Computer Programs and Systems, Inc.
Q2 2018 Earnings Call Transcript

Published: 3 Aug 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the CPSI Second Quarter 2018 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded, Thursday, August 2, 2018. I'd now like to turn the conference over to Boyd Douglas, President and Chief Executive Officer, CPSI. Please go ahead, sir.

[John Boyd Douglas:]

Thanks, George. Good afternoon, everyone, and thank you for joining us. During this conference call, we may make statements regarding future operating plans, expectations and performance that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that any such forward-looking statements only reflect management expectations and predictions based upon currently available information and are not guarantees of future results or performance. Actual results might differ materially from those expressed or implied by such forward-looking statements as a result of known and unknown risk, uncertainties and other factors, including those described in our public releases and reports filed with the Securities and Exchange Commission, including, but not limited to, our most recent Annual Report on Form 10-K. We also caution investors that the forward-looking information provided in this call represents our outlook only as of this date and we undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call. Joining me on the call today will be Matt Chambless, our Chief Financial Officer; David Dye, Chief Growth Officer; and Chris Fowler, our Chief Operating Officer. At the conclusion of our prepared comments, we will be available to take any questions that you may have. As noted in our press release earlier today, our second quarter financial results, specifically from a revenue perspective, ended with a disappointing performance. Matt will provide additional detail around the overall financials, but it's important to note that we expect to recapture this gap in revenue during the second half of the year and still end with a strong finish to 2018, due, in part, to the impressive 18 new system installations that we will be completed by the end of this year. In addition, 15 of those installations are traditional license purchases which translates to immediate revenue recognition upon the completion of implementation. With the recent announcements from CMS indicating they will likely allow a 90-day attestation permitting for meaningful use stage 3 instead of a full year, we saw a shift in client urgency to install the needed applications and functionality to attest. With the majority of our eligible clients having already purchased the MU3 package, installation and attestation are what remains in order for community hospitals to avoid a penalty from the federal government. This shift and the timing of the federal ruling has, in turn, extended the recognition of the bulk of the remaining estimated $11 million in meaningful use revenue into 2019. This quarter's financial performance should not overshadow the growth that the company experienced in Q2. Specifically, TruBridge grew 17% in year-to-date revenue compared with the same period last year. TruBridge also experienced another quarter of record bookings for the Revenue Cycle Management solution, totaling over $2 million. Finally, as we highlighted last quarter, our EHR client base is what fuels the TruBridge engine. So, it's important to mention that 15 new clients signed with the CPSI family of companies last quarter, which represents 11 community hospitals and 4 skilled nursing facilities. These 15 new acute and post-acute clients from Q2, along with $8.7 million in add-on sales, have helped to build up a pipeline of revenue to be recognized over the second half of 2018. As I mentioned, there are 18 new system installs scheduled for the second half of 2018 and this number represents the highest we've had in eight years. Management of our combined operations continues to progress as we most recently simplified our Acute EHR business frame. The Evident business now represents our acute and ambulatory IT solutions, which consists of two EHRs, Thrive and Centriq, which was formerly under the company brand, Healthland. In the second quarter, we began phasing out the Healthland brand to bring further clarity across the CPSI family of companies for our clients and the market. This shift is in alignment with our ongoing efforts that focus on leveraging best practices and processes that deliver the greatest value to our clients, including product development, sales and the delivery of a shared set of solutions to one or more of our EHR platforms. This strengthening of the Evident brand will help drive real efficiencies over the next 18 months, coupled with other distinct operational synergies that I will touch upon, garnering an estimated $10 million in incremental benefit to our bottomline in 2019 based on the 2018 expense exit run rate. Since the acquisition of Healthland and its affiliates in 2016, we have involved into a much larger organization with broader solutions that have helped us to remain relevant in a fiercely competitive and ever changing industry. We are pleased with our progress today. The process of bringing our companies together, including culture, skill sets and experiences, takes time and there is some art and needed patience to this process. As we have settled in and given our teams time to acclimate, we have identified opportunities that make sense for our business at this time and they'll also have a positive impact to our bottomline. One of the leading opportunities is a direct result of the progress made by our now-combined product development teams. Their successful work over the last two years has eliminated the need for a number of third party products that were very costly to us. These third party tools and products had addressed important product gaps that no longer exist, as they are now covered by our self-developed features and functionality. Another byproduct of being a much larger organization is the broad geographical coverage of our employees across the U.S. While our corporate office remains in Alabama, the broader geography of our employee base creates value for our clients and brings important advantages to our business. We have defined a future office strategy that supports our employees and our business objectives. We will plan to maintain our presence in the current geographies while negotiating more favorable real estate leases. In addition, we have begun the process of identifying new options for our employee benefits, with an eye to leveraging the competitiveness of health insurance market and scale of our employee base begun in (00

