in the impact on the sales cycle, I mean, decision process among your clients or even indications to put any spending on hold? Clearly, your bookings don't reflect that. But just curious like why is there any change in tone or still do you think that there is no impact as such?

Answer
David Sides (Executives)

Well, I mean, it does impact our clients from their ability to recruit staff, their bottom lines, right? But to the point of record bookings, right, we're doing well from a sales perspective. So we're not seeing an impact there. We feel good about the current quarter of Q4 that we're in to end the year. So it's not affecting us from that perspective. Obviously, like anyone, we have our own cost internally where it affects us, we've seen that. But we're mitigating that and feeling good about that. But the main piece is, I'll hand it to Jamie.

Answer
James Arnold (Executives)

Yes, David. Jailendra, it was more about -- when we talked about it today, it was more in context of the software revenue and the software bookings in this quarter. Last quarter, we were kind of nonplussed about the bookings level. And we said it was kind of a timing. We clearly made it up. And through the first 3 quarters this year, our bookings were up 9% in total.

What we did see this quarter that makes -- that sort of -- that we called out was the lower software level. And so we're monitoring the macro trends, all this discussion about potentially a recession this year and other conditions that affect our clients, we are seeing -- as we see the pipeline develop, there seems to be more of a preference for the SaaS product than the licensed product. And that's what we were commenting on.

Question and Answer Operator Message
Operator (Operator)

Our next question comes from Sean Dodge from RBC Capital Markets.

Question
Sean Dodge (Analysts)

Maybe just jumping off, Jamie, on your last point there. So David, your previous point around license sales was you had -- it sounds like some confidence is going to pick back up in Q4. I guess there's a little bit of softness there in Q3. Was that then from deals that simply slipped from Q3 to Q4? I guess have you actually seen a pickup in this already in Q4. Is there a pipeline? Are you off to a quicker start with those this quarter than you have historically?

Answer
David Sides (Executives)

Yes, Sean, it's a little bit of a slip. And so we have high confidence because some of those may have even closed by now. So it gives you confidence that this quarter looks good. But I do think, like I said in our earlier answer, I think next year, we're going to move the license revenue down from our own budgetary expectations because of the lumpiness. And we're seeing that trend because we're selling everything a subscription.

So that's kind of expected. It's been coming down as we've said before, for multiple years. It used to be $60 million 5 years ago. Now it's around $30 million. It won't go to 0, but it will keep getting a little bit smaller as all of our new offerings and Surround offerings are all subscription. So that's where we're seeing a lot of growth in the business.

Answer
James Arnold (Executives)

If you look at the longer-term trend over, as David said, 5 or 6 years, you see a very, very clear trend line. It did change as we started to come out of COVID. We're just being -- we are calling it out and -- but we have an adequate working set for this quarter. So we just want to highlight it. We try to be transparent.

Question
Sean Dodge (Analysts)

Okay. And then with cross-selling continuing to be an important part, David, you mentioned the Surround Solutions that being an important part of the growth algorithm going forward. What's the backdrop like there now? And what I'm trying to get is just the motivation for clients to swap out and consolidate ancillary systems on NextGen. Is that -- is kind of the main factor there just your ability to integrate all of these solutions more seamlessly and present them with kind of one offering. Or is there some element when you bundle all these together? Can you just price all of these in a way that's a little bit more competitive than stand-alone point solutions could?

Answer
David Sides (Executives)

Yes. So we think integration wins. So integration is an easier way to manage the system. So you have less interfaces between us and maybe point solutions. It's either to host, right? So we can host everything for a client in our -- in AWS and have an integrated cloud offering, and it's less from a cyber perspective to protect as well as less to manage. So if you're a physician office, you're under pressure from a revenue perspective, you're thinking, okay, I'm going to have less systems. We think the same thing when we're looking at our own cost internally, we want to simplify the number of suppliers that we work with, and we'll pick integrated suppliers to do more with fewer people.

And as you do more, you expect to see a return there. Nothing else from your own staff because there's less systems that they have to know how to work. So I think that trend is playing out. I think it's favorable for us from an integrated provider perspective, and it should continue. We see people still wanting to buy these solutions. It's easier to add one on than it is to go contract with somebody new and go through that process.

Question and Answer Operator Message
Operator (Operator)

Our next question comes from Jessica Tassan from Piper Sandler.

