10-Q


 
 
 
 
 

UNITED STATES
SECURITIES and EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2015

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-12537

QUALITY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

California
(State or other jurisdiction of incorporation or organization)

18111 Von Karman Avenue, Suite 700, Irvine, California
(Address of principal executive offices)
95-2888568
(IRS Employer Identification No.)

92612
(Zip Code)
 
(949) 255-2600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Small reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of outstanding shares of the Registrant’s common stock as of January 26, 2016 was 60,886,173 shares.


 
 
 
 
 




QUALITY SYSTEMS, INC.

TABLE OF CONTENTS
FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 2015

 
Item    
Page
 
 
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
 
 
Unaudited Consolidated Balance Sheets as of December 31, 2015 and March 31, 2015
 
Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended December 31, 2015 and 2014
 
Unaudited Consolidated Statements of Cash Flows for the nine months ended December 31, 2015 and 2014
 
Notes to Consolidated Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
Item 4.
Controls and Procedures.
 
PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings.
Item 1A.
Risk Factors.
Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3.
Defaults Upon Senior Securities.
Item 4.
Mine Safety Disclosure.
Item 5.
Other Information.
Item 6.
Exhibits.
 
Signatures




2



PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS.

QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
 
December 31, 2015
 
March 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
92,648

 
$
118,993

Restricted cash and cash equivalents
4,452

 
2,419

Marketable securities
12,165

 
11,592

Accounts receivable, net
92,592

 
107,669

Inventories
662

 
622

Income taxes receivable
10,565

 
3,147

Deferred income taxes, net
24,074

 
24,080

Prepaid expenses and other current assets
14,111

 
11,535

Total current assets
251,269

 
280,057

Equipment and improvements, net
23,171

 
20,807

Capitalized software costs, net
44,573

 
40,397

Intangibles, net
22,287

 
27,689

Goodwill
73,513

 
73,571

Other assets
18,577

 
18,000

Total assets
$
433,390

 
$
460,521

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
10,250

 
$
10,018

Deferred revenue
55,146

 
66,343

Accrued compensation and related benefits
16,345

 
24,051

Income taxes payable
53

 
10,048

Dividends payable
10,726

 
10,700

Other current liabilities
38,575

 
33,924

Total current liabilities
131,095

 
155,084

Deferred revenue, net of current
1,127

 
1,349

Deferred compensation
6,667

 
5,750

Other noncurrent liabilities
9,918

 
14,798

Total liabilities
148,807

 
176,981

Commitments and contingencies (Note 12)


 


Shareholders’ equity:
 
 
 
Common Stock
 
 
 
$0.01 par value; authorized 100,000 shares; issued and outstanding 60,886 and 60,303 shares at December 31, 2015 and March 31, 2015, respectively
609

 
603

Additional paid-in capital
210,184

 
198,650

Accumulated other comprehensive loss
(517
)
 
(192
)
Retained earnings
74,307

 
84,479

Total shareholders’ equity
284,583

 
283,540

Total liabilities and shareholders’ equity
$
433,390

 
$
460,521

The accompanying notes are an integral part of these consolidated financial statements.

3



QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Software license and hardware
$
16,150

 
$
21,428

 
$
52,026

 
$
60,505

Software related subscription services
11,705

 
11,864

 
36,388

 
31,266

Total software, hardware and related
27,855

 
33,292

 
88,414

 
91,771

Support and maintenance
39,519

 
43,045

 
125,408

 
125,985

Revenue cycle management and related services
21,594

 
20,392

 
62,630

 
54,517

Electronic data interchange and data services
20,643

 
19,051

 
61,413

 
56,276

Professional services
7,421

 
7,644

 
26,700

 
33,288

Total revenues
117,032

 
123,424

 
364,565

 
361,837

Cost of revenue:
 
 
 
 
 
 
 
Software license and hardware
6,530

 
7,295

 
20,149

 
22,326

Software related subscription services
5,533

 
5,194

 
17,454

 
15,029

Total software, hardware and related
12,063

 
12,489

 
37,603

 
37,355

Support and maintenance
7,537

 
7,365

 
23,874

 
21,064

Revenue cycle management and related services
14,381

 
14,246

 
43,573

 
40,154

Electronic data interchange and data services
12,437

 
11,956

 
37,302

 
35,970

Professional services
7,367

 
8,304

 
24,008

 
32,780

Total cost of revenue
53,785

 
54,360

 
166,360

 
167,323

Gross profit
63,247

 
69,064

 
198,205

 
194,514

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
39,395

 
41,482

 
115,962

 
116,893

Research and development costs
14,518

 
18,468

 
49,584

 
51,602

Amortization of acquired intangible assets
897

 
904

 
2,692

 
2,795

Total operating expenses
54,810

 
60,854

 
168,238

 
171,290

Income from operations
8,437

 
8,210

 
29,967

 
23,224

Interest income (expense), net
49

 
(82
)
 
392

 
41

Other expense, net
(43
)
 

 
(147
)
 
(17
)
Income before provision for income taxes
8,443

 
8,128

 
30,212

 
23,248

Provision for income taxes
1,141

 
1,452

 
8,233

 
6,659

Net income
$
7,302

 
$
6,676

 
$
21,979

 
$
16,589

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation (net of tax)
(7
)
 
(101
)
 
(291
)
 
(177
)
Unrealized gain (loss) on marketable securities (net of tax)
(29
)
 
68

 
(34
)
 
94

Comprehensive income
$
7,266

 
$
6,643

 
$
21,654

 
$
16,506

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.11

 
$
0.36

 
$
0.28

Diluted
$
0.12

 
$
0.11

 
$
0.36

 
$
0.27

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
60,867

 
60,272

 
60,548

 
60,250

Diluted
61,279

 
60,855

 
61,190

 
60,813

Dividends declared per common share
$
0.175

 
$
0.175

 
$
0.525

 
$
0.525


The accompanying notes are an integral part of these consolidated financial statements.

4



QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended December 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
21,979

 
$
16,589

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
6,577

 
6,755

Amortization of capitalized software costs
7,428

 
10,190

Amortization of other intangibles
5,402

 
5,371

Loss on disposal of equipment and improvements
158

 
12

Provision for bad debts
2,107

 
38

Provision for inventory obsolescence
118

 
71

Share-based compensation
2,328

 
2,627

Deferred income taxes
741

 
(20
)
Change in fair value of contingent consideration
1,201

 
1,533

Loss on disposition of Hospital Solutions Division
1,366

 

Changes in assets and liabilities, net of amounts acquired:
 
 
 
Accounts receivable
11,313

 
8,779

Inventories
(160
)
 
98

Accounts payable
6

 
(1,084
)
Deferred revenue
(10,320
)
 
(3,897
)
Accrued compensation and related benefits
(7,706
)
 
3,635

Income taxes
(18,395
)
 
4,868

Deferred compensation
917

 
668

Other assets and liabilities
2,232

 
2,473

Net cash provided by operating activities
27,292

 
58,706

Cash flows from investing activities:
 
 
 
Additions to capitalized software costs
(11,604
)
 
(9,535
)
Additions to equipment and improvements
(9,926
)
 
(5,444
)
Proceeds from sales and maturities of marketable securities
5,310

 
10,352

Purchases of marketable securities
(6,024
)
 
(10,995
)
Net cash used in investing activities
(22,244
)
 
(15,622
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of shares under employee plans
732

 
170

Dividends paid
(32,125
)
 
(32,073
)
Payment of contingent consideration related to acquisitions

 
(686
)
Net cash used in financing activities
(31,393
)
 
(32,589
)
Net increase (decrease) in cash and cash equivalents
(26,345
)
 
10,495

Cash and cash equivalents at beginning of period
118,993

 
103,145

Cash and cash equivalents at end of period
$
92,648

 
$
113,640


5



QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(In thousands)
(Unaudited)
 
Nine Months Ended December 31,
 
2015
 
2014
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes, net of refunds
$
25,574

 
$
1,523

Common stock issued for Mirth share-based contingent consideration
$
9,273

 
$

Non-cash investing and financing activities:
 
 
 
Dividends declared but not paid
$
10,726

 
$
10,697

Unpaid additions to equipment and improvements
$
226

 
$
158


The accompanying notes are an integral part of these consolidated financial statements.


6



QUALITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
(Unaudited)
1. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of Quality Systems, Inc. and its wholly-owned subsidiaries, which consist of NextGen Healthcare Information Systems, LLC (“NextGen”), NextGen RCM Services, LLC, QSI Management, LLC, Quality Systems India Healthcare Private Limited (“QSIH”), ViaTrack Systems, LLC (“ViaTrack”), Matrix Management Solutions, LLC, and Mirth LLC and Mirth Limited (“Mirth”) (collectively, the “Company”). Each of the terms “we,” “us,” or “our” as used herein refers collectively to the Company, unless otherwise stated. All intercompany accounts and transactions have been eliminated.
On October 22, 2015, we closed an Asset Purchase Agreement with Quadramed Affinity Corporation (part of the Harris Operating Group of Constellation Software Inc.) in which we sold and assigned substantially all assets and liabilities of the Hospital Solutions Division (“Hospital disposition”). The results of operations and cash flows for the Hospital Solutions Division are reflected in the accompanying consolidated financial statements through the date of disposition. See Note 3 for additional details.
Basis of Presentation. The accompanying unaudited consolidated financial statements as of December 31, 2015 and for the three and nine months ended December 31, 2015 and 2014 have been prepared in accordance with the requirements of Quarterly Report on Form 10-Q and Article 10 of the Securities and Exchange Commission Regulation S-X and therefore do not include all information and notes which would be presented were such consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements should be read in conjunction with the audited consolidated financial statements presented in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair statement of the results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full year.
Beginning in the first quarter of fiscal 2016, we presented certain components of revenue within the consolidated statements of comprehensive income in a format intended to group like-kind products and services and disaggregate the other services category of revenue, which has continued to comprise a larger percentage of total revenue. More specifically, the primary changes to the presentation of revenue included:

Revenue from software-as-a-service (SaaS), hosting services, and other software related subscriptions are now aggregated into a new software related subscription services category of revenue. Previously, revenue from software related subscriptions services was reported within the other services category of revenue.

Revenue from annual software licenses that was also previously reported within the other services category of revenue is now reported within the software license and hardware category of revenue.

Revenue from all other services, including implementation, training, and consulting, are now aggregated into a single professional services category of revenue that excludes software related subscription services and annual software licenses, as noted above.

Each of the corresponding components of cost of revenue has also been revised in a manner that is consistent with the new presentation of revenue described above.
For informational and comparability purposes, we have recast our previously reported consolidated statements of comprehensive income to provide historical information on a basis consistent with the new reporting format of revenue and cost of revenue. The reclassification of revenue and cost of revenue within the consolidated statements of comprehensive income has no impact on previously reported net income or earnings per share and no impact on the previously reported consolidated balance sheets, statements of stockholders' equity, and statements of cash flow.
References to amounts in the consolidated financial statement sections are in thousands, except shares and per share data, unless otherwise specified.
Significant Accounting Policies. There have been no material changes to the significant accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

7



Share-Based Compensation. The following table shows total share-based compensation expense included in the consolidated statements of comprehensive income for the three and nine months ended December 31, 2015 and 2014:
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
$
101

 
$
105

 
$
300

 
$
283

Research and development costs
67

 
113

 
280

 
293

Selling, general and administrative
575

 
752

 
1,748

 
2,051

Total share-based compensation
743

 
970

 
2,328

 
2,627


The total income tax benefit related to share-based compensation was $225 and $313 for the three months ended December 31, 2015 and 2014, respectively. For the nine months ended December 31, 2015 and 2014, total income tax benefit related to share-based compensation was $701 and $825, respectively.