[Matt J. Chambless:]

Thanks, Boyd, and good afternoon, everyone. As Boyd mentioned in his opening remarks, we encountered a number of headwinds during the second quarter that provided for a disappointing headline for this period's earnings. Although the optics aren't pleasant versus sequential in prior year comparatives, most of our disappointment this quarter is due to timing variables that have been characteristic of our business historically and less associated with any fundamental changes in our markets. These timing variables shouldn't overshadow the accomplishments that Boyd pointed out regarding new EHR client wins and year-over-year TruBridge growth or our continued strategy of building stable cash flows by focusing on recurring revenue growth. To that end, this was the fifth consecutive quarter of sequential recurring revenue growth, with year-over-year recurring revenue increasing 7%. This growth in recurring revenues, which made up 84% of revenues for the quarter and 79% of revenue in the trailing 12 months, provides an undercurrent of security amidst the noise that non-recurring revenues can inject into our periodic results. With improved execution around TruBridge sales, consolidated bookings of $23.4 million showed a 7% improvement over the first quarter of 2018 and the second consecutive growth quarter since the fourth quarter of 2017's disappointing bookings performance. However, record bookings in the second quarter of 2017 for both system sales and TruBridge made for a tough bar to clear. MU3-related bookings were down nearly $10 million, as roughly 80% of the related bookings opportunity has now been signed, causing an overall $7.9 million decrease in system sales and support bookings, with improved net new bookings offsetting a portion of the MU3 headwinds. TruBridge bookings were down $2.3 million as last year's bookings were propelled by the record $3.1 million contract we closed in the second quarter of 2017. By comparison our largest booking value for this quarter was $0.7 million. Of the $17.1 million in system sales and support bookings, roughly $1.6 million is included in our second quarter revenues. $13.6 million represents non-subscription sales that should trickle into revenue over the next 12 months, with an average lag between booking and install of five to six months. $1.8 million represents EHR subscription revenue to be recorded over a weighted average period of five years, with a start date in the next 12 months, and similar to our non-subscription sales and average lag between booking and install of five to six months. Our $6.4 million of bookings from TruBridge are fully comprised of recurring revenues to be recorded over a one-year period starting in the next four to six months. 3 customer sites went live with our Thrive acute care solution compared to 5 in the first quarter and 10 in the second quarter of 2017, with each of these periods containing exactly one go-live under a cloud or subscription model. The three go-lives this quarter were less than the expected four we mentioned last quarter as one moved to the fourth quarter. At this time, we expect eight new client facilities to go-live with our Thrive solution in the third quarter of 2018, with none expected to go-live in a cloud environment. Our employee head count as of June 30 was roughly 2,080, essentially flat with March 31 numbers. Turning to the income statement, TruBridge maintained the strong gains earned during the first quarter, posting results that were relatively flat sequentially, with revenues up 13% over the second quarter of 2017. Accounts receivable management and medical coding services continue to propel recurring revenue growth. Accounts receivable management revenues increased 38% year-over-year as hospital clients continue to partner with us for their full business office needs, and medical coding revenues increased 88% year-over-year as providers continue to view TruBridge as a full-service RCM partner. Margins were relatively flat at 46% for the period, compared to 47% in the first quarter and 46% in the prior year. Headwinds against non-recurring revenues drove system sales and support down $3 million sequentially and $2.7 million year-over-year. As Boyd mentioned, the proposed rule from CMS has moved the goalpost for our customers, resulting in less urgency by our clients which ultimately impacts the timing of the revenue for our MU3 incremental applications and driving a $900,000 decrease in related revenues from the first quarter. This MU3 dynamic, coupled with the lighter implementation schedule that, as Boyd mentioned, should reverse itself in the back half of 2018, and temporary weakness and other add-on sales, resulted in non-recurring system sales revenues that were down $3 million sequentially. From a year-over-year perspective, MU3 drove growth in add-on sales but the 10 go-lives in the second quarter of 2017 set a tough bar to clear, with non-recurring revenues declining $2.6 million. Today, we've recognized $22.1 million in MU3-related revenue with life-to-date bookings of $28.7 million. Our cost of system sales and support decreased slightly from the prior year but increased $1.1 million due to sales mix impact on hardware costs and third party content fees. When coupled with the previously mentioned non-recurring revenue declines, margins were down to 54%, compared to 60% in the first quarter and 57% during the second quarter of 2017. Product development costs increased $600,000 or 6% sequentially and $900,000 or 11% year-over-year due to our strategic initiatives designed to improve provider adoption and clinical workflow and rejuvenate our post-acute offering. Sales and marketing costs were relatively flat year-over-year and decreased to $0.2 million from the first quarter as revenue declines impacted commission expense. General and administrative costs increased $800,000 over the first quarter, behind an additional $1 million in costs associated with our National Client Conference held in May. Year-over-year costs were up $300,000 as the $1.7 million decrease in severance costs were offset by increased prescription drug spend and increased bad debt. This quarter's effective tax rate of 46% was impacted by some year-to-date adjustments related to state income apportionment which had an outsized impact on the effective tax rate, as taxable income for the quarter was heavily impacted by the aforementioned declines in non-recurring revenues. And with that, I'll now turn things over to David Dye, our Chief Growth Officer.

