Q1 2016 Earnings Call Transcript

Published: 13 May 2016

[Operator:]

Good day and welcome to this Auxilio First Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, for opening remarks I would like to turn the conference over to Mike Cole with MZ North America. Please go ahead, sir. Mike Cole Thank you operator. I want to welcome everyone to Auxilio’s first quarter 2016 earnings call. Joining us today from the Company are Mr. Joe Flynn, President and Chief Executive Officer and Mr. Paul Anthony, Chief Financial Officer. Before we begin the formal presentation, I would like to remind everyone that some statements made on the call and webcast, including those regarding future financial results and industry prospects among others are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the conference call. Certain of these risks and uncertainties are or will be described in greater detail in the Company’s SEC filings. Auxilio is under no obligation and expressly disclaims any such obligation to update or alter its forward-looking statements whether as a result of new information, future events or otherwise. At this time, I would now like to now turn the call over to Mr. Joe Flynn. Joe, the floor is yours.

[Joseph J. Flynn:]

First of all, I want to apologize everyone for the release not being out. Apparently, there were some technical difficulties with the wire service. So my hope is that during the course of this presentation it will be posted. So again apologizing upfront for that. Thank you Mike and thank you everybody for joining today's call. We carried over strong momentum established during our 2015 campaign into the first quarter of 2016. On top we continuing to maintain a strong balance sheet which has allowed us to get board approval for a $1 million share buyback program. We continue to bring greater scale to our model. Scale, which we believe continues to provide us both greater tangible and intangible benefits as a company. As many of you who follow the Auxilio story know, traditionally the first half of the year is a period of lower earnings due to seasonality. Our top-line growth was somewhat masked by the fact that we had a large equipment sale in the first quarter of 2015. If we exclude the equipment sales from both quarters we would have realized revenue growth of 16%. We're happy with our execution during the first quarter and we feel like it sets the table for a strong 2016. Implementing prior contract wins, solidifying our national presence as a blended MPS service provider, and expanding our reach from a security service offering standpoint have been and will continue to be our primary strategic initiative moving forward. We continue to pursue some very large contract opportunities in our MPS business, which we simply did not have the opportunity to compete for in past years. Our size, our national presence, and our expanded security service offering are all driving greater acceptance within our perspective customer base and this is all very positive for the future. As we have discussed in the past, as MPS contract enter the mature or maintenance space, profitability is expected to improve. As investors have come to know, one of our key assets is the trust and relationships we have developed with some of the largest health systems in the country. I think it is important for investors to understand that we are building something of great value. In addition, to the stream of cash flow we generate, we are building a brand with a presence in healthcare IT in multi-billion dollar market. Our vision is to create healthcare IT platform from which we can continue to expand with higher margin service offering with the objective of driving long-term customer relationships. We are actively looking at both organic and acquisition opportunities to accelerate this vision. We are entering into a new phase of opportunity in healthcare IT, now that the electronic medical record is a reality in most institutions. Unfortunately, billions of dollars have been spent on the implementation of EMR, and the benefits of doing so have not met expectations. While EMR has transformed the manner in which personal health information is exchanged and access to this information is more readily available, security, document workflow, and the continued proliferation of paper, continues to pose major challenges and cost to healthcare providers. This reality presents Auxilio with enormous opportunities for growth as our customers continue to look to us, solve problems relating to print management, document workflow and cyber security. We are confident that our success to-date puts us in a strong position to realize this vision. Auxilio anticipates full-year revenues approaching $70 million with strong cash reserves. There are very few microcap companies that can make that claim. From a business perspective, this position allows us great flexibility to compete in the market. There is a great deal to be optimistic about, given what we are seeing in the sales channel for our security services with Redspin. Initially these services are often smaller in dollar value and shorter term in nature, but they provide an excellence channel for future security revenue potential, as we hope to sign them for recurring security services thereafter. All the signs we see on this front are very positive and reflect both the macro forces, driving demand and the internal investment we made to stimulate the sales channel. We have a lot of work to do here as the year goes on. But I fully expect these positive leading indicators translate into a strong financial performance within our security group. Overall, I’m very pleased with what we achieved during the first quarter of 2016 as well as the progress we made in investing in our future. We have put ourselves in a great position and we are certainly excited about the remainder of 2015. And for now, I’ll turn it over to Paul Anthony to go through some of the financial details for the quarter, Paul.

