Q3 2016 Earnings Call Transcript

Published: 10 Nov 2016

[Operator:]

Good day everyone and welcome to the Auxilio Inc. Third Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call 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 third 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'd 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 on 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 like to now turn the call over to Mr. Joe Flynn. Joe, the call is yours.

[Joe Flynn:]

Thank you, Mike. And thank you everybody for joining today's call. Across the board we were very pleased with our execution as we delivered another solid quarter of profitability while also making considerable progress on our strategic initiative. We laid out a plan early in the year and I could not be more pleased with our execution to-date. Our goals were well defined, to diversify our revenue streams with additional higher margin service offering, to expand aggressively into document security, with both cyber and traditional print needs and to create a more stable and profitable business model to help fund our growth initiatives. We are executing aggressively along these lines and we plan to continue to do so. And so that is the reason why I am so optimistic about our future. This is one of the more exciting times in the history of Auxilio as we evolved into a leading provider of total document workflow solutions and security services for our health care customers. We are pursuing a significant opportunity through an expansion of our service offerings to provide higher margin revenue streams that are recurring in nature. This is only possible only due to our entrenched relationships within several of the largest health systems in the country. We have earned our customers respect as a trusted partner in their day-to-day operations and those customers continue to look for us for assistance in driving our costs while making their operations more efficient and secure. While we see numerous opportunities for expansion into IT security related offerings we also continue to see plenty of growth potential in our core document solutions business. Historically periods of high revenue growth were accompanied by wide fluctuations in profitability. Our objective is to build a more consistent earnings profile that lessens the volatility of those swings experienced during the early stages of a new contract. Providing greater stability in our financial performance, these contracts tend to ramp in a more stage fashion and then accelerate overtime. This is in contrast to some of the larger engagements we have won in the past, which ramped up aggressively at the onset. This more gradual runway would enable us to lessen some of the upfront expenses associated with implementation, allowing us the opportunity to remain profitable during all phases. We can’t say with absolute certainty we will be successful in winning these particular contracts but that is exactly the type of business we are targeting and keep you updated on our progress. The two smaller security related acquisitions we made over the last couple of years provided us with an excellent opportunity to fully understand the specific customer needs and the benefits and challenges of integrating those services under the Auxilio umbrella. It has not been easy and has required patients but that experience has put us in a great position to properly understand how to profit from the trend of the expanding healthcare IT security budgets. We know all the significant players in this space their reputations their strengths and weakness and how those may align with our existing service offerings. During the quarter we closed our first successful cross-sell of security services to an existing document solutions customer. We continue to see a substantial opportunity to provide increased security services to our customer base as health systems try to mitigate ever-increasing security threat. Security needs are often viewed as largely being cyber related with security surrounding traditional print related hardware and software are on the rise as well. By having boots on the ground and good visibility into our customers daily operations we are afforded an improved opportunity to understand their current security needs. The demand for greater security across the entire document workflow life cycle is undoubtedly increasing. And we will invest both internally and potentially by acquisitions to strengthen our presence in that category. At this point I will hand it over to Paul to provide some details regarding the financial results for the quarter. Paul?

[Paul Anthony:]

