Computer Programs and Systems, Inc.
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Computer Programs & Systems Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, July 26, 2013. I would now like to turn the conference over to Boyd Douglas, President and Chief Executive Officer, Computer Programs & Systems. Please go ahead, sir.

[J. Boyd Douglas:]

Thank you, Myra. Good morning, 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 risks, 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 this morning is David Dye, our Chief Financial Officer. David and I have a few notes and prepared comments, and then we'll be happy to take your questions. In the second quarter, we installed our Financial and Patient Accounting System in 10 hospitals and our core clinical departmental applications at 15 facilities. Additionally, 13 hospitals implemented nursing Point of Care and 39 customers went live with physicians applications, which consist of ChartLink, CPOE and Physician Documentation. Add-on sales to existing clients were $9.6 million or 18% of total revenue for the quarter. At this time, we expect to install our Financial and Patient Accounting System in 6 facilities in the third quarter. We anticipate 5 new installations of our core clinical departmental modules, 3 nursing Point of Care implementations and 38 installations of physicians applications. You certainly noticed that our software implementations for the third quarter are less than what we would normally expect when compared to prior quarters. We believe this can be attributed to 2 factors

[David A. Dye:]

Thanks, Boyd, and good morning, everyone. My prepared comments are very brief this morning, and then we'll take questions. Our employee headcount as of June 30 was 1,410, down 13 sequentially and 31 year-over-year. We expect our total employee headcount, inclusive of TruBridge, to stabilize around 1,400 for the remainder of 2013 and first half of 2014. The total accumulated unrecognized revenue related to first-generation Meaningful Use contracts as of June 30 was $3.9 million. This $3.9 million is made up primarily of amounts outstanding from 4 hospital implementations. 2 of the 4 have already attested in -- payment, and the other 2 are attesting in August. We anticipate the amounts outstanding from these remaining first-generation MU contracts to be recognized in the third quarter or early fourth quarter of this year. All 10 of the new customer system implementations in the second quarter were generation 2 Meaningful Use contracts. Since December 2012, we have performed 18 new client installations under gen 2 contract arrangements. Of those 18, 7 have either recently attested or will attest August 1, 4 will attest at September 1 and 7 will attest on October 1. As a result, we expect our cash collections to experience a significant uptick in the fourth quarter of this year, just as they did in the fourth quarter of 2012. Some of you may have seen the press release Wednesday announcing that CPSI and Sunquest have joined the CommonWell Health Alliance. Along with the founding member companies, CPSI and Sunquest will participate in the pilot program later this year, with a goal of achieving meaningful interoperability results by HIMS 2014. CPSI's inclusion in this project ensures that rural hospitals will be relevant in the development of the alliance. Myra, if you would please open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Jamie Stockton with Wells Fargo.

[Jamie Stockton:]

I guess, maybe the first one, there was a big uptick sequentially in the Business Management Services. I suspect that is a combination of the traction you guys have had with both CPSI and non-CPSI clients lately, but I mean, is there anything else? I know we had a little revenue recast from support and maintenance last quarter into Business Management Services. Could you just give some color on what's going on?

[David A. Dye:]

Yes, Jamie, it's more to do with what we've continued to sell to our existing EHR customer base, the 3 contracts in the first half of the year that were outside of our EHR clients. The revenue from that will begin to be recognized in the second half of the year. It's -- but it is a result of sort of the renewed focus that we put on TruBridge as we announced that and being more aggressive from a sales standpoint, and it's notably, too, a result of more of our consulting services, more specifically, our clinical consulting being utilized by our existing customer base. So we're pretty fired up about it, given that we're seeing that growth within our current customer base, but we're also selling into the noncurrent customer -- CPSI customer base more successfully than we thought we probably would have at this point. So we're pretty excited about where that's headed for the future.

[Jamie Stockton:]

Just so we don't get ahead of ourselves, as analysts, while we're modeling this thing out, I mean, is there any component of the clinical consulting that could fade some in the second half, as implementation activity pulls back a little bit after we got past this July deadline to get live? Or would you expect it to be a more recurring revenue stream?