[Paul T. Anthony:]

Thanks Joe. For the three-months ended March 31, 2016, the Company reported revenues of $14.5 million, an increase of 5% when compared to $13.8 million reported for the same period in 2015. Approximately $2 million of the increase is a net result of the addition of new recurring service revenue contracts offset by lower volumes related to seasonality and completed projects. Equipment sales for 2016 were $0.5 million as compared to $1.8 million for the same period in 2015. Cost of revenue for the three-months ended March 31, 2016 was $12.2 million compared to $11.7 million in the same period in 2015. The increase in the cost of revenues in the first quarter of 2016 is primarily attributable to the addition of new recurring service revenue contracts incurring approximately $1.7 million in additional staffing cost, contract labor, travel cost and service and supply cost as a result of these new contracts. Equipment costs decreased by $1.2 million in the first quarter primarily as a result of decrease in equipment revenues from some copier fleet refresh activity. Gross profit the first quarter of 2016 was $2.3 million or 16% of revenues compared to $2.1 million or 15% of revenues for the same period in 2015. During both periods, we implemented services of new large customers. Our recent growth will result in additional implementation cost over the next six-months. We expect higher cost of revenues at the start of our engagements with most new customers with improved gross margins expected as some of our contracts mature. Operating expenses for the first quarter of 2016 were $2.4 million compared to $2.1 million in the same period of 2016. Sales and marketing expenses decreased by 10% due to lower marketing expense in the first quarter. General and administrative expenses increased 27% to $1.8 million due to an increase of approximately $0.3 million in staffing and facility related costs associated with the recent growth and acquisitions. Net loss for the three-months ended March 31st 2016 was $0.15 million or $0.01 per share basic and diluted compared to a negligible net loss of $0.00 per basic and diluted share in the same period of 2015. Excluding $0.2 million in charges related to stock based comp and amortization of intangibles the non-GAAP measure of adjusted income from operations was $0.1 million in the first quarter of 2016 compared to $0.1 million after excluding charges of $0.1 million related to stock based comp and amortization of intangibles for the same period last year. At March 31, 2016 the company had $5.3 million of cash and cash equivalents and working capital of $3.1 million. Cash used for operating activities for the three-months ended March 31 was $0.8 million compared to cash provided by operating activities of $0.4 million during the same period of 2015. The company continues to maintain a line of credit with the commercial bank of up to an additional $2 million. That concludes the financial overview. Joe back to you.

[Joseph J. Flynn:]

Thank you Paul. Again, we would like to state that we were pleased with our growth in the first quarter of 2016, seasonal challenges inclusive. And that we continue to feel confident in the long term opportunity ahead. Furthermore, as I've mentioned earlier, we are in an excellent position to realize our vision of building out a healthcare IT platform that solves critical problems in document work flow security and print management. Sometimes of these items that are driving my optimism include. We are sitting on a very large pipeline of sales activity in both MPS and security offering. We've posted record revenues and have cash and credit with our lending institutions to actively pursue acquisition opportunities that will enhance our value proposition. We are investing in sales and diversifying our print management program to include digital document workflow solution and fill in the gaps left in the post EMR implementation. We have announced a stock buyback program that demonstrates to the market and to our shareholders that we have full confidence in our strategy and our vision of leveraging Auxilio as a robust healthcare IT platform. We hope it has been evident as of late, we are maturing into a market leading enterprise that has ambitions not yet reflected in our market cap. We thank our loyal long-term investor base for their patience and we look forward to reporting more success in the immediate term. I want to thank you for your support. At this point, I'm going to hand it over to the operator for Q&A. Operator.

[Operator:]

Yes sir, thank you [Operator Instructions] first question comes from Dallas Salazar with Atlas Consulting. Sir, your line is open, please check your mute function.

[Dallas Salazar:]

Hey guys, sorry about that. Really quick can you remind me what the revenue figure would have been had it been normalized without specific sales trailing 12-months.

[Joseph J. Flynn:]

One more time Dallas.

[Dallas Salazar:]

Can you guys hear me okay?

[Joseph J. Flynn:]

Yes, now we can.

[Dallas Salazar:]

Sorry, we're like in the middle of a storm so there might be some background noise as well. Can you remind me what would the revenue growth figure have been had it - the period has been normalized without.

[Joseph J. Flynn:]

16%. Yes 16% was that.

[Dallas Salazar:]

Interesting, okay, great. The other questions I had were just sort of general, but you guys got the buyback approved. To me that you have some pretty significant visibility into the stability of your income statement. That said, I know that the security business is doing okay from what it sounds like. Do you guys have a preference on the capital allocation and/or timing on the deployment. So just for instance, how long will you wait to see how quick the traction is in the security services or for instance if a nice acquisition comes up, how long is that period that you will wait prior to looking into deploying some of that capital into the buyback.