Recent Accounting Standards. Recent accounting pronouncements requiring implementation in future periods are discussed below or in the notes, where applicable.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"), which simplifies the presentation of deferred income taxes by requiring deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. The new guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted and may be applied either prospectively or retrospectively. This guidance is effective for us for the quarter ending June 30, 2016. We are currently evaluating the timing of adoption and potential impact of implementation of this updated authoritative guidance on our consolidated financial statements.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments ("ASU 2015-16"), which eliminates the requirement to restate prior period financial statements for measurement period adjustments following a business combination. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. ASU 2015-16 is effective for interim and annual periods beginning after December 15, 2015 and early adoption is permitted. This guidance is effective for us for the quarter ending March 31, 2016. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"), which replaces the concept of subsequently measuring inventory at 'lower of cost or market' with that of 'lower of cost and net realizable value'. The guidance only applies to inventories for which cost is determined by methods other than last-in first-out (LIFO) and the retail inventory method (RIM). ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. This guidance is effective for us for fiscal year ending March 31, 2018. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Arrangement ("ASU 2015-05"), which requires a customer to determine whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software or as a service contract. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. Upon adoption, an entity has the option to apply the provisions of ASU 2015-05 either prospectively to all arrangements entered into or materially modified, or retrospectively. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ("ASU 2014-15"), which incorporates and expands upon certain principles that currently exist in U.S. auditing standards. ASU 2014-15 provides guidance regarding management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. The new standard requires management to perform interim and annual evaluations and sets forth principles for considering the mitigating effect of management's plans. The standard mandates certain disclosures when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016, and all annual and interim periods thereafter. Early adoption is permitted. ASU 2014-15 is effective for us for fiscal year ending March 31, 2017. We do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.

8



In May 2014, the FASB, along with the International Accounting Standards Board, issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition.  ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards and GAAP.  The core principle of this updated guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosure about revenue and provides improved guidance for multiple element arrangements. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, based on the July 2015 decision and issuance of Accounting Standards Update No. 2015-14, Deferral of Effective Date ("ASU 2015-14") by the FASB to delay the effective date by one year. Companies are permitted to adopt this new guidance following either a full retrospective or modified retrospective approach. ASU 2014-09 is effective for us in the first quarter of fiscal 2019.  We are currently evaluating the potential impact of implementation of this updated authoritative guidance on our consolidated financial statements.
We do not believe that any other recently issued, but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements.

2. Fair Value Measurements

The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at December 31, 2015 and March 31, 2015:
 
Balance at
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
 
December 31,
2015
 
 
 
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
92,648

 
$
92,648

 
$

 
$

Restricted cash and cash equivalents
4,452

 
4,452

 

 

Marketable securities (2)
12,165

 
12,165

 

 

 
$
109,265

 
$
109,265

 
$

 
$

LIABILITIES
 
 
 
 
 
 
 
Contingent consideration related to acquisitions
$
8,046

 
$

 
$

 
$
8,046

 
$
8,046

 
$

 
$

 
$
8,046

 
Balance at
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
 
March 31,
2015
 
 
 
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents (1)
$
118,993

 
$
118,993

 
$

 
$

Restricted cash and cash equivalents
2,419

 
2,419

 

 

Marketable securities (2)
11,592

 
11,592

 

 

 
$
133,004

 
$
133,004

 
$

 
$

LIABILITIES
 
 
 
 
 
 
 
Contingent consideration related to acquisitions
$
16,155

 
$

 
$

 
$
16,155

 
$
16,155

 
$

 
$

 
$
16,155

___________________________________
(1) Cash equivalents consist of money market funds.
(2) Marketable securities consist of available-for-sale money market instruments and fixed-income securities, including certificates of deposit, corporate bonds and notes, and municipal securities.

Our contingent consideration liability is accounted for at fair value on a recurring basis and is adjusted to fair value when the carrying value differs from fair value. The fair value adjustments are reflected as a component of selling, general and administrative expense. Key assumptions include discount rates and probability-adjusted achievement of strategic targets that are not observable in the market. The categorization of the framework used to measure fair value of the contingent consideration liability is considered Level 3 due to

9



the subjective nature of the unobservable inputs used. The fair values of the contingent consideration liability were estimated based on the probability of achieving certain business milestones.
The following table presents activity in our financial assets and liabilities measured at fair value using significant unobservable inputs (Level 3), as of and for the nine months ended December 31, 2015:
 
 
Total Liabilities
Balance as of April 1, 2015
 
$
16,155

Settlement of contingent consideration related to acquisitions
 
(9,310
)
Fair value adjustments
 
1,201

Balance as of December 31, 2015
 
$
8,046


Non-Recurring Fair Value Measurements
We have certain assets, including goodwill and other intangible assets, which are measured at fair value on a non-recurring basis and are adjusted to fair value only if an impairment charge is recognized. The categorization of the framework used to measure fair value of the assets is considered Level 3 due to the subjective nature of the unobservable inputs used. During the nine months ended December 31, 2015, we recorded a $58 adjustment to Gennius goodwill based on additional information that became available during the measurement period about certain liabilities that had existed as of the acquisition date. There were no other adjustments to fair value of such assets.

3. Business Combinations and Disposals
Gennius Acquisition
On March 11, 2015, we acquired Gennius, a provider of healthcare data analytics. The purchase price totaled $2,345. We accounted for the Gennius acquisition as a purchase business combination. The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The fair values of acquired assets and liabilities assumed represent management’s estimate of fair value. The estimated fair value of the acquired tangible and intangible assets and liabilities assumed were determined using multiple valuation approaches depending on the type of tangible or intangible asset acquired, including but not limited to the income approach, the excess earnings method and the relief from royalty method approach. Goodwill arising from the acquisition of Gennius was determined as the excess of the purchase price over the net acquisition date fair values of the acquired assets and the liabilities assumed, and is not deductible for tax purposes. The Gennius goodwill represents the expected future synergies resulting from the integration of the Gennius healthcare data analytics technology, which will enhance our current enterprise analytics competencies and broaden our business intelligence capabilities for addressing new value-based care requirements. Gennius operates under the NextGen Division.
During the three months ended December 31, 2015, we recorded a $58 adjustment to goodwill based on additional information that became available during the measurement period about certain liabilities that had existed as of the acquisition date.
The total purchase price for the Gennius acquisition is summarized as follows:
 
Gennius
Total cash purchase price
$
2,345



10



The following table summarizes the purchase price allocation for the Gennius acquisition:
 
Gennius
Fair value of the net tangible assets acquired and liabilities assumed:
 
Other assets
$
4

Deferred revenues
(37
)
Other liabilities
(131
)
Total net tangible assets acquired and liabilities assumed
(164
)
Fair value of identifiable intangible assets acquired:
 
Software technology
1,800

Goodwill
709

Total identifiable intangible assets acquired
2,509

Total purchase price
$
2,345

The pro forma effects of the Gennius acquisition would not have been material to our results of operations and are therefore not presented.

Hospital Disposition
On October 22, 2015, we closed an Asset Purchase Agreement (the “Purchase Agreement”) with Quadramed Affinity Corporation in which we sold and assigned substantially all assets and liabilities of the Hospital Solutions Division. We believe that the Hospital disposition will allow us to focus our efforts and resources on our core ambulatory business. The financial terms of the transaction and the amount of consideration received were not significant. Since the Hospital disposition did not and is not expected to have a major effect on our operations and financial results, separate discontinued operations reporting is not provided.
We incurred a preliminary loss on the Hospital disposition of $1,366 in the three months ended December 31, 2015, which was recorded in our consolidated statements of comprehensive income as a component of selling, general and administrative expense. The loss was measured as the total consideration received and expected to be received less the lower of carrying value or fair value of the Hospital Solutions Division. Additionally, we incurred $387 in direct incremental costs of disposition and $335 in severance and other employee-related costs in connection with the Hospital disposition during the three months ended December 31, 2015.
Pursuant to the Purchase Agreement, the initial purchase price is subject to certain purchase price adjustments for changes in Net Tangible Assets (as defined in the Purchase Agreement) and future collections of the assigned accounts receivable through July 2016.
4. Goodwill
We test goodwill for impairment annually during our first fiscal quarter, referred to as the annual test date. We will also test for impairment between annual test dates if an event occurs or circumstances change that would indicate the carrying amount may be impaired. During the three months ended December 31, 2015, we have not identified any events or circumstances that would require an interim goodwill impairment test.
We do not amortize goodwill as it has been determined to have an indefinite useful life.
Goodwill by reporting unit consists of the following:
 
March 31,
2015
 
December 31,
2015
NextGen Division
$
33,992

 
$
33,934

RCM Services Division
32,290

 
32,290

QSI Dental Division (1)
7,289

 
7,289

Total goodwill
$
73,571

 
$
73,513

___________________________________
(1) QSI Dental Division goodwill is presented on a basis consistent with that of our management reporting structures. However, for the purposes of assessing goodwill for impairment annually and as otherwise may be required, the QSI Dental Division goodwill is allocated to the reporting units that derive cash flows from the products associated with the acquired goodwill. For all periods presented in this report, the allocation resulted in substantially all of the QSI Dental Division goodwill being ascribed to the NextGen Division.


11



5. Intangible Assets

Our definite-lived intangible assets, other than capitalized software development costs, are summarized as follows:
 
December 31, 2015
 
Customer Relationships
 
Trade Name and Contracts
 
Software Technology
 
Total
Gross carrying amount
$
22,050

 
$
3,368

 
$
25,310

 
$
50,728

Accumulated amortization
(17,270
)
 
(2,567
)
 
(8,604
)
 
(28,441
)
Net intangible assets
$
4,780

 
$
801

 
$
16,706

 
$
22,287

 
March 31, 2015
 
Customer Relationships
 
Trade Name and Contracts
 
Software Technology
 
Total
Gross carrying amount
$
22,050

 
$
3,368

 
$
25,310

 
$
50,728

Accumulated amortization
(14,986
)
 
(2,159
)
 
(5,894
)
 
(23,039
)
Net intangible assets
$
7,064

 
$
1,209

 
$
19,416

 
$
27,689


Amortization expense related to customer relationships and trade name and contracts that is included as operating expenses in the consolidated statements of comprehensive income was $898 and $905 for the three months ended December 31, 2015 and 2014, respectively. Amortization expense related to software technology that is included in cost of revenue for software license and hardware was $903 and $858 for the three months ended December 31, 2015 and 2014, respectively.
Amortization expense related to customer relationships and trade name and contracts that is included as operating expenses in the consolidated statements of comprehensive income was $2,692 and $2,811 for the nine months ended December 31, 2015 and 2014, respectively. Amortization expense related to software technology that is included in cost of revenue for software license and hardware was $2,710 and $2,560 for the nine months ended December 31, 2015 and 2014, respectively.
The following table represents the remaining estimated amortization of definite-lived intangible assets as of December 31, 2015:
For the year ended March 31,
 
2016 (remaining three months)
$
1,801

2017
6,733

2018
4,481

2019
3,697

2020
3,352

2021 and beyond
2,223

Total
$
22,287


6. Capitalized Software Costs

Our capitalized software costs are summarized as follows:
 
December 31,
2015
 
March 31,
2015
Gross carrying amount
$
125,559

 
$
113,955

Accumulated amortization
(80,986
)
 
(73,558
)
Net capitalized software costs
$
44,573

 
$
40,397


Amortization expense related to capitalized software costs was $2,499 and $3,073 for the three months ended December 31, 2015 and 2014, respectively.
Amortization expense related to capitalized software costs was $7,428 and $10,190 for the nine months ended December 31, 2015 and 2014, respectively.