[David A. Dye:]

Thanks, Matt. As Boyd mentioned, we had a quarter of nice growth for TruBridge as a result of our sales efforts. We continue to see a steady pick up from within our family of EHR clients and from outside the CPSI family, having put focus and energy toward those non-family opportunities. Hitting just over $2 million in bookings for the TruBridge RCM solution marks another record this quarter, and we see no reason to believe this momentum will slow down any time soon. TruBridge revenue is just over $50 million year-to-date, putting us in a good position to easily surpass the $100 million annual revenue milestone before year end. The sales team continues to execute extremely well against a healthy pipeline of opportunity in the community hospital market. In a competitive market, not only have we enjoyed a 32% increase in the number of deals we participated in year-to-date, but we have also seen a jump in the win rate of new system sales compared to the same period last year. As Boyd mentioned, we signed 15 new client contracts in the second quarter, 11 of those were Evident system sales, giving us 24 new Evident clients year-to-date, and all indications are pointing to a similar, if not, stronger new system sales booking performance throughout the second half of the year. The core of our long-term growth strategy remains centered on increasing recurring revenue and continued customer retention. In Q2, we have seen a spike in interest among our existing customer base in moving to our subscription offering, nTrust. Our nTrust program allows clients to convert from a license and maintenance fee model to a monthly subscription-based model. Included in their monthly subscription are all existing and future products available through the CPSI families of companies, including maintenance and monthly support with no additional cost to the client. This service offering is based upon a percentage of collections managed by TruBridge, which minimizes risk while improving the financial health of the organization through a reduction in their AR and increased cash flow. We interpret the uptick in client interest as a very positive signal in terms of our continued client retention, as well as another opportunity to increase our recurring revenue stream. This solid progress associated with our topline growth, along with the estimated $10 million of operational synergies benefiting our bottomline in 2019, gives us continued assurance that we are executing well and the results will be demonstrated further by improved financial performance throughout the remainder of 2018 and into 2019 and beyond. George, if you would please open the call for questions.

[Operator:]

Certainly. Our first question is from the line of Stephanie Demko with Citigroup. Please proceed with your question.

[Stephanie J. Demko:]

Hey, guys. Thank you for taking my question. I just want a quick update on the competitive landscape and any changes you may be seeing, given the recent announcement by one of the new entrants that they're taking a more measured approach to the hospital market.

[David A. Dye:]

Yeah. Hi, Stephanie. I would say there's not a whole lot of change from the last quarter. I certainly know what you're referring to, and to borrow from your terminology, which I think you took straight from them, I would say that we are seeing that is the case, that they're probably more selective in the deals that they're going after at this point, yes.

[Stephanie J. Demko:]

All right. Understood. So, no near-term impact to the attrition rate?

[David A. Dye:]

I'm sorry.

[Stephanie J. Demko:]

Is there any near-term impact to the attrition rate, just given there's this more measured approach?

[David A. Dye:]

We certainly continue to and we definitely had in the last quarter several clients that have attempted, at some point, to some degree, to install the system and are definitely looking to either return to us if they were honest or if they were on a competitive system to look at us. So, we've seen the pattern continue there that we've seen for some time.

[Stephanie J. Demko:]

All right. Good. Good to hear. And one follow-up on the competitive side, have you seen any impact from some of the IT standardizations we're seeing in the hospital space or you're more shielded given your smaller hospital focus?

[David A. Dye:]

I would say we're much more shielded given our focus.