[Joseph J. Flynn:]

Again to answer this correctly, if we're posed with an opportunity to make acquisition that moves the needle, and again it adds to our to the value of what we're offering our customers and of course to the value of the overall enterprise. That would probably take priority over a buyback. We may be able to do both simultaneously depending on the size of such an acquisition, but you know we're looking at opportunities in the marketplace right now. And I would say that that would probably take priority, but you know as you know getting those type of deals done takes time. We got to find the right one, got to make sure it's the right group of people all those types of things and so you know to answer your question we're looking at both of these things simultaneously.

[Dallas Salazar:]

Okay, now I appreciate that, and I would agree, they are much harder to do than its said right. The other question I have is generally like, when it comes to the security services. Are we still in the education phase with that? So are you happy to introduce that you offer that to your customers, are we into this selling phase where they know you have it, they are familiar with the services and you are spending more of your time selling it rather than introducing them?

[Joseph J. Flynn:]

Well we are spending a lot of time selling it. This business is quite different from the MPS business and that its small project based work. What we are seeing is small projects turning into much larger longer term engagements, but in security, especially our security business, which is a known entity but not a very well known entity. And as you know we operated under the name brand Redspin, because when we acquired Redspin they already had a brand in the marketplace and we felt it was worthwhile and just to keep that brand going. But we are involved with some large health systems, some of our own customers as well as some other large customers, taking advantage of our services. I think that half of the healthcare market is getting a very rapid education, because of what is going on in the marketplace, and if you’ve been reading about it, you’ve seen some of the rents and somewhere taxes and so forth. So certainly the demand and the anxiety around security is heightened and we are definitely seeing that in our pipeline, in our sales pipeline right now. We’re also seeing interestingly enough a number of large physician practices or self insured physician practices really, really getting focused on locking down their PHI and a number of deals we closed recently fit that ilk of type of customer. But education is still a big part of our selling process, it's interesting. We kind of have a mix of direct sales people who often times will go on a sales call with one of our subject matter expert, because whilst the sales person does all the work in terms of moving the customer along the pipeline and really, really important that they have that SME with them educating the customer on the opportunities that we can present and some of the things that they should be concerned about. So I would say in healthcare, we are still in the early stages of where security is going. I think that there is a tremendous amount of opportunity and a tremendous upside in that area and we are definitely continuing to look at that and invest in it.

[Dallas Salazar:]

Okay thanks for that. And then just finally the last question I would have is, and it's maybe not something that you quantified or tracked, but I really like the stickiness of the broader MPS business. When it comes to the security side of the enterprise here, are your winning along the same vertical of the security side or - I hope that makes better sense to you than how I’m explaining it. But are you finding that you are selling the services that you are selling from one particular direction, or are these services being sold, obviously on a case-by-case basis. I mean are you seeing that you are doing one thing better than the others that you are trying to build momentum from? Or are you just trying to push the momentum forward in general?

[Joseph J. Flynn:]

I think it's probably the latter. we are trying to push the momentum forward in general. Our business, our security business, forte currently is in the assessment in the find side of things. In other words finding out the problem; finding out the vulnerability; doing penetration testing; doing different risk assessments. These are all things that identify problems in an enterprise. When we acquired Redspin, they had 50% of the business coming from outside of healthcare. And I would say that that portion of our business is still very robust. But as we expand our security services, where we really want to focus is on these longer term contract opportunities where some of our subject matter experts and some of our consultants and we’ve just hired a very senior guy from who was at PWC for about 20-years to kind of run our consulting practice. We’re seeing the opportunity to engage in much longer term contracts with these clients who really want trusted partner helping them out. Another benefit that we are seeing from the acquisition of our security business is, as I mentioned in my comments, we are getting invited to the table to some very large MPS engagements with large health systems, like the ones we have currently as customers. Having a security arm or having a security offering, having deep knowledge of security and especially the vulnerabilities around device security is that we are seeing this is a major advantage where our ability to answer these questions with a level of expertise that we don’t believe our competitors have. Has definitely demonstrated itself to be a competitive advantage, especially with large RFPs for large health systems. So we are excited that we got into that business. we are still new to it and I think we are still learning but we are definitely bullish.

[Dallas Salazar:]

Well thank you guys. I’ll let some other guys take their shot here. But I do want to say, it's good to hear that you are having a capital allocation problem, that’s always a good problem to have you have money that you needed to put somewhere, you just have to pick your horse if you will. Thanks again and chat soon, thanks.

[Joseph J. Flynn:]

Alright, thank you.

[Operator:]

[Operator Instructions] And we'll next move to Jeff Bash with General Pacific Partners.

[Jeffrey Bash:]

Hey Joe.

[Joseph J. Flynn:]

Hey Jeff, how you doing?