12



The following table presents the remaining estimated amortization of capitalized software costs as of December 31, 2015. The estimated amortization is comprised of (i) amortization of released products and (ii) the expected amortization for products that are not yet available for sale based on their estimated economic lives and projected general release dates.
For the year ended March 31,
 
2016 (remaining three months)
$
2,500

2017
6,800

2018
1,800

2019
5,900

2020
6,700

2021 and beyond
20,873

Total
$
44,573


7. Composition of Certain Financial Statement Captions

Accounts receivable include amounts invoiced but not yet rendered at each period end. Undelivered products and services are included as a component of the deferred revenue balance on the accompanying consolidated balance sheets.
 
December 31,
2015
 
March 31,
2015
Accounts receivable, gross
$
103,009

 
$
119,807

Sales return reserve
(7,128
)
 
(8,835
)
Allowance for doubtful accounts
(3,289
)
 
(3,303
)
Accounts receivable, net
$
92,592

 
$
107,669


Inventories are summarized as follows:
 
December 31,
2015
 
March 31,
2015
Computer systems and components
$
662

 
$
622


Prepaid expenses and other current assets are summarized as follows:
 
December 31,
2015
 
March 31,
2015
Prepaid expenses
$
10,469

 
$
9,941

Other current assets
3,642

 
1,594

Prepaid expenses and other current assets
$
14,111

 
$
11,535


Equipment and improvements are summarized as follows:
 
December 31,
2015
 
March 31,
2015
Computer equipment
$
40,773

 
$
42,668

Furniture and fixtures
9,505

 
10,408

Leasehold improvements
10,783

 
9,767

 
61,061

 
62,843

Accumulated depreciation and amortization
(37,890
)
 
(42,036
)
Equipment and improvements, net
$
23,171

 
$
20,807



13



Current and non-current deferred revenue are summarized as follows:
 
December 31,
2015
 
March 31,
2015
Professional services
$
24,910

 
$
30,340

Software license, hardware and other
14,669

 
17,638

Support and maintenance
10,239

 
15,077

Software related subscription services
5,328

 
3,288

Deferred revenue
$
55,146

 
$
66,343

Deferred revenue, net of current
$
1,127

 
$
1,349


Accrued compensation and related benefits are summarized as follows:
 
December 31,
2015
 
March 31,
2015
Payroll, bonus and commission
$
8,044

 
$
13,505

Vacation
8,301

 
10,546

Accrued compensation and related benefits
$
16,345

 
$
24,051


Other current and non-current liabilities are summarized as follows:
 
December 31,
2015
 
March 31,
2015
Contingent consideration and other liabilities related to acquisitions
$
8,313

 
$
9,124

Customer credit balances and deposits
4,700

 
4,760

Care services liabilities
4,467

 
2,381

Accrued legal expense
3,266

 
3,527

Accrued acquisition costs
3,252

 

Accrued royalties
2,650

 
2,063

Accrued EDI expense
2,327

 
2,322

Accrued consulting
2,225

 
2,603

Self insurance reserve
2,165

 
2,290

Other accrued expenses
5,210

 
4,854

Other current liabilities
$
38,575

 
$
33,924

 
 
 
 
Contingent consideration and other liabilities related to acquisitions
$

 
$
7,581

Deferred rent
6,012

 
3,122

Uncertain tax position and related liabilities
3,906

 
4,095

Other non-current liabilities
$
9,918

 
$
14,798


8. Income Taxes
The provision for income taxes for the three months ended December 31, 2015 and 2014 was approximately $1,141 and $1,452, respectively. The effective tax rates were 13.5% and 17.9% for the three months ended December 31, 2015 and 2014, respectively, and both periods reflect approximately three quarters of a full fiscal year impact of the research and development tax credit due to the timing of the expiration and retroactive reinstatement of the credit. The effective rate for the three months ended December 31, 2015 decreased as compared to the prior year period primarily due to a favorable impact of the qualifying production activity deduction in the three months ended December 31, 2015.
The provision for income taxes for the nine months ended December 31, 2015 and 2014 was approximately $8,233 and $6,659, respectively. The effective tax rates were 27.3% and 28.6% for the nine months ended December 31, 2015 and 2014, respectively. The effective rate for the nine months ended December 31, 2015 decreased as compared to the prior year period primarily due to a favorable impact of the qualifying production activity deduction in the nine months ended December 31, 2015.

14



The deferred tax assets and liabilities have been shown net in the accompanying consolidated balance sheets based on the long-term or short-term nature of the items that give rise to the deferred amount. We expect to receive the full benefit of the deferred tax assets recorded with the exception of a specific state tax credit for which we have recorded a valuation allowance.
Uncertain tax positions
As of December 31, 2015, we had recorded a liability of $3,836 for unrecognized tax benefits related to various federal, state and local income tax matters. If recognized, this amount would reduce our effective tax rate. The tax liability for the nine months ended December 31, 2015 increased from the prior year period by $3,059 due to changes in reserves for state and local income tax benefit related to prior year tax positions.
We are no longer subject to U.S. federal income tax examinations for tax years before 2012. With few exceptions, we are no longer subject to state income tax examinations for tax years before 2011. We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statute of limitations within the next twelve months.

9. Earnings per Share

The dual presentation of “basic” and “diluted” earnings per share (“EPS”) is provided below. Shares discussed below are in thousands.
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
Net income
$
7,302

 
$
6,676

 
$
21,979

 
$
16,589

Basic net income per share:
 
 
 
 
 
 
 
Weighted-average shares outstanding — Basic
60,867

 
60,272

 
60,548

 
60,250

Basic net income per common share
$
0.12

 
$
0.11

 
$
0.36

 
$
0.28

 
 
 
 
 
 
 
 
Net income
$
7,302

 
$
6,676

 
$
21,979

 
$
16,589

Diluted net income per share:
 
 
 
 
 
 
 
Weighted-average shares outstanding — Basic
60,867

 
60,272

 
60,548

 
60,250

Effect of potentially dilutive securities
412

 
583

 
642

 
563

Weighted-average shares outstanding — Diluted
61,279

 
60,855

 
61,190

 
60,813

Diluted net income per common share
$
0.12

 
$
0.11

 
$
0.36

 
$
0.27


The computation of diluted net income per share does not include 1,839 and 1,789 options to acquire shares of common stock for the three and nine months ended December 31, 2015, respectively, because their inclusion would have an anti-dilutive effect on net income per share.
The computation of diluted net income per share does not include 1,731 and 1,653 options to acquire shares of common stock for the three and nine months ended December 31, 2014, respectively, because their inclusion would have an anti-dilutive effect on net income per share.

10. Share-Based Awards
Employee Stock Option and Incentive Plans
In October 2005, our shareholders approved a stock option and incentive plan (the “2005 Plan”) under which 4,800,000 shares of common stock were reserved for the issuance of awards, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock, unrestricted stock, restricted stock units, performance shares, performance units (including performance options) and other share-based awards. The 2005 Plan provides that our employees and directors may, at the discretion of the Board of Directors or a duly designated compensation committee, be granted certain share-based awards. In the case of option awards granted under the 2005 Plan, the exercise price of each option is determined based on the date of grant and expire no later than 10 years from the date of grant. Awards granted pursuant to the 2005 Plan are subject to the vesting schedule or performance metrics set forth in the agreements pursuant to which they are granted. Upon a change of control of our Company, as such term is defined in the 2005 Plan, awards under the 2005 Plan will fully vest under certain circumstances. The 2005 Plan expired on May 25, 2015. As of December 31, 2015, there were 1,702,326 outstanding options and 26,279 outstanding shares of restricted stock, restricted stock units and performance based restricted stock under the 2005 Plan.

15



In August 2015, our shareholders approved a stock option and incentive plan (the “2015 Plan”) under which 11,500,000 shares of common stock were reserved for the issuance of awards, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock awards and restricted stock unit awards, performance stock awards and other share-based awards. The 2015 Plan provides that our employees and directors may, at the discretion of the Board of Directors or a duly designated compensation committee, be granted certain share-based awards. In the case of option awards granted under the 2015 Plan, the exercise price of each option is determined based on the date of grant and expire no later than 10 years from the date of grant. Awards granted pursuant to the 2015 Plan are subject to the vesting schedule or performance metrics set forth in the agreements pursuant to which they are granted. Upon a change of control of our Company, as such term is defined in the 2015 Plan, awards under the 2015 Plan will fully vest under certain circumstances. As of December 31, 2015, there were 150,000 outstanding options, 92,934 outstanding shares of restricted stock awards and 11,551,215 shares available for future grant under the 2015 Plan.
A summary of stock option transactions during the nine months ended December 31, 2015 follows:
 
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
per Share
 
Weighted-
Average
Remaining
Contractual
Life (years)
 
Aggregate
Intrinsic
Value
(in thousands)
Outstanding, April 1, 2015
 
1,636,176

 
$
24.82

 
5.5
 

Granted
 
564,000

 
15.44

 
7.5
 


Exercised
 
(300
)
 
15.99

 
6.4
 
$

Forfeited/Canceled
 
(497,550
)
 
24.75

 
4.8
 


Outstanding, December 31, 2015
 
1,702,326

 
$
21.79

 
5.6
 
$
552

Vested and expected to vest, December 31, 2015
 
1,570,577

 
$
22.11

 
5.6
 
$
485

Exercisable, December 31, 2015
 
633,116

 
$
28.16

 
4.2
 
$
10


We utilize the Black-Scholes valuation model for estimating the fair value of share-based compensation with the following assumptions:
 
 
Nine Months Ended December 31,
 
 
2015
 
2014
Expected term
 
 3.8 - 3.9 years
 
 4.8 years
Expected volatility
 
38.3% - 38.9%
 
36.4% - 36.6%
Expected dividends
 
4.1% - 5.3%
 
4.3% - 4.4%
Risk-free rate
 
1.3% - 1.6%
 
1.7%
The weighted-average grant date fair value of stock options granted during the nine months ended December 31, 2015 and 2014 was $3.33 and $3.50 per share, respectively.