[Stephanie J. Demko:]

Sounds good to me. Thank you for taking my questions.

[David A. Dye:]

Thanks, Stephanie.

[Operator:]

Our next question is from the line of Mike Ott with Oppenheimer. Please proceed with your (00

[Mike Ott:]

Hey, guys. Thanks for taking my question. Wonder if you could, first, maybe expand a little bit on the delayed implementation that you discussed heading into 4Q. What led to that?

[David A. Dye:]

There was a customer request that they felt like due to some personal things that they had going on in-site and some interfaces, that they felt it was best to move to later in the year.

[Mike Ott:]

Okay. It makes sense. And then, do you have the confidence that you have the sufficient internal capacity to get done the 18 installs that you're targeting for the second half of this year?

[David A. Dye:]

Yeah. Absolutely.

[Mike Ott:]

Great.

[John Boyd Douglas:]

Now, I'll – So, I'll expand on that for a second. We've been doing new installs for a long time. So obviously, we evolved as the methodology change to do these implementations. But it's definitely more than we've done, I think, as Boyd mentioned, since 2013. But we have a lot of tenure here so we – yes, it's certainly not without its challenges but we do have the capacity.

[Mike Ott:]

Great. Thanks. And then, lastly, if I could, so the $10 million incremental bottomline benefit you're expecting in 2019, I know you mentioned the real estate plans, Boyd. But are there any specific OpEx lines you think might see more leverage as we look into 2019?

[Matt J. Chambless:]

Yeah. Mike, this is Matt. I'd say that of the OpEx lines that we'd expect to see hit the most would likely be in the G&A side, as we reconfigure some of our employee benefits offerings.

[Mike Ott:]

Okay. Very helpful. Thanks, guys.

[John Boyd Douglas:]

Thanks, Mike.

[Operator:]

Our next question is from the line of Gene Mannheimer with Dougherty & Company. Please proceed with your question.

[Eugene Mannheimer:]

Oh, thanks. Good afternoon. Thanks for taking the questions here. With respect to that last comment on the $10 million or so in cost synergies, how much impact does the elimination of those third party developers that you mentioned, Boyd, have on this and where would that show up in the OpEx?

[Christopher L. Fowler:]

Gene, this is Chris. I'll let Matt answer the second half of that. But I would say probably about 15% to 20% of that $10 million would be accounted for in that third party. And where it shows up, I'll let Matt answer that.

[Matt J. Chambless:]

Yeah. And so, Gene, where our third party spend like that shows up is in cost of system sales and support.

[Eugene Mannheimer:]

Okay. Got you. Very good. Okay, so on the – with respect to the top of the income statement, clearly, with the MU3 attestation revenue winding down, have you thought or – can you share with us your plan for sort of replacing that revenue in 2019?

[David A. Dye:]

Yeah. I'd say, Gene, it's a combination of new system sales. I mean, obviously, you know how many installs we've been doing and how many we've been selling. So, we've got a significant run rate there. And as I mentioned, we think that the number that we have been selling can continue. We've got a lot of momentum there. So replacing that with more installs, certainly, is one methodology, and then, we expect the remainder to come from TruBridge. The last couple of quarters, we had a more solid quarter from a bookings standpoint with TruBridge this quarter, but we think that that'll get better throughout the rest of the year. We have had some success with getting TruBridge RCM to move upstream in the larger hospitals and we think that that'll grow significantly in the future as well. We are working on some bigger deals with regards to accounts receivable management that we won't necessarily think it will execute on this quarter, but we could in the fourth quarter of this year or the first quarter of next. And so, there's some – we expect the rest of that to be made up for by TruBridge growth.

[Eugene Mannheimer:]

Very good. Thank you.

[David A. Dye:]

Thanks, Gene.

[John Boyd Douglas:]

Thank you, Gene.

[Operator:]

There are no further questions at this time. I will now turn the call back to the presenters for their closing remarks.

[John Boyd Douglas:]

Great. Thank you, George. I want to thank everyone for joining us on the call today. I know we had a lot to talk about and we appreciate you spending the time with us this afternoon. I'd like to close our call today by reiterating that TruBridge continues to be a growth driver for CPSI, with a good deal of opportunity remaining in and outside of the CPSI family of companies. Our strong client retention rate and steady sales execution in the EHR replacement market gives us real confidence for the remainder of 2018 and beyond. We're building long-term value for CPSI as we focus on our clients' success, helping them cerate healthier communities. Thank you, everyone, and have a great evening.

[Operator:]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.