[Jeffrey Bash:]

Okay, fine. I missed the cash number was that Paul.

[Paul T. Anthony:]

5.3 million.

[Jeffrey Bash:]

Okay and last quarter you had mentioned that the customers you were losing, I think you said it wasn't going to affect the first quarter, but it might affect the second quarter, is that accurate?

[Paul T. Anthony:]

That's accurate, yes the contract ended April 30th.

[Jeffrey Bash:]

April 30, so actually in one month of the second quarter.

[Paul T. Anthony:]

Yes, well had it for one month. That’s right.

[Jeffrey Bash:]

As far as the buyback goes I generally prefer using capital for great business opportunities on the other hand I don’t like the idea of issuing stock or acquisitions at $0.86 a shares. So you can have you know both things in mind. The advantage of getting the price somewhat higher if you might be forced to use stocks to induce someone to come with you as an acquisition. And I guess what I'm wondering is, do you see capability of doing acquisitions without stock or we are going to be stuck issuing stock at a poor price to encourage people to join us as the growth opportunity company.

[Joseph J. Flynn:]

No, we definitely see opportunities to make acquisitions without stock, any acquisition I think at this point that we would do we would try to minimize the amount of stock that we would give. Not to say that we wouldn’t consider it as part of the overall deal but until we see the stock move up it’s really not the currency we want to use. We want to use more cash opportunities.

[Paul T. Anthony:]

More like what we did with Red Spin Jeff where we had a portion of cash up front and then an earned out opportunity on the backend which would hopefully be self funded through that. So that's kind of the strategy we are looking at on the security side and the smaller side.

[Jeffrey Bash:]

Good. You mentioned you were looking at approaching $70 million in revenue this year, but you didn't mention anything about the bottom line. I'm not really going to ask directly, but I'm interested in your sale funnel which you have indicated you saw stronger opportunities on both the MPS and the IP side. Let’s say 18-months or so ago, it looked like all of a sudden these deals which can take more than a year to emerge and hits you a whole bunch of $50 million or five-year revenue or more or once and therefore we suffered on the earnings side for three quarters of a year or more. How do you see these deals just generally emerging from your funnel, do you think we may get a whole bunch once again or do you think there will be more space with less impact on earnings or what?

[Joseph J. Flynn:]

Yes, it's really hard to predict Jeff, I mean for sure they take long. I mean you know some of these contract negotiations from the time they tell you, okay we have chosen you to the time you actually get a contract can be four or five-months to get a contract out of them. And then when you have to start the clock ticking of you know implementing and getting them set up and that type of thing. So it’s very hard for me to predict when they will all come together. We're going to do our best to try to minimize the impact especially the upfront impact if they are big accounts, we are going to try and automate some of that work and lessen the human cost of getting them set up, but again hard for me to predict when they will happen.

[Jeffrey Bash:]

No there were sort of like you did with the giant Midwestern company where you sort of scheduled the implementations over a year ago.

[Joseph J. Flynn:]

Right, right yes. That one is actually still going on too about 18-months. It's about an 18-month thing and a couple that we're working right now would be very similar you know God willing if we were to get them, they would be similar in nature. But I think we are getting better at it, we are getting better at the planning, we are getting better at understanding the upfront costs and so forth. But you know it's still one of those things where we still think it’s a good problem to have to add to that more revenue and that much more of these large health systems in the marketplace.

[Paul T. Anthony:]

And it's still real early too Jeff, but some of the investment that we have indicated that we are doing on the sales side too is focused on trying to sell into some of these opportunities some solution document work flow and such that are less focused on taking a risk upfront, maybe smaller in nature. But have recurring revenue model attached to them that kind of changes up that mix a little bit. It’s still a little early in that effort, but we're doing some things to try to diversify kind of the MPS offering and the overall I guess profitability picture of an individual account.

[Jeffrey Bash:]

Right. Would you generally say you are not resource limited in terms of managing whatever happens with your sales funnel?

[Joseph J. Flynn:]

Not at this point, we're not.

[Paul T. Anthony:]

We are in good shape for what we have in front of us it’s good to have the cash to do it too.

[Jeffrey Bash:]

I understand. Alright thanks for the good work you are doing. Good luck for the future.

[Joseph J. Flynn:]

Thanks Jeff.

[Operator:]

And with no further questions in queue, I would like to turn the conference back over to management for closing remarks.

[Joseph J. Flynn:]

I just want to thank everybody once again for being on the call. And hope to see you in the next earnings call. Have a great day.

[Operator:]

Ladies and gentlemen that does conclude today’s conference. You may now disconnect. Have a great rest of your day.