16



During the nine months ended December 31, 2015, a total of 564,000 options to purchase shares of common stock were granted under the 2005 and 2015 Plans at an exercise price equal to the market price of our common stock on the date of grant. A summary of stock options granted under the 2005 and 2015 Plans during fiscal years 2016 and 2015 is as follows:
Option Grant Date
 
Number of Shares
 
Exercise Price
 
Vesting Terms (1)
 
Expires
August 17, 2015
 
150,000

 
$
12.80

 
Five years
 
August 17, 2023
May 22, 2015
 
414,000

 
$
16.64

 
Five years
 
May 22, 2023
Fiscal year 2016 option grants
 
564,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 11, 2015
 
10,000

 
$
15.84

 
Five years
 
March 11, 2023
September 2, 2014
 
20,000

 
$
15.63

 
Five years
 
September 2, 2022
June 3, 2014
 
439,650

 
$
15.99

 
Five years
 
June 3, 2022
Fiscal year 2015 option grants
469,650

 
 
 
 
 
 
__________________________________
(1) Options vest in equal annual installments on each grant anniversary date commencing one year following the date of grant with the exception of the August 17, 2015 grant which vests in five equal annual installments beginning on July 1, 2016.
Employee Share Purchase Plan
On August 11, 2014, our shareholders approved an Employee Share Purchase Plan (the “Purchase Plan”) under which 4,000,000 shares of common stock were reserved for future grant.  The Purchase Plan allows eligible employees to purchase shares through payroll deductions of up to 15% of total base salary at a price equal to 90% of the lower of the fair market values of the shares as of the beginning or the end of the corresponding offering period.  Any shares purchased under the Purchase Plan are subject to a six-month holding period.  Employees are limited to purchasing no more than 1,500 shares on any single purchase date and no more than $25,000 in total fair market value of shares during any one calendar year. As of December 31, 2015, we have issued 95,190 shares under the Purchase Plan and 3,904,810 shares are available for future issuance.
Share-based compensation expense recorded for the employee share purchase plan was $70 for the three months ended December 31, 2015 and $50 for the three months ended December 31, 2014
Share-based compensation expense recorded for the employee share purchase plan was $216 for the nine months ended December 31, 2015 and $59 for the nine months ended December 31, 2014.
Performance-Based Awards
On May 14, 2015, the Compensation Committee approved our fiscal year 2016 Executive Compensation Program (the "Program") for our named executive officers for fiscal year 2016, on May 20, 2015, our Compensation Committee approved the Program for our Interim Chief Financial Officer, and on June 3, 2015, our Compensation Committee approved the Program for our Chief Executive Officer (effective July 1, 2015). Under the incentive portion of the Program, the executive officers are eligible to receive cash bonuses based on meeting certain target increases in revenue and non-GAAP earnings per share for fiscal year 2016 and certain equity incentive awards, including a potential award of up to an aggregate of 320,000 restricted performance shares of our common stock vesting over a three year period based on the achievement of target average daily share prices for the thirty calendar day period ending April 30th of each of the subsequent three fiscal years. In addition, under the Program, a target pool of up to 400,000 options is available for new hires, promotions, and for certain high-performing, non-executive employees based on achievement in performance targets.
Share-based compensation expense associated with the restricted performance shares with market conditions under the Program is based on the grant date fair value measured at the underlying closing share price on the date of grant using a Monte Carlo-based valuation model.

17



Share-based compensation expense associated with the target pool of options under our equity incentive programs are initially based on the number of options expected to vest after assessing the probability that the performance criteria will be met. Cumulative adjustments are recorded quarterly to reflect subsequent changes in the estimated outcome of performance-related conditions. We utilize the Black-Scholes option valuation model with the assumptions in the table below to calculate the share-based compensation expense related to the options.
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
Expected term
3.8 years
 
4.8 years
 
 3.8 - 3.9 years
 
 4.8 years
Expected volatility
39.2%
 
36.2%
 
37.7% - 39.2%
 
36.2% - 36.5%
Expected dividends
—%
 
4.4%
 
0.0% - 5.5%
 
4.3% - 5.0%
Risk-free rate
1.5%
 
1.7%
 
1.1% - 1.6%
 
1.6% - 1.8%
Share-based compensation expense recorded for our performance-based awards was $143 for the three months ended December 31, 2015 and $133 for the three months ended December 31, 2014
Share-based compensation expense recorded for our performance-based awards was $290 for the nine months ended December 31, 2015 and $345 for the nine months ended December 31, 2014.
Non-vested stock option award activity, including employee stock options and performance-based awards, during the nine months ended December 31, 2015 is summarized as follows:
 
 
Non-Vested
Number of
Shares
 
Weighted-
Average
Grant-Date
Fair Value
per Share
Outstanding, April 1, 2015
 
1,068,290

 
$
5.81

Granted
 
564,000

 
3.33

Vested
 
(274,400
)
 
5.70

Forfeited/Canceled
 
(288,680
)
 
5.34

Outstanding, December 31, 2015
 
1,069,210

 
$
4.39

As of December 31, 2015, $3,459 of total unrecognized compensation costs related to stock options is expected to be recognized over a weighted-average period of 3.4 years. This amount does not include the cost of new options that may be granted in future periods or any changes in our forfeiture percentage. The total fair value of options vested during the nine months ended December 31, 2015 and 2014 was $1,564 and $1,633, respectively.
Director Awards
On May 20, 2015, the Board of Directors approved our 2016 Director Compensation Program, pursuant to which each non-employee director is to be granted shares of restricted stock upon election or re-election to the Board of Directors. The shares of restricted stock will be granted promptly following shareholder approval and registration of our 2015 Equity Incentive Plan. The shares of restricted stock will be issued according to a standard form of restricted stock award agreement and pursuant to our 2015 Equity Incentive Plan, will carry a restriction requiring that the restricted stock vest in two equal installments over two consecutive years with the vesting dates being the next two meeting dates of our annual shareholders’ meeting following election or re-election to the Board of Directors.
Share-based compensation expense related to restricted stock was $249 for the three months ended December 31, 2015 and $245 for the three months ended December 31, 2014
Share-based compensation expense related to restricted stock was $664 for the nine months ended December 31, 2015 and $637 for the nine months ended December 31, 2014.

18



Restricted stock activity for the nine months ended December 31, 2015 is summarized as follows:
 
 
Number of
Shares
 
Weighted-
Average
Grant-Date
Fair Value
per Share
Outstanding, April 1, 2015
 
78,205

 
$
17.94

Granted
 
92,934

 
12.86

Vested
 
(50,426
)
 
19.98

Canceled
 
(1,500
)
 
17.95

Outstanding, December 31, 2015
 
119,213

 
$
13.88

The weighted-average grant date fair value for the restricted stock was estimated using the market price of the common stock on the date of grant. The fair value of the restricted stock is amortized on a straight-line basis over the vesting period.
As of December 31, 2015, $1,264 of total unrecognized compensation costs related to restricted stock is expected to be recognized over a weighted-average period of 1.6 years. This amount does not include the cost of new restricted stock that may be granted in future periods.

11. Concentration of Credit Risk
We had cash deposits at U.S. banks and financial institutions which exceeded federally insured limits at December 31, 2015. We are exposed to credit loss for amounts in excess of insured limits in the event of non-performance by the institutions; however, we do not anticipate non-performance by these institutions.

12. Commitments, Guarantees and Contingencies
Commitments and Guarantees
Our software license agreements include a performance guarantee that our software products will substantially operate as described in the applicable program documentation for a period of 365 days after delivery. To date, we have not incurred any significant costs associated with our performance guarantee or other related warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these warranties. Certain arrangements also include performance guarantees related to response time, availability for operational use, and other performance-related guarantees. Certain arrangements also include penalties in the form of maintenance credits should the performance of the software fail to meet the performance guarantees. To date, we have not incurred any significant costs associated with these warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these warranties.
We have historically offered short-term rights of return in certain sales arrangements. If we are able to estimate returns for these types of arrangements and all other criteria for revenue recognition have been met, revenue is recognized and these arrangements are recorded in the consolidated financial statements. If we are unable to estimate returns for these types of arrangements, revenue is not recognized in the consolidated financial statements until the rights of return expire, provided also, that all other criteria of revenue recognition have been met.
Certain standard sales agreements contain a money back guarantee providing for a performance guarantee that is already part of the software license agreement as well as training and support. The money back guarantee also warrants that the software will remain robust and flexible to allow participation in the federal health incentive programs. The specific elements of the performance guarantee pertain to aspects of the software, which we have already tested and confirmed to consistently meet using our existing software without any modifications or enhancements. To date, we have not incurred any costs associated with this guarantee and do not expect to incur significant costs in the future. Therefore, no accrual has been made for potential costs associated with this guarantee.
Our standard sales agreements contain an indemnification provision pursuant to which we shall indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any United States patent, any copyright or other intellectual property infringement claim by any third-party with respect to our software. As we have not incurred any significant costs to defend lawsuits or settle claims related to these indemnification agreements, we believe that our estimated exposure on these agreements is currently minimal. Accordingly, we have no liabilities recorded for these indemnification obligations.

19



Hussein Litigation
On October 7, 2013, a complaint was filed against our Company and certain of our officers and directors in the Superior Court of the State of California for the County of Orange, captioned Ahmed D. Hussein v. Sheldon Razin, Steven Plochocki, Quality Systems, Inc. and Does 1-10, inclusive, No. 30-2013-00679600-CU-NP-CJC, by Ahmed Hussein, a former director and significant shareholder of our Company.  We filed a demurrer to the complaint, which the court granted on April 10, 2014. An amended complaint was filed on April 25, 2014. The amended complaint generally alleges fraud and deceit, constructive fraud, negligent misrepresentation and breach of fiduciary duty in connection with statements made to our shareholders regarding our financial condition and projected future performance. The amended complaint seeks actual damages, exemplary and punitive damages and costs. We filed a demurrer to the amended complaint. On July 29, 2014, the court sustained the demurrer with respect to the breach of fiduciary duty claim, and overruled the demurrer with respect to the fraud and deceit claims. On August 28, 2014, we filed an answer and also filed a cross-complaint against the plaintiff, alleging that the plaintiff breached fiduciary duties owed to the Company, Mr. Razin and Mr. Plochocki. On June 26, 2015, we filed a motion for summary judgment, which the court granted on September 16, 2015, dismissing all claims against us. On September 23, 2015, the plaintiff filed an application for reconsideration of the Court's summary judgment order, which the court denied. On October 28, 2015, the plaintiff filed a motion for summary judgment, seeking to dismiss our cross-complaint. The hearing on the plaintiff's motion for summary judgment is set for February 18, 2016. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.
Federal Securities Class Action
On November 19, 2013, a putative class action complaint was filed on behalf of the shareholders of our Company other than the defendants against us and certain of our officers and directors in the United States District Court for the Central District of California by one of our shareholders. After the court appointed lead plaintiffs and lead counsel for this action, and recaptioned the action In re Quality Systems, Inc. Securities Litigation, No. 8L13-cv-01818-CJC(JPRx), lead plaintiffs filed an amended complaint on April 7, 2014. The amended complaint, which is substantially similar to the litigation described above under the caption “Hussein Litigation,” generally alleges that statements made to our shareholders regarding our financial condition and projected future performance were false and misleading in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the individual defendants are liable for such statements because they are controlling persons under Section 20(a) of the Exchange Act. The complaint seeks compensatory damages, court costs and attorneys' fees. We filed a motion to dismiss the amended complaint on June 20, 2014, which the court granted on October 20, 2014, dismissing the complaint with prejudice. Plaintiffs filed a motion for reconsideration of the Court's order, which the court denied on January 5, 2015. On January 30, 2015, Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit, captioned In re Quality Systems, Inc. Securities Litigation, No. 15-55173. Plaintiffs filed their opening brief and we answered. Oral argument is not yet scheduled. We believe that the plaintiffs' claims are without merit and continue to defend against them vigorously. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.
Shareholder Derivative Litigation
On January 24, 2014, a complaint was filed against our Company and certain of our officers and current and former directors in the United States District Court for the Central District of California, captioned Timothy J. Foss, derivatively on behalf of himself and all others similarly situated, vs. Craig A. Barbarosh, George H. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D. Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig and Quality Systems, Inc., No. SACV14-00110-DOC-JPPx, by Timothy J. Foss, a shareholder of ours. The complaint arises from the same allegations described above under the captions “Hussein Litigation” and “Federal Securities Class Action” and generally alleges breach of fiduciary duties, abuse of control and gross mismanagement by our directors, in addition to unjust enrichment and insider selling by individual directors. The complaint seeks compensatory damages, restitution and disgorgement of all profits, court costs, attorneys’ fees and implementation of enhanced corporate governance procedures. The parties have agreed to stay this litigation until the United States Court of Appeals for the Ninth Circuit issues a ruling on the pending appeal described above under the caption “Federal Securities Class Action”. We believe that the plaintiff’s claims are without merit and intend to defend against them vigorously. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.