[David A. Dye:]

I would expect it to be more recurring because a lot of it is around assisting our clients with their move towards Meaningful Use, and it's not a one-to-one relationship with how many installs we're doing in a given period of time.

[Jamie Stockton:]

Okay. And then, I guess, just, David, the G&A expense was high last quarter. You guys had some relatively high health care costs. It came down a little sequentially, but not quite as much as I thought it would. Is there anything notable going on in that G&A line that could unwind as the rest of the year progresses?

[David A. Dye:]

Yes, perhaps the insurance cost did come down back in line more with the norm. Our bad debt is a flat percentage of our total accounts receivable, including short-term receivables that you see there on the balance sheet. And obviously, that's grown because of the gen 2 contracts. So that is the majority of what you're seeing there in G&A. In addition, we had a huge conference down at the beach, a regional -- all of our regional conferences were combined into one conference this year for the first time in this quarter, in which we -- which was successful beyond our wildest imagination. And because of that, we spent a good deal of money on that as well. But those are the 2 primary items that were slight outliers.

[Jamie Stockton:]

The previous regional conferences, had they been kind of spread throughout the year, historically, and then they all kind of got concentrated?

[David A. Dye:]

Yes, spread throughout the first half of the year, and we didn't have quite the attendance that we had this year as well, so we didn't have the expense.

[Operator:]

Our next question comes from Jeff Garro with William Blair.

[Jeffrey Garro:]

So I wanted to see if you guys have already started to see any advantages to your kind of early announcement that Version 19 is Stage 2 or year 2014 certified. Well, we've noticed that some of your peers have not yet achieved that certification.

[J. Boyd Douglas:]

Yes, that -- I think it's probably too early because it was just in the last week or 2 that we did make that announcement. But we certainly expect that to drive sales to prospects and just be one more feather in your cap, I guess, you -- feather in our cap, I guess, you could say, that we can use to point to our continued success with Meaningful Use.

[David A. Dye:]

Yes. And to add to that, to Boyd's comment, there's some uncertainty out there with some vendors as to whether their current version is going to get you to Stage 2 or if you're going to have to upgrade to a newer version. And of course, we're quick to point out that we only have one version of our system and that all of our customers will have the same version of the system that can -- where they can achieve Stage 2 Meaningful Use. So we think that's a plus as well.

[Jeffrey Garro:]

So can you kind of describe the revenue opportunity within your base, upgrading people to Version 19? I thought the press release referenced there is some kind of revenue potential there. And also, outside of your base, I know it's a much bigger opportunity.

[J. Boyd Douglas:]

There's -- the Version 19 release, there's no revenue associated with that for existing clients, that's part of our professional license. But as long as you've maintained -- been a customer and paying us for software support and maintenance, that all upgrades to your software are new releases at no cost to you.

[Jeffrey Garro:]

Great. Then just to transition quickly to -- so I'll talk about the competitive landscape. And if we want to think about the cyclical nature that you discussed, but might we see that change a little bit as you're getting new clients on to attest for Stage 1, but there might also be a more robust replacement cycle, to get clients there on other vendor systems to attest for Stage 2 using your system? I know Cerner yesterday commented that they think 2014 will be a big replacement year. I wanted to see if you guys shared those thoughts.

[J. Boyd Douglas:]

I don't know that I'm really willing to quantify it at this point, but I certainly think there's a possibility there. I don't think it's any secret that certainly some of our competitors are struggling and as David mentioned, a couple of them, it's unclear whether their current version is even going to be Stage 2 compatible or not. So there's a lot of uncertainty. And I think another thing that a lot of people don't talk about, which is interesting, is ICD-10 coming up, that should be a catalyst for people to switch systems as well. It certainly, historically, has been -- when there's a major change to the billing like that, but vendors either sunset products or they're perceived that their products aren't going to be able to help them comply with ICD-10. So both of those things, I think, bodes well for a healthy replacement market in 2014, and really even in '15 as well.