Thanks Joe. For the months ended September 30, 2016 we reported revenues $14.3 million a decrease of 9% when compared $15.7 million reported in the third quarter of 2015. Excluding the equipment revenues, which were seen as ancillary to our core business revenues were flat for the quarter when compared to last year with the addition of 1.5 million of new recurring service revenue contracts being offset by an equal amount of volume reductions and terminated services. Equipment revenues in the third quarter were $0.2 million compared to approximately $1.6 million in the third quarter of 2015, a decrease of $1.49 million. Cost of revenue was $11.1 million, compared to $12.9 million in 2015. The Company incurred approximately $0.6 million less in staffing costs, including contract labor, and incurred approximately $0.1 million in additional service and supply costs primarily as a result of new customers. Equipment costs decreased by approximately $1.2 million, largely as a result of decrease in equipment revenues. Gross profit for the third quarter of 2016 was $3.2 million, or 23% of revenues, compared to $2.9 million, or 18% of revenues for the same period in 2015. The increase in gross margin is due to the maturation of the previously announced new services contracts. Operating expenses for the third quarter were $2.5 million, an increase of $0.2 million compared to the third quarter of 2015. Sales and marketing expenses decreased by 5% due to decreased marketing spend. General and administrative expenses increased 12% to $1.8 million. The increase in G&A is primarily attributable to approximately $50,000 and more in rent paid as a result of a move to a larger office space in 2016 and approximately 150,000 paid in non-recurring consulting fees related to some strategic initiatives. Net income for the three months ended September 30, 2016, was $0.7 million, or $0.03 per basic and diluted share compared to net income of $0.5 million, or $0.02 per basic and diluted share in the same period of 2015. The Company achieved an adjusted income from operations of $1 million in the third quarter of 2016 compared to an adjusted income from operations of $0.9 million in the third quarter of 2015. After excluding charges of $0.2 million and $0.3 million respectively related to stock-based comp and amortization of intangibles. For the nine months ended September 30, 2016 the Company reported revenues of $44 million, a decrease of 3% when compared to $45.2 million reported in the same period of 2015. The Company added approximately $3.4 million of net new recurring service revenue contracts, offset by a decrease of $4.6 million in equipment revenue compared to the same period in 2015. Cost of revenue was $35.4 million compared to $38.1 million in 2015, representing a 7%, or $2.7 million decrease. Gross profit for the nine months ended September 30, 2016 was $8.6 million, or 20% of revenues compared to $7.1 million, or 16% of revenues for the same period in 2015. Operating expenses for the nine months ended September 30, 2016 were $7.3 million, an increase of 1% from $7.2 million in the same period of 2015. Sales and marketing expenses decreased by 9% due to lower compensation expense and reduced marketing spend. General and administrative expenses increased 6% to $5.2 million due to increased rent and non-recurring consulting fees. Net income for the nine months ended September 30, 2016 was $1.2 million, or $0.05 per basic and diluted share compared to a net loss of $0.2 million, or $0.01 per basic and diluted share in the same period of 2015. Excluding $0.6 million in charges related to stock based comp and amortization of intangibles the Company achieved an adjusted income from operations of $1.9 million for the nine months ended September 30, 2016 compared to an adjusted income from operations of $0.7 million after excluding charges of $0.7 million related to stock based comp and amortization of intangibles. At September 30, 2016, the Company had $5.4 million of cash and cash equivalents and working capital of $4.4 million. Cash used for operating activities for the nine months ended September 30, 2016 was $0.3 million compared to cash provided by operating activities of $0.9 million during the same period in 2015. The decrease in cash from operating activities in 2016 is primarily due to the decrease in accounts payables as we have reduced the number of days to validate expenses related to the vendors of recently implemented clients. That concludes the financial overview. Joe.

[Joe Flynn:]

Thank you Paul and thank you everybody for joining us on the call today. As we come into the final months of 2016, I look back with a great deal of pride in what our team has accomplished this year. Early in the year we laid out aggressive goals designed to enhance shareholder value and we continue to execute on that plan. Our company is in a very strong position ready to capitalize on the ever-increasing demand for solutions and services, which provide greater efficiency and security in our health care customers daily operations. We look forward to building on that position of strength as we head into 2017. Thank you once again all of you for all your support and with that I will hand it back to the operator for Q&A. Operator?

[Operator:]

Thank you sir. [Operator Instructions] And we go first to Jeff Bash with General Pacific Partners.

[Jeff Bash:]

Hi Joe and Paul.

[Joe Flynn:]

Hi Jeff. How are you.

[Jeff Bash:]

Good thank you. Are the large MPS contracts now fully implemented?

[Joe Flynn:]

Not fully yet Jeff, we've got to the final stages of the larger one that should be completed in Q1. The only caveat to that is they've expanded the scope of the agreement since we originally implemented and so they've been – either done some acquisitions is the primary reason so some of the implementations have I wouldn’t say been delayed but they're extending because of added scope.

[Jeff Bash:]

Okay, now absent any new contract announcements, what you just said is the outlook is sort of flattish revenue forward due to gradual volume reductions.

[Joe Flynn:]

Yeah I mean at his point we're looking for the core, the current customer base that is correct. Obviously we're in renewal discussions with a number of accounts as we are at all times during the year and so assuming no loss of accounts. We wouldn’t expect any major drops and then obviously we're looking to close additional deals and so hope we’ll see some increase. But other than those factors we would expect flat revenue.

[Paul Anthony:]

Jeff, I’ll add to that. There's certainly in the deals we're currently working on newer deals we’re definitely seeing a lengthening of the sales cycle given a lot of pressure that the health systems are under. And that pressure is bearing down heavily actually it is interesting seeing that in the last, back half of this year. And if you look at some of the publicly traded hospital systems you can see many of them were having significant issues financially so we're seeing that across the board. As the Affordable Care Act is sort of fully engulfed the industry and so – it’s we have a lot of stuff working in the pipeline but it's taking longer than we’ve normally experienced.

[Jeff Bash:]

So your pipeline hasn’t shrunk, but it is just stretching out.

[Paul Anthony:]

It is stretching right. Right.