13. Operating Segment Information
As of December 31, 2015, our Company has three reportable segments that are evaluated regularly by our chief decision making group (consisting of our Chief Executive Officer, Interim Chief Financial Officer and Chief Operating Officer) in deciding how to allocate resources and in assessing performance. The Hospital Solutions Division operating segment data for the three and nine months ended December 31, 2015 are reflected through the date of disposition on October 22, 2015.

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Operating segment data is as follows:
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
 
NextGen Division
 
$
88,693

 
$
92,054

 
$
275,282

 
$
276,914

RCM Services Division
 
22,994

 
21,913

 
67,989

 
58,226

QSI Dental Division
 
4,726

 
4,480

 
13,825

 
13,379

Hospital Solutions Division
 
619

 
4,977

 
7,469

 
13,318

Consolidated revenue
 
$
117,032

 
$
123,424

 
$
364,565

 
$
361,837

 
 
 
 
 
 
 
 
 
Income (loss) from operations:
 
 

 
 
 
 
 
 
NextGen Division
 
$
42,012

 
$
45,108

 
$
134,510

 
$
134,166

RCM Services Division
 
4,838

 
4,681

 
13,334

 
9,583

QSI Dental Division
 
1,783

 
1,523

 
4,369

 
3,859

Hospital Solutions Division
 
(2,103
)
 
372

 
(927
)
 
(2,150
)
Corporate and unallocated
 
(38,093
)
 
(43,474
)
 
(121,319
)
 
(122,234
)
Consolidated operating income
 
$
8,437

 
$
8,210

 
$
29,967

 
$
23,224

The major components of the Corporate and unallocated amounts are summarized in the table below:
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2015
 
2014
 
2015
 
2014
Research and development costs
 
$
14,518

 
$
18,468

 
$
49,584

 
$
51,602

Amortization of capitalized software costs
 
2,499

 
3,073

 
7,428

 
10,190

Marketing expense
 
2,925

 
3,328

 
9,664

 
9,439

Other Corporate and overhead costs
 
18,151

 
18,605

 
54,643

 
51,003

Total Corporate and unallocated
 
38,093

 
43,474

 
121,319

 
122,234

Assets by segment are not tracked or used by our chief decision making group to allocate resources or to assess performance, and thus not included in the table above.
The amounts classified as Corporate and unallocated consist primarily of corporate general and administrative costs, non-recurring acquisition and transaction-related costs, recurring post-acquisition amortization of certain acquired intangible assets and amortization of capitalized software costs, as well as costs of other centrally managed overhead and shared-services functions, including accounting and finance, human resources, marketing, legal, and research and development, that are not controlled by segment level leadership. Although the segments may derive direct benefits as a result of such costs, our chief decision making group evaluates performance based upon stand-alone segment operating income, which excludes these Corporate and unallocated amounts.
Effective April 1, 2015, as part of our ongoing efforts to refine the measurement of our segment data to better reflect an organizational structure whereby certain expenses managed by functional area leadership are no longer classified within the operating segments but rather as a component of Corporate and unallocated, we no longer classify certain costs within the information services and credit granting and collections functional areas, such as bad debt expense and other information services related general and administrative costs, within the operating segments. Such classification is consistent with the disaggregated financial information used by our chief decision making group. We have retroactively reclassified the prior year operating income in the table above to present all segment information on a comparable basis.

14. Subsequent Events

On January 4, 2016, we entered into a $250,000 revolving credit agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A., as administrative agent, U.S. Bank National Association, as syndication agent, and certain other lenders. The initial draw down on the Credit Agreement was approximately $173,509. The Credit Agreement is secured by substantially all of our existing and future property and material domestic subsidiaries. The Credit Agreement provides a subfacility of up to $10,000 for letters of credit and a subfacility of up to $10,000 for swing-line loans. The Credit Agreement matures on January 4, 2021 and the full balance of the revolving loans and all other obligations under the agreement must be paid at that time.

21



The revolving loans under the Credit Agreement bear interest at our option of either, (a) a base rate based on the highest of (i) the rate of interest per annum publicly announced from time to time by JPMorgan Chase Bank, N.A., as its prime rate, (ii) the greater of (A) the federal funds effective rate and (B) the overnight bank funding rate (as determined by the Federal Reserve Bank of New York) plus 0.50% and (iii) the one-month LIBOR plus 1.00%) plus an applicable margin based on our leverage ratio from time to time, ranging from 0.50% to 1.50%, or (b) a LIBOR-based rate (subject to a floor of 0.00%) plus an applicable margin based on our leverage ratio from time to time, ranging from 1.50% to 2.50%. We will also pay a commitment fee of between 0.25% and 0.45%, payable quarterly in arrears, on the average daily unused amount of the revolving facility based on our leverage ratio from time to time.
The revolving loans are subject to customary representations, warranties and ongoing affirmative and negative covenants and agreements. The negative covenants include, among other things, limitations on indebtedness, liens, asset sales, mergers and acquisitions, investments, transactions with affiliates, dividends and other restricted payments, subordinated indebtedness and amendments to subordinated indebtedness documents and sale and leaseback transactions. The Credit Agreement also requires us to maintain a maximum leverage ratio and minimum fixed charge coverage ratio. The revolving loans under the Credit Agreement will be available for letters of credit, working capital and general corporate purposes.
Also on January 4, 2016, we completed our acquisition of HealthFusion Holdings, Inc. ("HealthFusion") pursuant to the Agreement and Plan of Merger (the “Merger Agreement"), dated October 30, 2015. HealthFusion provides Web-based, cloud computing software for physicians, medical billing service providers, and hospitals. Its flagship product, MediTouch, is a fully-integrated, cloud-based software suite consisting of clearinghouse, practice management, electronic health records, and patient portals with rich functionality to enable mobility, workflow automation, and advanced reporting and analytics aimed primarily at small-to-mid-size physician practices. The acquisition of HealthFusion is part of our strategy to expand its client base and cloud-based solution capabilities in the ambulatory market. Over time, we plan to expand the HealthFusion platform to satisfy the needs of practices of increasing size and complexity.
Total cash consideration paid was $165,000, subject to certain adjustments in accordance with the Merger Agreement. In addition, we may pay up to an additional $25,000 in cash in the form of an earnout, subject to HealthFusion achieving certain revenue targets through December 31, 2016. This acquisition was funded by our initial draw down of the Credit Agreement, a portion of which has been subsequently repaid from our cash on hand. We are in the process of determining the purchase price allocation for this acquisition.

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Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements that are purely historical, are forward-looking statements. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “should,” “would,” “could,” “may,” and similar expressions also identify forward-looking statements. These forward-looking statements include, without limitation, discussions of our product development plans, business strategies, future operations, financial condition and prospects, developments in and the impacts of government regulation and legislation, including, without limitation, The American Recovery and Reinvestment Act ("ARRA"), the Patient Protection and Affordable Care Act ("PPACA"), and the Medicare Access and CHIP Reauthorization Act of 2015 ("MACRA"), and market factors influencing our results. Our expectations, beliefs, objectives, intentions and strategies regarding our future results are not guarantees of future performance and are subject to risks and uncertainties, both foreseen and unforeseen, that could cause actual results to differ materially from results contemplated in our forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to continue to develop new products and increase systems sales in markets characterized by rapid technological evolution, consolidation, and competition from larger, better-capitalized competitors. Many other economic, competitive, governmental and technological factors could affect our ability to achieve our goals, and interested persons are urged to review any risks that may be described in “Item 1A. Risk Factors” as set forth herein and other risk factors appearing in our most recent Annual Report on Form 10-K for the fiscal year ended March 31, 2015 (“Annual Report”), as supplemented by additional risk factors, if any, in our interim filings on our Quarterly Reports on Form 10-Q, as well as in our other public disclosures and filings with the Securities and Exchange Commission ("SEC"). Because of these risk factors, as well as other variables affecting our financial condition and results of operations, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. We assume no obligation to update any forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of the filing of this Quarterly Report on Form 10-Q.
This management's discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to the consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q in order to enhance your understanding of our results of operations and financial condition and should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Historical results of operations, percentage margin fluctuations and any trends that may be inferred from the discussion below are not necessarily indicative of the operating results for any future period.
Our MD&A is organized as follows:
Management Overview. This section provides a general description of our Company and operating segments, a discussion as to how we derive our revenue, background information on certain trends and developments affecting our Company and a discussion on management’s strategy for driving revenue growth.
Critical Accounting Policies and Estimates. This section discusses those accounting policies that are considered important to the evaluation and reporting of our financial condition and results of operations, and whose application requires us to exercise subjective or complex judgments in making estimates and assumptions. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 1, “Summary of Significant Accounting Policies,” of our notes to consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Company Overview.  This section provides a more detailed description of our Company, its operating segments, a summary of our recent acquisition transactions and the products and services we offer.
Overview of Results of Operations and Results of Operations by Divisions. These sections provide our analysis and outlook for the significant line items on our consolidated statements of comprehensive income, as well as other information that we deem meaningful to understand our results of operations on both a consolidated basis and divisional basis.
Liquidity and Capital Resources.  This section provides an analysis of our liquidity and cash flows.
New Accounting Pronouncements. This section provides a summary of the most recent authoritative accounting standards and guidance that have either been recently adopted by our Company or may be adopted in the future.