[Jeffrey Garro:]

So with that ICD-10 deadline coming at October 1 of next year, should we think about Q2 being a big sales period and Q3 being a big install period? Or is there any other seasonality aspects we should be thinking of for 2014?

[J. Boyd Douglas:]

That's all I'm aware of. Certainly, yes, the potential exists there, [indiscernible] we'll see.

[Jeffrey Garro:]

Great. And then one last question on the competitive environment. You talked about some of your traditional competitors struggling, but is that being balanced out at all by some of the traditionally larger system facing vendors coming downstream at all?

[J. Boyd Douglas:]

We're not seeing any more of that now than we had even a year ago. We see very little of that.

[Operator:]

The next question comes from Sean Wieland with Piper Jaffray.

[Sean W. Wieland:]

Just wanted to get my numbers straight on the accumulated unrecognized revenue. So you recognized in the quarter about $1.4 million from that versus $1.9 million last quarter? Do I have those numbers right?

[David A. Dye:]

Yes. I'm showing $1.3 million, Sean.

[Sean W. Wieland:]

Okay. So does -- your text in the release says $3.8 million, but you said $3.9 million on the call. Am I looking at the right numbers, because I'm a little confused.

[David A. Dye:]

Well, I'm pulling it up.

[Sean W. Wieland:]

The total remaining accumulated unrecognized revenue related to such contracts as of June 30 was approximately $3.8 million, but I think you said $3.9 million. I don't mean to split hairs, but I just want to make sure I'm looking at the right numbers.

[David A. Dye:]

Yes, I said $3.9 million. $3.8 million was right. So I think it was $3.82, which is probably why. I rounded incorrectly. So you're right, $1.4 million is the number then. You're right.

[Sean W. Wieland:]

Okay, that's helpful. And then, I missed it, the number of core clinical apps that you installed in the quarter.

[J. Boyd Douglas:]

In the second quarter, we installed -- clinical applications, 15.

[Sean W. Wieland:]

15. Got it. Okay. Then really, my other question is, we hear a lot of these other -- a lot of your peers talk about growth initiatives thinking beyond the EHR, thinking about how to monetize the data through population health management and other initiatives. How do you think about that opportunity? Does that opportunity exist within your customer base?

[J. Boyd Douglas:]

I think it certainly exists. I think there's still a lot of unknowns out there. And being from a conservative nature, we don't kind of speculate too much [indiscernible] much into speculation. But I certainly think there's the potential there. And clearly, with around 650 hospitals [indiscernible] and everything and the government wanting access to it, that there's certainly some revenue opportunities there for us.

[Operator:]

Our next question comes from Bret Jones with Oppenheimer.

[Rohit Vanjani:]

This is Rohit for Bret Jones. So on the gross margin, it looks like the core business x MU payments was up substantially. Is there anything going on there? If I'm looking at system sales x MU, and I know you said it was a 90% margin, but just to assume 100% margin for simplicity, it looks like it was up about $2 million sequentially, but COGS stayed flat. What was going on with the improved margin?

[David A. Dye:]

This has happened in the past for us. I mean, our costs are reasonably fixed. And so when system sales hit a certain point and then grow beyond that, a much larger percentage of it falls to the bottom line. And where we have a core like we did in the second quarter, that's where you see the margin improvement there, and that's what happened here.

[Rohit Vanjani:]

Okay. So there's no pricing or anything like that?

[David A. Dye:]

That's correct.

[Rohit Vanjani:]

Okay. And the headcount reductions, I mean, are they part of a natural attrition that you talked about rather than a layoff? And are they trending to where you want them be?

[David A. Dye:]

They're certainly not part of a layoff. They're absolutely just natural attrition, and this is exactly what we have been telling you for the last several years, is that we would, at some point, stop hiring at least for a period of time. And we stopped in the end of the September quarter of 2012, and we might and we have done a small amount of replacement hiring over time, based on attrition. But it's -- we expect -- as I said, we expect that number to maybe trend down a tiny bit more and then stabilize, but any downward trend is just attrition, certainly not layoffs.