Question
Jessica Tassan (Analysts)

I just wanted to follow up a little bit on the TSI margin questions. Can you maybe talk about the gross margin profile and then the EBITDA margin profile of that business maybe near term and then also steady state just because I think there are a couple of different specialty EMRs that you guys will be maintaining as you scale that business?

Answer
David Sides (Executives)

Well, it's not multiple EMRs. So they use our EMR. They have content that's specific to 3 specialties, the pulmonology, rheumatology and cardiology. That's really attractive to us because we haven't gone after those specialties, but they use our EMR. So over time, the EBITDA profile looks really good. It will look like our own EBITDA profile. And in some ways, they do better in some places than we might do. So long term, I think the EBITDA profile will approach ours. And Jamie, I don't know if you want to add any color on the gross margin.

Answer
James Arnold (Executives)

Yes, David. I'm going to go back to why we acquired TSI is more so than talking about the margins are going to look pretty similar to ours. The -- but the reason we acquired TSI is their specialty content and their high level of service that they provide to their customers, which -- so the content is in rheumatology, cardiology, and pulmonology. These are specialty areas that they had built content, and we didn't have it. So we think it opens up new areas for us and can help accelerate our growth for the NextGen enterprise domain.

And the other thing is some of the things they provide services to their customers, they have some offerings that their customers value, and we will bring those to our NextGen clients also. So it's more about the opportunity it creates on the top line is how I think about it.

Question
Jessica Tassan (Analysts)

Got it. And then I think just as you were discussing the TSI revenue acceleration potential, you might have mentioned that the sales force was kind of limited at the time of the acquisition. I'm wondering, were the costs associated with ramping the sales force for that business fully reflected in the fiscal 3Q? And then if not, just when might those investments begin to appear?

Answer
David Sides (Executives)

Well, we only -- we didn't own the asset that long in 3Q. So you'll see it ongoing, but it should offset with the growth we think we'll see from that business, too. So it will be in going forward, but it's in all of our guidance.

Question and Answer Operator Message
Operator (Operator)

Next question comes from George Hill from Deutsche Bank.

Question
George Hill (Analysts)

Yes. David and Jamie, kind of a macro question as cost-cutting and HR levels and staffing levels seem to be a trend across the industry. I know this is always a sensitive topic. But I know that it was hard to hire employees during the upswing. We're seeing a lot of layoffs across a lot of macro tech sectors during this downswing.

I guess I'd ask you how you feel about cost structure and staffing. And does the company see this more as an opportunity to opportunistically hire people and bring on talent? Or as you look at the demand environment, is this something where you're kind of trying to match staffing levels to end market? And the questions kind of spawned from the SG&A spend in the quarter was kind of flattish to downish slightly year-over-year and below where we had expected. So just kind of a headline cost and headcount question, please.

Answer
David Sides (Executives)

Yes. Thanks for your question, George. I think we see it as an opportunity to acquire talent. So when we see Salesforce, Twitter, those kinds of organizations laying off in large numbers, we think, wow, we could -- there's probably a great architect in there who could be building software with us in a more resilient industry of health care.

So we're thinking about it as this is a good time to be us to start growing and thinking about how can we acquire really great talent. We always look at our cost basis, and we talked a little bit earlier about how we're thinking about getting efficiency and making investments in the systems to automate our own staff and the productivity of our own teams.

That will continue. I think we'll be through most of that in this fiscal year. And then that's why we'll see kind of earnings growth next year. It's one of the leverage points for us. But we're pleased to be hiring in this environment, and I'll let Jamie provide some color.

Answer
James Arnold (Executives)

Yes, David. What I would say is, we've worked really hard over the last few years to build a scalable infrastructure. We will continue to invest in technology that increases our efficiency. And we managed our headcount very tightly over the -- even during the growth periods of the last 1.5 years, and we will continue. David's point about bringing on the opportunity for some of these layoffs, it's for us to get certain skill sets that have been hard to find. So we will be selective in it, and that's all part of our plan to demonstrate operating leverage over the coming years. So you have to be very disciplined to make that a reality.

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Answer
David Sides (Executives)

Well, there's no other questions. Thanks for joining. It was a good quarter, great quarter as far as a bookings perspective, still being able to sell in this market, very excited about the prospects going forward. Double-digit growth coming up here very shortly as we start fiscal year '24 on April 1. Thanks for your continued interest in NextGen Healthcare.

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