23



Management Overview
Quality Systems, Inc. and its wholly-owned subsidiaries operate as three business divisions (each, a "Division") which are comprised of: (i) the NextGen Division, (ii) the RCM Services Division, and (iii) the QSI Dental Division. The Hospital Solutions Division was sold to QuadraMed Affinity Corporation (part of the Harris Operating Group of Constellation Software Inc.) on October 22, 2015. We also have a captive entity in India called Quality Systems India Healthcare Private Limited (“QSIH”).
We primarily derive revenue by developing and marketing healthcare information systems that automate certain aspects of medical and dental practices, networks of practices such as physician hospital organizations (“PHOs”) and management service organizations (“MSOs”), accountable care organizations, ambulatory care centers, community health centers and medical and dental schools along with comprehensive systems implementation, maintenance and support and add-on complementary services such as revenue cycle management (“RCM”) and electronic data interchange (“EDI”). Our systems and services provide our customers with the ability to redesign patient care and other workflow processes while improving productivity through the facilitation of managed access to patient information. Utilizing our proprietary software in combination with third party hardware and software solutions, our products enable the integration of a variety of administrative and clinical information operations. Our scalable interoperability and population health offerings help to improve care collaboration, quality and safety. Enabled by our interoperability and enterprise analytics solutions, data-driven patient population healthcare management decisions can assist in creating more desirable operational, clinical, and financial outcomes that substantiate the value of patient-centered and accountable care models.
The turbulence in the worldwide economy has impacted almost all industries. While healthcare is not immune to economic cycles, we believe it is more heavily influenced by U.S.-based regulatory and national health projects than by the cycles of our economy. The impact of the current economic conditions on our existing and prospective customers has been mixed. Various factors have had, and are anticipated to continue to have, a meaningful impact on the U.S. healthcare industry. Particularly, the healthcare industry has been significantly impacted by the Obama Administration's broad healthcare reform efforts, including the Health Information Technology for Economic and Clinical Health ("HITECH") portion of the American Recovery and Reinvestment Act ("ARRA") and the Patient Protection and Affordable Care Act ("PPACA") that provides significant incentives to health care organizations for "Meaningful Use" adoption and interoperable electronic health record solutions, the mandate requiring individuals to obtain insurance, the individual state responses to the government-requested Medicaid expansion, the creation and operation of insurance exchanges, and the increasing focus of private businesses on moving their employee health benefit offerings to a more wellness-based health platform.
We have benefited and hope to continue to benefit from the increased demands on healthcare providers for greater efficiency and lower costs, financial incentives from the HITECH portion of the ARRA to physicians who adopt electronic health records, as well as increased adoption rates for electronic health records and other technology in the healthcare arena. We also believe that healthcare reform, including the repeal of the sustainable growth rate (SGR) formula in April 2015 as part of the Medicare Access and CHIP Reauthorization Act of 2015 ("MACRA"), and a movement towards a value-based, pay for performance model and quality initiative efforts will also stimulate demand for robust electronic health record solutions as well as new healthcare information technology solutions from bundled billing capabilities to patient engagement and population health management.
While we expect to benefit from the increasing demands for greater efficiency as well as government support for increased adoption of electronic health records systems, the market for physician based electronic health records software is becoming increasingly saturated while physician group practices are rapidly being consolidated by hospital, insurance payers and other entities. Hospital software providers are leveraging their position with their hospital customers to gain market share with hospital owned physician practices. Insurance providers and large physician groups are also consolidating physician offices creating additional opportunity for ambulatory software providers like us. Our strategy is to focus on addressing the growing needs of accountable care organizations around interoperability, patient engagements, population health and collaborative care management, and data analytics.
We believe that our core strength lies in the central role our software products and services play in the delivery of healthcare by the primary physician in an ambulatory setting. We intend to remain at the forefront of upcoming new regulatory requirements including meaningful use requirements for stimulus payments. We believe that the expanded requirements for continued eligibility for incentive payments under meaningful use rules will result in an expanded replacement market for electronic health records software. We intend to continue the development and enhancement of our software solutions to support healthcare reform, such as the recently enacted MACRA, which promotes the transition from fee-for-service to value-based, pay-for-performance, and patient-centric care and quality initiatives such as accountable care organizations. Key elements of our future software development will be to expand our interoperability capabilities enhancing the competitiveness of our software offerings, make our products more intuitive and easy to use, and to enhance our ability to deliver our software over the cloud with the latest technology.
We also want to continue investments in our infrastructure, including but not limited to maintaining and expanding sales, marketing and product development activities in order to improve patient care and reduce healthcare costs, providing industry-leading, integrated clinical and administrative healthcare data systems, services and expertise to clinical, medical, technology, and healthcare business professionals while continuing our strong commitment of superb service in support of our customer satisfaction programs. These investments in our infrastructure will continue while maintaining reasonable expense discipline. We strive to add new customers and expand our relationship with existing customers through delivery of add-on and complementary products and

24



services and believe that our customer base that is using our software on a daily basis is a strategic asset. We intend to leverage this strategic asset by expanding our product and service offerings towards this customer base.
On January 4, 2016, we completed our acquisition of HealthFusion Holdings, Inc. ("HealthFusion") pursuant to the Agreement and Plan of Merger, dated October 30, 2015. HealthFusion provides Web-based, cloud computing software for physicians, medical billing service providers, and hospitals. Its flagship product, MediTouch, is a fully-integrated, cloud-based software suite consisting of clearinghouse, practice management, electronic health records, and patient portals with rich functionality to enable mobility, workflow automation, and advanced reporting and analytics aimed primarily at small-to-mid-size physician practices. The acquisition of HealthFusion is part of our strategy to expand its client base and cloud-based solution capabilities in the ambulatory market. Over time, we plan to expand the HealthFusion platform to satisfy the needs of practices of increasing size and complexity. We are evaluating the impact of HealthFusion’s existing cloud-based product on our ongoing efforts to develop and release our NextGen Now cloud-based platform. Our assessment may lead us to determine that the HealthFusion product, which is already a production-ready and sellable solution, may represent a more prudent investment in our technical future than continuing with the NextGen Now development plans. If we decide to abandon further development of the previously capitalized NextGen Now platform or certain components thereof, a material impairment of the asset may result.
Critical Accounting Policies and Estimates
The discussion and analysis of our consolidated financial statements and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate estimates (including but not limited to those related to revenue recognition, accounts receivable reserves, software development costs, contingent consideration liabilities, goodwill, and intangible assets) for reasonableness. We base our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We describe our significant accounting policies in Note 2, “Summary of Significant Accounting Policies,” of our notes to consolidated financial statements included in our Annual Report. We discuss our critical accounting policies and estimates in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report. There have been no material changes in our significant accounting policies or critical accounting policies and estimates since the end of fiscal year 2015.
Company Overview
Quality Systems, Inc. was incorporated in California in 1974. Our principal offices are located at 18111 Von Karman Ave., Suite 700, Irvine, California, 92612. We operate on a fiscal year ending on March 31.
Our Company was founded with an early focus on providing information systems to dental group practices. This focus area would later become the QSI Dental Division. In the mid-1980s, we capitalized on the increasing focus on medical cost containment and further expanded our information processing systems to serve the ambulatory market. In the mid-1990s, we made two acquisitions that accelerated our penetration of the ambulatory market and formed the basis for the NextGen Division. In the last few years, we acquired ViaTrack Systems, LLC ("ViaTrack") and Matrix Management Solutions, LLC ("Matrix") as part of our strategy to enhance our EDI and RCM services capabilities. More recently, we acquired Mirth Corporation ("Mirth") and Gennius, Inc ("Gennius"), both of which operate under the NextGen Division. Mirth enhances our current enterprise interoperability initiatives and broadens our accountable and collaborative care, population health, disease management and clinical data exchange offerings. Gennius is expected to enhance our current enterprise healthcare data analytics competencies while broadening business intelligence capabilities for addressing new value-based care requirements. In October 2015, we sold our Hospital Solutions Division in an effort to focus on our core ambulatory business. Today, we serve the ambulatory, RCM services and dental markets through each of our three business Divisions.
A growing number of customers are simultaneously utilizing software or services from more than one of our Divisions. In an effort to further enhance our ability to cross sell products and services between Divisions, we are in the process of further integrating our products to provide a more robust and comprehensive platform to offer our customers. To achieve greater efficiency and integration within our operations, we have consolidated our divisional sales, marketing, information services, and software development responsibilities into single company-wide roles. The Divisions also share the resources of our “corporate office,” which includes a variety of accounting and other administrative functions. We continue to evaluate the organizational structure of the Company with the objective of achieving greater synergies and further integration of our products and services, including software implementation and customer support functions.
The NextGen Division and QSI Dental Division develop and market software that is designed to automate and streamline a number of the administrative functions required for operating a medical or dental, such as patient scheduling and billing. Since practice management software systems have already been implemented by the vast majority of both the medical and dental practices, we actively compete in a replacement market by leveraging the benefits of our interoperable electronic health records software. With

25



the addition of Gennius and Mirth, our combined solutions enrich the already strong collaborative, connected care support and set the stage for data synchronization and enterprise analytics, interoperability growth and expansion of our current accountable and collaborative care, population health, disease management and clinical data exchange offering. These Divisions also develop and market software that automates patient records in physician practices, community health centers and hospital settings. In this patient records area of our business, we are typically competing to replace paper-based patient record alternatives as opposed to replacing previously purchased systems. The RCM Services Division provides technology solutions and outsourcing services to cover the full spectrum of healthcare providers' RCM needs, with a primary focus on outsourced billing and collection services.
QSIH, located in Bangalore, India, functions as our India-based captive entity to offshore technology application development and business processing services. Our employee base in Bangalore has grown to over 450 employees with a primary focus on software development activities.
We continue to pursue product and service enhancement initiatives within each of our Divisions. The majority of such expenditures are currently targeted to the product lines and customer base of the NextGen Division.
The following table reflects our reported segment revenue breakdown by Division and segment revenue growth (decline) as compared to the prior year period for the three and nine months ended December 31, 2015 and 2014. Operating results for the Hospital Solutions Division are included in the table below through the date of disposition.
 
 
Segment Revenue Breakdown
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2015
 
2014
 
2015
 
2014
NextGen Division
 
75.9
%
 
74.6
%
 
75.6
%
 
76.5
%
RCM Services Division
 
19.6
%
 
17.8
%
 
18.6
%
 
16.1
%
QSI Dental Division
 
4.0
%
 
3.6
%
 
3.8
%
 
3.7
%
Hospital Solutions Division
 
0.5
%
 
4.0
%
 
2.0
%
 
3.7
%
Consolidated
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
 
Segment Revenue Growth (Decline)
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2015
 
2014
 
2015
 
2014
NextGen Division
 
(3.7
)%
 
8.7
 %
 
(0.6
)%
 
66.6
%
RCM Services Division
 
4.9
 %
 
30.9
 %
 
16.8
 %
 
70.7
%
QSI Dental Division
 
5.5
 %
 
(8.6
)%
 
3.3
 %
 
33.1
%
Hospital Solutions Division
 
(87.6
)%
 
5.1
 %
 
(43.9
)%
 
30.6
%
Consolidated
 
(5.2
)%
 
11.1
 %
 
0.8
 %
 
64.0
%
NextGen Division. The NextGen Division, with headquarters in Horsham, Pennsylvania and significant locations in Atlanta, Georgia and Costa Mesa, California, provides integrated clinical, financial and connectivity solutions for ambulatory and dental provider organizations. The NextGen Division's major product categories include the NextGen® ambulatory product suite and interoperability solutions.
The NextGen® ambulatory product suite features an integrated and interoperable solution that streamlines the business of running a practice as well as patient care with standardized, real-time clinical and administrative workflows within a physician’s practice. Major ambulatory product lines include NextGen® EHR ("Electronic Health Record"), NextGen® PM ("Practice Management"), NextGen® Population Health (including NextGen® Care), NextGen® Analytics, NextGen® Patient Portal ("NextMD.com"), NextGen® Document Management, NextGen® ePrescribing, NextGen® Mobile, and NextGen® NextPen. The interoperability solutions consist of NextGen® EHR Connect, NextGen® Health Information Exchange ("HIE"), and NextGen® Share. The NextGen Division also offers hosting services, NextGuard data protection services, professional consulting services, such as strategic governance models and operational transformation, technical consulting services, such as data conversions or interface development, and physician consulting services. The NextGen Division products utilize Microsoft Windows technology and can operate in a client-server environment as well as via private intranet, the Internet, or in an ASP environment. The NextGen Division also provides EDI services, which include electronic submission of claims to insurance providers as well as automated patient statements.
On September 9, 2013, we acquired Mirth, a global leader in health information technology that helps customers achieve interoperability. Operating results associated with Mirth products and services are included in the NextGen Division. The acquisition of Mirth enhances our current enterprise interoperability initiatives and broadens our accountable and collaborative care, population