[Rohit Vanjani:]

Okay. And then on the financing receivables, I'm assuming that's all gen 2 contracts, is that correct? So if I'm looking at it, $23.3 million in the first half, $7.7 million in the first quarter, so it looks like an additional $15 million to $16 million of financing receivables, but then you booked 19 of bookings. So is most of that finance? Am I thinking about that right?

[David A. Dye:]

Yes, you are. It's all gen 2 contract stuff.

[Rohit Vanjani:]

Okay. And the competitive -- the last question is the competitive environment that you mentioned last quarter, you talked about some competitors struggling. Did you notice anything -- business from that in this quarter? Any successes there?

[David A. Dye:]

Yes, we certainly stated last quarter that the prospect hospitals that are entering the pipeline, we're seeing more from current competitors than from sort of legacy vendors and that's continued, and as a result of the struggles with some of the longtime competitors in the space. So we're encouraged by that. I think we -- I'll just echo what we said last quarter. I mean, we think that bodes well for potential replacement business in, as Boyd said, 2014 and into '15 and '16.

[Operator:]

And our next question comes from David Larsen with Leerink Swann.

[David Larsen:]

Is there any update to the 35 installs that I think was guided to for 2013?

[David A. Dye:]

Yes, we've got 27 on the books right now, and we're still looking to achieve 35. That remains to be seen. But based on what we have in the pipeline and where they are from a maturity standpoint, we think that's still very possible.

[David Larsen:]

Okay. Because I think -- didn't you do 7 in 1Q, 10 in 2Q? You're going to do 6 in 3Q, which means you need to do 13 in 4Q. Is that correct or not?

[David A. Dye:]

I don't know. We did 7 in the first quarter, 10 the second, we've got 6 in the third. Your math is -- you can probably add in your head more quickly than I can on a kindergarten level. What is that...

[David Larsen:]

I think that means...

[David A. Dye:]

Yes, there you go, so that would be 12. Yes, that would be 12 in the fourth quarter.

[David Larsen:]

Okay. So you're comfortable with doing 12 new installs in the fourth quarter?

[David A. Dye:]

I didn't say that. I said I think it still remains a possibility based on where the pipeline is.

[David Larsen:]

Okay. And then, in terms of the number of new clinical installs for 3Q, the 5 figure, was there anything unusual there? I understand that there's cyclicality there, given the timing of Meaningful Use payments. Did any deals push into 4Q or anything like that? Or at this time, is it really just sort of the timing of the Meaningful Use?

[J. Boyd Douglas:]

No deals pushed. It's simply the timing of the Meaningful Use.

[David Larsen:]

Okay. And then just my last question. In terms of the bad debt, I understand the way that you estimate it is a percentage of AR. Has the actual write-off amounts increased at all, given sort of these NextGen payment models? Or have you pretty much been collecting on everything you thought you would?

[David A. Dye:]

No, we've been collecting on everything that we thought we would. So it's not a result of anything in particular going bad as such. It's just a result of the overall percentage of what's outstanding.

[Operator:]

Our next question comes from Sandy Draper with Raymond James.

[Alexander Y. Draper:]

Two questions. The first one relates to support and maintenance. And I just -- I can't remember, David, if you had gone into the revenue recognition on these new gen 2 contracts. If I remember correctly, the software and system, the install portion [indiscernible] is recognized when the system goes live, but then obviously payment comes later. Can you remind me, in terms of the maintenance and support, does that start up normally and you start collecting cash and recognizing it? Is that delayed? I'm just trying to think you're generally pretty flat sequentially in support and maintenance, but you're starting to install more. I'm just trying to see if there's a lag there too or trying to understand the trend line there.

[David A. Dye:]

Yes. We are -- with the gen 2 contracts, the customer doesn't pay us for support and maintenance until they achieve Meaningful Use. However, we allocate -- based on accounting rules, we allocate a portion of what would otherwise have been system sales to the support and maintenance on a monthly basis until they achieve Meaningful Use. So I think that's what you're seeing there.

[Alexander Y. Draper:]

Okay. So you should see some very modest growth. But then if people start to come on once they've achieved Meaningful Use, then you would start to see the more normalized growth rate of just adding customers and going in the maintenance support line?

[David A. Dye:]

That's exactly correct.

[Alexander Y. Draper:]

Okay, great. Second question, taking a very conservative view, obviously, you pointed out that the cash balance and what happened there helped fully [ph] here the timing expectation. But just from a management and maybe board level, if things don't -- if a customer, for whatever reason, can't attest, something goes wrong, at what point do you guys look at saying, "Okay, let's hold off on the dividend or bring down the dividend because this transition is a little bumpy. We need to take off a couple of quarters. Once we get there, we're okay." But is there sort of a cash level at which you think, "Okay, we need to hold off here just to be prudent"?

[David A. Dye:]

I don't think so, Sandy. I mean, we've looked at this very closely. And based on prior experience and sort of looked at it worst case scenario, what's more probable and best case scenario, and we feel very confident in our dividend going forward.

[Operator:]

Our next question comes from Gene Mannheimer with B. Riley & Co.

[Eugene M. Mannheimer:]

Let's see. A couple of quick ones related to -- I just want to go back to the unrecognized revenue from the prior year. It looks like you've got good visibility to about half of it, given that 2 of the hospitals have attested. But how does one get comfortable that you get paid on the other 2 hospitals by Q4?

[David A. Dye:]

Well, because we know exactly where they stand in their attestation process and within their 90 days. I think I mentioned on the call that the other 2 are attesting in August. I mean, we've -- with all these hospitals, we monitor sort of in partnership with them exactly how they stand with regard to this whole process of achieving Stage 1 Meaningful Use. Beyond just the implementation of the products, the -- when they begin their period and how they're doing with the measures during the period and then obviously, with all our experience now getting hundreds of hospitals, or helping hundreds of hospitals achieve this successfully, we can fill them in on what we've learned from other clients on the best ways to attest and how to time it and the hurdles that they might have to overcome. So getting 2 more hospitals to attest after the hundreds that we've already gotten there is not a hurdle. We're pretty confident it will happen.

[Eugene M. Mannheimer:]

Okay, fair enough. And then, David, given how you're tracking on your installation schedule year-to-date, are there any deviations from your guidance that you had presented earlier in the year? Is there a bias to the high or low end at this point?

[David A. Dye:]

I think it would be very difficult for us to install more than 35 systems this year. As I said, I believe it was Dave's question earlier, I think it's still very possible based on the number that we already have, to date, booked, which is 27. And based on where we are with our pipeline, I think it's very possible that we can do 35. But to be much over that would be, at this point, difficult and not likely.

[Eugene M. Mannheimer:]

Sure, very reasonable. Okay. And then last thing, the physician applications that you installed, I think there was 39 of them. Is it fair to say that roughly 2/3 were physician documentations sort of consistent with prior quarters?

[David A. Dye:]

Yes.

[Operator:]

[Operator Instructions] And our next question comes from Caroline LeCates with Lazard Capital Markets.

[Caroline LeCates:]

A while back, you guys discussed emergency department systems. And I think the penetration was still very low, like under 1% of the base. I was just wondering if there was any update there, or whether the sales focus has been on physician applications at this point.

[J. Boyd Douglas:]

We are -- that -- the ED application is on Version 19, which we're beginning to roll out now. We are, I guess, dotting the Is and crossing the Ts, putting on some finishing touches on it. And I believe, as we said in previous calls, we expect to have it out at least in [indiscernible] form certainly before the end of the year. So there's been no revenue from it at this point, but it's tracking well. We're real pleased with where we are with the ED application. And like I said, before the end of the year, we should have several out there and deployed.

[Operator:]

Our next question comes from Neil Chatterji with Sidoti & Company.