26



health, disease management and clinical data exchange offerings. Mirth offers a wide variety of products and services utilized by both users of Mirth open code technology as well as a large base of domestic and international paying customers. Product offerings available from Mirth include Mirth Connect, Mirth Results, Mirth Match, Mirth Mail, Mirth Appliance, and Mirth Care Enterprise. As a direct result of the Mirth acquisition, we introduced NextGen® Share to our customer base in November 2013. As our first offering that integrates technologies from both NextGen Healthcare and Mirth, NextGen® Share provides the ability to securely and easily share patient charts and other data with other practices using NextGen Internet based software.
On March 11, 2015, we acquired Gennius, a provider of healthcare data analytics. Gennius's operations are managed under the NextGen Division. The acquisition of Gennius is expected to enhance our current enterprise analytics competencies while broadening business intelligence capabilities for addressing new value-based care requirements.
RCM Services Division. The RCM Services Division, with locations in St. Louis, Missouri, North Canton, Ohio, South Jordan, Utah and Hunt Valley, Maryland, provides technology solutions and consulting services to cover the full spectrum of healthcare providers' RCM needs, from patient access through claims denials, with a primary focus on billing and collection services in order to optimize customers' revenue cycle results, improve cash flow, and decrease accounts receivable days. The RCM Services Division combines a high-touch service model and the NextGen® PM software platform to execute its service offerings, which include billing and collections, claims submissions and reconciliation, coding services, electronic remittance and payment posting, accounts receivable management, patient customer service, advance analytics, charge entry and capture, enrollment credentialing, and software setup, hosting and support.
QSI Dental Division. The QSI Dental Division, co-located with our corporate headquarters in Irvine, California, focuses on developing, marketing and supporting software suites sold to dental group organizations located throughout the United States. The QSI Dental Division sells additional licenses to its legacy products as existing customers expand their operations and also sells its practice management and clinical software solutions to new and existing customers primarily as a cloud-based SaaS model, known as QSIDental Web ("QDW"). QDW is marketed primarily to multi-location dental group practices in which the QSI Dental Division has historically been a dominant player. When sold under a SaaS model, QDW offers a lower cost of ownership as it is a cloud-based solution that provides users with access to vital data from any web-enabled device. Further, QSI Dental sells its electronic dental charting software in conjunction with NextGen® PM and EHR, which is marketed as NextGen® EDR (“Electronic Dental Record”) to federally qualified health centers (“FQHC”) and other safety-net clinics, as further defined below.
The QSI Dental Division participates jointly with the NextGen Division in providing software and services to safety-net clinics like FQHCs and other safety-net health centers, including public health centers, community health centers, free clinics, as well as rural and tribal health centers. FQHCs and other safety-net clinics are community-based organizations that are funded by the federal government, which provide medical and dental services to underprivileged and underserved communities. The Patient Protection and Affordable Care Act, which was signed into law in March 2010, reserved $11 billion over a multi-year period for FQHCs, creating unprecedented opportunities for FQHCs growth and the formation of new FQHCs. When combined and used in tandem, NextGen® EHR, NextGen® EDR, and NextGen® PM are capable of providing an integrated patient record, which is a unique product in this marketplace that is accessible by both physicians and dentists. In May 2013, NextGen® EDR version 4.3 was ONC-ATCB certified by the Certification Commission for Health Information ("CCHIT®") as a complete EHR and demonstrated compliance with all clinical quality measures for eligible providers.
The QSI Dental Division's legacy practice management software suite, known as Clinical Product Suite (“CPS”), uses a UNIX® operating system and can be fully integrated with the customer server-based practice management software offered by each of our Divisions. When integrated and delivered with the NextGen® PM solution, CPS is re-branded as NextGen® EDR and incorporates a wide range of clinical tools including, but not limited to, periodontal charting and digital imaging of X-ray and inter-oral camera images, that are integrated as part of the electronic patient record. The QSI Dental Division also develops, markets, and provides EDI services to dental practices, including electronic submission of claims to insurance providers as well as automated patient statements.

Overview of Our Results
Consolidated revenue increased 0.8%, or $2.7 million, in the nine months ended December 31, 2015 as compared to the prior year period. The change is primarily the result of a 16.4% increase in software related subscription services revenues, a 14.9% increase in RCM and related services revenues, and a 9.1% increase in EDI and data services revenue, partially offset by a 14.0% decrease in software license and hardware revenue and a 19.8% decrease in professional services revenue. The increase in subscription services revenue reflects growth in subscriptions related to our interoperability and patient portal product offerings. The increase in RCM and related services revenues are the result of new customer additions and organic growth. The growth in EDI and data services revenue has come from new customers and from further penetration of our existing customer base. The decline in software license and hardware revenue reflects the increasingly saturated markets in which our core software products are sold, and the decline in professional services revenue is due to lower implementation and training revenue resulting from the recent decline in system sales and lower consulting services revenue due to reduced demand from customers.

27



Consolidated gross profit as a percentage of revenue increased to 54.4% for the nine months ended December 31, 2015 compared to 53.8% in the prior year period primarily due to improved profitability from RCM and related services, EDI and data services, and professional services, resulting from more effective cost management.
Consolidated operating income increased 29.0%, or $6.7 million, in the nine months ended December 31, 2015 as compared to the prior year period. The increase is mostly due to a 1.9%, or $3.7 million, increase in gross profit resulting from the increase in total revenues and improvements in profitability noted above and a decrease of 3.9%, or $2.0 million, in research and development costs attributed mostly to higher rates of capitalization of software costs related to the development of enhancements to our ambulatory software products during the nine months ended December 31, 2015 as compared to the prior year period.
NextGen Division
NextGen Division revenue decreased by 0.6% in the nine months ended December 31, 2015, as compared to the prior year period. Divisional software license and hardware revenue decreased by 11.8% and professional services revenue decreased by 22.9%, offset by an increase of 18.5% in software related subscription services revenue, an increase of 8.4% in EDI and data services revenue, and an increase of 1.7% in support and maintenance revenue. As noted above, the increase in subscription services revenue reflects growth in interoperability subscriptions as well as subscriptions related to our NextGen® Patient Portal product offering while the decrease in software license and hardware revenue and professional services revenue reflects the increasingly saturated markets in which our core software products and services are sold.
NextGen Division operating income (excluding Corporate and unallocated amounts) increased by 0.3% in the nine months ended December 31, 2015, as compared to the prior year period. Although overall operating expenses decreased by 11.4%, or $5.4 million, primarily as a result of lower sales commissions associated with a decline in new system sales and a decrease in other personnel related costs resulting from improved operational efficiency, such benefit was mostly offset by a $5.0 million decline in divisional gross profit caused primarily by a decrease in high-margin software license sales.
Our goals for the NextGen Division include further enhancement of our existing products, including expansion of our software and service offerings that support pay-for-performance initiatives around accountable care organizations, bringing greater ease of use and intuitiveness to our software products, enhancing our managed cloud and hosting services to lower our clients' total cost of ownership, expanding our interoperability and enterprise analytics capabilities, and further development and enhancements of our portfolio of specialty focused templates within our electronic health records software. We intend to remain at the forefront of upcoming new regulatory requirements, including meaningful use requirements for stimulus payments and recent healthcare reform that is driving the transition towards pay-for-performance, value-based reimbursement models. We believe that the expanded requirements for continued eligibility for incentive payments under meaningful use rules will result in an expanded replacement market for electronic health records software. We also intend to continue selling additional software and services to existing customers, expanding penetration of connectivity and other services to new and existing customers, and capitalizing on growth and cross selling opportunities within the RCM Services Division. Our acquisitions of Mirth and Gennius improve our competitiveness in the markets and provide new customers and expanded markets for the NextGen Division and also support our strategy to focus on accountable care organizations around interoperability, patient engagements, population health and collaborative care management, and enterprise analytics. We believe we are well-positioned within the evolving healthcare market to deliver products and services that address the growing importance of quality collaborative care and shift from fee-for-service to value-based, pay-for-performance care.
The NextGen Division’s growth is attributed to a strong brand name and reputation within the marketplace for healthcare information technology software and services and investments in sales and marketing activities, including new marketing campaigns, Internet advertising investments, tradeshow attendance and other expanded advertising and marketing expenditures.
RCM Services Division
RCM Services Division revenue increased 16.8%, or $9.8 million, in the nine months ended December 31, 2015. The RCM Services Division benefited mostly from new customer additions during the nine months ended December 31, 2015 as well as organic growth achieved through cross selling RCM services to existing NextGen Division customers.
Divisional operating income (excluding Corporate and unallocated amounts) increased 39.1%, or $3.8 million, in the nine months ended December 31, 2015 as compared to the prior year period primarily due to an increase in divisional gross profit, offset by higher operating expense related mostly to higher sales commissions associated with the growth in revenue noted above.
The Company believes that a significant opportunity exists to continue cross selling RCM services to existing customers. The portion of existing NextGen customers who are using the RCM Services Division's services is approximately 10%. Management is actively pursuing efforts to achieve faster growth from expanded efforts to leverage the existing NextGen Division's sales force towards selling RCM services. We also believe that ongoing increases in the complexity of medical billing and collections processes, including the migration to value-based reimbursement models, will create additional opportunities for our RCM Services Division.

28



QSI Dental Division
QSI Dental Division revenue increased 3.3%, or $0.4 million in the nine months ended December 31, 2015 primarily due to a $0.3 million increase in software license and hardware revenue and a $0.3 million increase in software related subscription services, offset by a $0.3 million decrease in support and maintenance revenue.
Divisional operating income (excluding Corporate and unallocated amounts) increased 13.2%, or $0.5 million, in the nine months ended December 31, 2015 as compared to the prior year period primarily due to the increase in divisional gross profit associated with the increase in higher-margin software license and software related subscription services revenue noted above.
The QSI Dental Division is well-positioned to sell to the FQHCs market and intends to continue leveraging the NextGen Division's sales force to sell its dental electronic medical records software to practices that provide both medical and dental services, such as FQHCs, which are receiving grants as part of the ARRA. Our goal for the QSI Dental Division is to continue to invest in the new cloud-based QDW platform while aggressively marketing QDW to both new and existing customers.
Hospital Solutions Division
On October 22, 2015, we closed an Asset Purchase Agreement with Quadramed Affinity Corporation in which we sold and assigned substantially all assets and liabilities of the Hospital Solutions Division (“Hospital disposition”). We believe that the Hospital disposition will allow us to focus our efforts and resources on our core ambulatory business. The results of operations included within this management's discussion and analysis reflect the operating results of the Hospital Solutions Division through the date of disposition.
Hospital Solutions Division revenue decreased 43.9% in the nine months ended December 31, 2015. Revenue was primarily impacted by a 70.4% decrease in software, hardware and related revenue and a 48.2% decrease in professional services revenue. These decreases are primarily the result of reduced demand for implementation, training, and consulting services due to a decline in new software sales and because software license and hardware sales and software related subscriptions services revenue in the prior year period were favorably impacted by decreases in reserves for sales credits. Additionally, the Hospital disposition partially contributed to the overall decrease in revenue as compared to the prior year period.
Divisional operating loss (excluding Corporate and unallocated amounts) was $0.9 million for the nine months ended December 31, 2015 as compared to a $2.2 million loss for the prior year period. The improvement in operating results is due mostly to a decrease in selling, general and administrative expenses associated mostly to decline in divisional headcount.
A $1.8 million loss (including related incremental direct costs) on the Hospital disposition was recorded in the nine months ended December 31, 2015 and is reflected as a component of selling, general and administrative expense on our consolidated statements of comprehensive income.
Corporate and unallocated amounts (costs not allocated to the operating segments)
Research and development costs decreased by 3.9% to $49.6 million for the nine months ended December 31, 2015 as compared to $51.6 million for the prior year period attributed mostly to higher rates of capitalization of software costs related to the development of enhancements to our ambulatory software products. Capitalized software costs increased to $11.6 million as compared to $9.5 million for the prior year period while gross expenditures, including both amounts expensed and capitalized, remained consistent with the prior year period. The table below provides a summary of the amount of software costs capitalized in proportion to the amount of gross expenditures for the three and nine months December 31, 2015 and 2014:
 
Nine Months Ended December 31,
 
2015
 
2014
Gross expenditures
$
61,188

 
$
61,137

Capitalized software costs
(11,604
)
 
(9,535
)
Research and development costs, as reported
$
49,584

 
$
51,602

 

 

Capitalized software costs as a percentage of gross expenditures
19.0
%
 
15.6
%
Amortization of capitalized software costs decreased by 27.1% to $7.4 million for the nine months ended December 31, 2015 as compared to $10.2 million for the prior year period. The decrease in amortization of capitalized software costs is due to certain products being fully amortized. Amortization of capitalized software costs are reflected as cost of revenue on our consolidated statements of comprehensive income. Refer to Note 6, “Capitalized Software Costs” of our notes to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for an estimate of future amortization of capitalized software costs.

29



Other Corporate and overhead costs increased by $3.6 million to $54.6 million for the nine months ended December 31, 2015 as compared to $51.0 million for the prior year period primarily due to higher bad debt expense and acquisition related costs. In addition, higher utilization of online advertising and media placement has resulted in a 2.4% increase in marketing expense to $9.7 million for the nine months ended December 31, 2015 as compared to $9.4 million for the prior year period.

Comparison of the Three Months Ended December 31, 2015 and December 31, 2014
Net Income. Our net income for the three months ended December 31, 2015 was $7.3 million, or $0.12 per share on both a basic and fully diluted basis. In comparison, we had net income of $6.7 million, or $0.11 per share on both a basic and fully diluted basis for the three months ended December 31, 2014. The $0.6 million increase in net income for the three months ended December 31, 2015 as compared to the prior year period was primarily attributed to the following:
a $4.0 million decrease in research and development costs due to higher rates of capitalization of software costs related to the development of enhancements to our ambulatory software products combined with lower gross expenditures, including both amounts expensed and capitalized, related to lower costs as a result of the Hospital disposition and lower third-party consulting costs, and
a $2.1 million decrease in selling, general and administrative costs due primarily to lower shareholder litigation expense, offset by higher acquisition related costs and the loss on Hospital disposition, partially offset by
a $5.8 million decrease in gross profit due mostly to a decrease in high-margin software license sales.
Revenues. Revenue for the three months ended December 31, 2015 decreased 5.2% to $117.0 million from $123.4 million for the three months ended December 31, 2014. NextGen Division revenue decreased 3.7% to $88.7 million compared to $92.1 million in the three months ended December 31, 2014; RCM Services Division revenue increased 4.9% to $23.0 million from $21.9 million; QSI Dental Division revenue increased 5.5% to $4.7 million from $4.5 million; and Hospital Solutions Division revenue decreased 87.6% to $0.6 million from $5.0 million in the three months ended December 31, 2014.
Software, Hardware and Related. Revenue from consolidated software, hardware and related sales for the three months ended December 31, 2015 decreased 16.3% to $27.9 million from $33.3 million in the prior year period.
The following table summarizes software, hardware and related sales on a consolidated and divisional basis for the three months ended December 31, 2015 and 2014 (in thousands):
 
 
Software License and Hardware
 
Software Related Subscription Services
 
Total Software, Hardware and Related
Three Months Ended December 31, 2015
 
 
 
 
 
 
NextGen Division
 
$
15,663

 
$
11,220

 
$
26,883

RCM Services Division
 
3

 

 
3

QSI Dental Division
 
526

 
395

 
921

Hospital Solutions Division
 
(42
)
 
90

 
48

Consolidated
 
$
16,150

 
$
11,705

 
$
27,855

Three Months Ended December 31, 2014
 
 
 
 
 
 
NextGen Division
 
$
19,210

 
$
10,645

 
$
29,855

RCM Services Division
 
143

 
222

 
365

QSI Dental Division
 
435

 
284

 
719

Hospital Solutions Division
 
1,640

 
713

 
2,353

Consolidated
 
$
21,428

 
$
11,864

 
$
33,292

Software, hardware and related sales for the NextGen Division decreased by $3.0 million in the three months ended December 31, 2015 compared to the prior year period due primarily to a $3.5 million, or 18.5%, decrease in software license and hardware revenue, offset by an increase of $0.6 million, or 5.4%, in software related subscription services revenue resulting from growth in both our interoperability subscriptions and subscriptions related to our NextGen® Patient Portal product offering. The decline in NextGen Division software license and hardware revenue is principally due to increasing levels of market saturation for core electronic health record and practice management solutions. The NextGen Division’s software license and hardware revenue accounted for 58.3% of divisional software, hardware and related revenue during the three months ended December 31, 2015 compared to 64.3% during the prior year period.

30



The RCM Services Division was not a significant contributor to consolidated software, hardware and related revenue for both the three months ended December 31, 2015 and 2014 as a result of the nature of the division's product and service offering.
Total software, hardware and related sales for the QSI Dental Division increased 28.1%, or $0.2 million, in the three months ended December 31, 2015 versus the same period last year primarily due to higher software license sales and increases in software related subscription services, such as QDW, the Division's cloud-based software solution. QDW is sold primarily as a SaaS solution for which revenue is recognized over an extended period of time rather than upfront.
At the Hospital Solutions Division, software, hardware and related revenue decreased 98.0%, or $2.3 million in the three months ended December 31, 2015 versus the same period last year primarily due to the Hospital disposition in October 2015.
We expect to benefit, over time, from growth in the replacement market, driven by an expected consolidation of electronic health records vendors. We also anticipate the creation of new opportunities in connection with the evolution of healthcare from a fee-for-services reimbursement model to a pay-for-performance model around the management of patient populations. Our acquisitions of Gennius and Mirth provided us with new products and services around population health, collaborative care management, interoperability and enterprise analytics to address these market dynamics. While it remains difficult to assess the relative impact or the timing of positive and negative trends affecting the aforementioned market opportunities, we believe we are well positioned to remain a leader in serving the evolving market needs for healthcare information technology.
Support and Maintenance, RCM, EDI and Professional Services. For the three months ended December 31, 2015, our consolidated revenue from RCM and related services and EDI and data services increased by 5.9%, and 8.4%, respectively, compared to the prior year period. Consolidated revenue from support and maintenance decreased by 8.2% compared to the prior year period as a result of increases in sales credits and related reserves and net customer attrition. Professional services revenue decreased by 2.9% compared to the prior year period due to lower demand for related system sales.
The following table summarizes support and maintenance, RCM and related services, EDI and data services and professional services revenue by category on a consolidated and divisional basis for the three months ended December 31, 2015 and 2014 (in thousands):
 
 
Support and Maintenance
 
RCM and Related Services
 
EDI and Data Services
 
Professional Services
Three Months Ended December 31, 2015
 
 
 
 
 
 
 
 
NextGen Division
 
$
36,984

 
$

 
$
18,806

 
$
6,020

RCM Services Division
 
55

 
21,594

 
422

 
920

QSI Dental Division
 
2,006

 

 
1,395

 
404

Hospital Solutions Division
 
474

 

 
20

 
77

Consolidated
 
$
39,519

 
$
21,594

 
$
20,643

 
$
7,421

Three Months Ended December 31, 2014
 
 
 
 
 
 
 
 
NextGen Division
 
$
38,285

 
$

 
$
17,633

 
$
6,281

RCM Services Division
 
152

 
20,392

 
216

 
788

QSI Dental Division
 
2,166

 

 
1,178

 
417

Hospital Solutions Division
 
2,442

 

 
24

 
158

Consolidated
 
$
43,045

 
$
20,392

 
$
19,051

 
$
7,644

Support and maintenance revenue at the NextGen Division for the three months ended December 31, 2015 decreased by 3.4% to $37.0 million from $38.3 million as a result of increases in sales credits and related reserves and net customer attrition. NextGen Division EDI and data services revenue grew 6.7% to $18.8 million compared to $17.6 million in the prior year period. The growth in NextGen EDI revenue has come from new customers and from further penetration of the division’s existing customer base. Professional services revenue for the NextGen Division, which consists primarily of implementation and training and consulting services, decreased 4.2% to $6.0 million in the three months ended December 31, 2015 from $6.3 million in the prior year period due to the softening demand for related system sales, as noted above.
For the three months ended December 31, 2015, RCM and related services revenue increased to $21.6 million compared to $20.4 million in the prior year period. The growth in RCM revenue is primarily attributable to organic growth achieved through cross selling RCM services to existing NextGen Division customers as well as the addition of new customers.
QSI Dental Division support and maintenance for the three months ended December 31, 2015 decreased by $0.2 million as compared to the prior year period due primarily to a shift in customer preference to subscription-based software services as opposed to software licenses that require support and maintenance. Professional services revenue remained consistent while EDI and data services revenue at the QSI Dental Division increased to $1.4 million for the three months ended December 31, 2015 from $1.2 million in the prior year period.

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For the Hospital Solutions Division, support and maintenance revenue decreased by $2.0 million, or 80.6%, and professional services revenue decreased by $0.1 million, or 68.9%, for the three months ended December 31, 2015 as compared to the prior year period primarily due to the Hospital disposition in October 2015.
We intend to continue to promote support and maintenance, RCM and related services, and EDI and data services to both new and existing customers.
Cost of Revenue. Cost of revenue for the three months ended December 31, 2015 decreased to $53.8 million from $54.4 million in the prior year period and the cost of revenue as a percentage of revenue increased to 46.0% from 44.0%. The increase in cost of revenue as a percentage of revenue principally reflects the decline in high-margin software license sales.
The following table details revenue and cost of revenue on a consolidated and divisional basis for the three months ended December 31, 2015 and 2014 (in thousands):
 
 
Three Months Ended December 31,
 
 
2015
 
%
 
2014
 
%
NextGen Division
 
 
 
 
 
 
 
 
Revenue
 
$
88,693

 
100.0
 %
 
$
92,054

 
100.0
%
Cost of revenue
 
32,497

 
36.6
 %
 
30,678

 
33.3
%
Gross profit
 
$
56,196

 
63.4
 %
 
$
61,376

 
66.7
%
RCM Services Division
 
 
 
 
 
 
 
 
Revenue
 
$
22,994

 
100.0
 %
 
$
21,913

 
100.0
%
Cost of revenue
 
15,105

 
65.7
 %
 
14,757

 
67.3
%
Gross profit
 
$
7,889

 
34.3
 %
 
$
7,156

 
32.7
%
QSI Dental Division
 
 
 
 
 
 
 
 
Revenue
 
$
4,726

 
100.0
 %
 
$
4,480

 
100.0
%
Cost of revenue
 
2,093

 
44.3
 %
 
2,114

 
47.2
%
Gross profit
 
$
2,633