[Neil Chatterji:]

So actually, I guess, my question was also on the ED application. So just in terms of impact, so if it rolls out kind of back half of the year, are you anticipating more of an impact kind of second half of 2014? Or would it start to kind of hit that first half?

[David A. Dye:]

I think, Neil, there will be a positive impact in the first half, certainly. I think it will be more positive in the second half, but it will be -- it should be full blown late part of the first quarter. In the second quarter of next year, we should be installing that at a nice pace.

[Neil Chatterji:]

Okay. And then just secondly, so on the CommonWell Health piece that you had announced, in terms of any timing with any interoperability benefits there. I mean, the pilot is going to start later this year. With that start, would you start to see some of that benefit next year then, or was it post pilot?

[David A. Dye:]

The -- I'm not -- maybe quantifying...

[Neil Chatterji:]

In terms of the interoperability, in terms of like working with some of the other systems through that alliance.

[David A. Dye:]

Yes, I mean, the pilot is just a test, right? So the true actual benefit in terms of quality of patient care, I think, we'd be very optimistic to say we'd see anything. I think when we say we -- the CommonWell Alliance looks to achieve meaningful results by HIMS, I mean, that's meaningful in that it can be demonstrated this could be beneficial and that it actually works. I don't care to speculate at this point when we could see meaningful results in inoperability that actually improve. The end result here, which is to improve the quality of patient care based on interoperability, so all of that remains to be seen. I mean, I think the important takeaway is that we applauded CommonWell when it was announced and think it's a great concept. And immediately, we strive to be a part of it and we are now and we're excited about it. We think it's the right thing to do. Whether or not it helps us -- certainly, we're in the business of making money. But whether or not this actually ends up helping us sell systems or not remains to be seen. It's just the right thing to do.

[Operator:]

Our next question comes from Brian Hoffman with CPSI.

[Brian Hoffman:]

It's Brian Hoffman with Avondale, not CPSI. Could you describe how you -- how would you characterize the RFP pipeline looking? Specifically, for Patient and Financial Accounting and Clinical Solutions, are you starting to see any slowdown there?

[David A. Dye:]

No. We saw a slowdown -- a slight slowdown in the back half of last year. It's remained steady since then. I think that what we're seeing is the total number is remaining steady, but the percentage that is replacement of sort of existing vendors that were capable of helping hospitals achieve Stage 1, that is a higher percentage than it ever has been before. In other words, the replacements of the old legacy systems, the number of vendors that are coming off those -- the number of hospitals that are coming off those type of vendors that are in the market is down, but the number of existing competitive replacements potentially that are in the pipeline continues to go up.

[Brian Hoffman:]

And is any one stronger than the other, Patient and Financial Accounting versus Clinical?

[David A. Dye:]

It's virtually all Clinical. I mean, no one's in the market now because they're, generally speaking at least, because they're unhappy with their patient and financial accounting system. I mean, it's all based on who has the best clinical system and who can best help me achieve Meaningful Use, and who makes the doctors the happiest. I mean, it's all in the clinical arena right now.

[Operator:]

And our next question is a follow-up question from Bret Jones with Oppenheimer.

[Bret D. Jones:]

I just had an additional question on the G&A. Is there any way you could -- I think last quarter, you said the shock loss claims was about $1 million, the 401(k) match was about $1 million. Can you quantify how much the extra costs were from concentrating the businesses -- the regional conferences all into one for the quarter?

[David A. Dye:]

It was about $0.5 million.

[Bret D. Jones:]

$0.5 million? And I'm sorry, what was the other? You listed 2 reasons for the elevated costs. What was the other? It was the bad debt?

[David A. Dye:]

Bad debt.

[Operator:]

And Mr. Douglas, there are no further questions at this time. I'll turn the conference back to you. Please continue with your presentation or closing remarks.

[J. Boyd Douglas:]

Okay. I would certainly want to thank everyone for their time this morning and thank you for your interest in CPSI. Hope everyone has a great weekend.

[Operator:]

Thank you. Ladies and gentlemen, that concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.