[Jeff Bash:]

And how would you characterize the security end of the pipeline.

[Joe Flynn:]

I mean that is a smaller transactional type of business we feel pretty strongly of the – that pipeline. Interestingly enough was - and again with that business we're not, it is more difficult for us to get to the hospitals or the business associates to allow us to provide press releases because they don't really want to talk about it, but we're seeing an increase in demand from the healthcare side especially in the last couple of months.

[Jeff Bash:]

Incidentally getting back to the MPS pipeline you would think that if people are getting squeezed more financially there – their sense of urgency to do something to save the money which is your basic theory of your business would increase and they would work hard to the make the business quicker. What’s the issue with them in taking longer instead?

[Paul Anthony:]

Jeff this is Paul. What we're seeing is that because of the extent of these issues. It almost paralyzes them especially when it comes to these non-clinical service areas, within the hospital. And so it's just taking them a lot longer to get through it. In addition what you're finding is especially in a larger health system, they are all hiring consultants these days to help with the process. To run RP's or take these initiative cost savings initiatives and that only extends out the effort, because you've got now this third party that's inserting themselves into the process. And so what we're finding is that those items when they all come together. It is almost severely extending the timeframe in some cases just keeping them from even making a decision.

[Joe Flynn:]

So there is a little bit of the deer in headlights mentality. Frankly that we're seeing not only in our prospects but in our customers as well. Getting them to make decisions on getting new leases in place and changing out equipment and so forth it has been more of a challenge than certainly we've seen since we started this business.

[Jeff Bash:]

Is it included in deer in headlights symptom the possibility that they finally decide they can't go it alone anymore and then look to be purchased by somebody else.

[Joe Flynn:]

Yes

[Jeff Bash:]

This just takes you out of the pipeline in a sense all together.

[Joe Flynn:]

There is no question that that's happening at a fairly rapid pace and probably in your part of the world as it is and in all parts of the country. There is you can see it, if you Healthcare Trade Press there is mergers taking place and then the STC is getting involved in monopolistic issues in certain regions, so forth. Its bit of a frenzy at the movement and we're definitely on both sides as I mentioned. That large account where the scopes have been expanded, now is the other side of it right.

[Paul Anthony:]

Benefit.

[Joe Flynn:]

It eliminated the sales cycle, customer said here its yours but if you're on the other end of it then you're – you sit and wait.

[Jeff Bash:]

Yep, might the potential elimination of The Affordable Care Act now, whether on the President he had another wrinkle to this mix.

[Joe Flynn:]

Good Lord we will see what happens in the first hundred days, that’s what they are talking about right.

[Jeff Bash:]

Now my last question is, were any shares repurchased last quarter under the authorized buyback.

[Paul Anthony:]

Yeah Jeff, they weren’t we’re still in a blackout period. You can't get into more details on why that it at this time.

[Jeff Bash:]

Okay, all right thank you very much.

[Joe Flynn:]

Okay Jeff thank you.

[Operator:]

[Operator Instructions] Next to Bill Chapman, Private Investor

[Bill Chapman:]

Guys good afternoon. Nice third quarter, congratulations and I was going to ask you about the share buyback. So the full quarter you were blacked out?

[Joe Flynn:]

Yeah that is correct.

[Bill Chapman:]

You're trying to conserve cash though – aren’t you to make a deal you’re going to want to use cash. I presume that's part of the reason.

[Joe Flynn:]

I mean I think in this point any deal that we've been looking at obviously dilution is a major concern for us. And so if we have the opportunity to use cash, that is the route we're trying to take that's correct.

[Bill Chapman:]

Okay, I am fairly new to the story in your Company's operations, could you give me a better idea about your cross-selling of the security offering that you had with this existing customer. Could you give me more detail of what you're providing to them from A to Z.

[Joe Flynn:]

Yeah we were invited by this customer to participate in their RFP which was a fairly comprehensive RFP that included not only services but a lot of the equipment as well. And when we first were approached by our customer to do that they knew that we own Redspin and we’re familiar with Redspin. We told them listen we are in the assessment and consulting part of security, we’re not involved in equipment reselling. And should we even respond because we can't do all of this and they said no we really want to break it up into two or three different groups. So we were lucky enough to be given but to be awarded a number of services including up front assessments meaning we go in and figure out exactly what's going on in each of their facilities and this group is on the east coast, actually on the Eastern Seaboard. Look at their facilities find out what their vulnerabilities are create a remediation roadmap along the lines of a specific framework, security framework that this particular customer wanted to follow based on the suggestion or recommendation of their board of directors. And so this is a I think a three year engagement where we do upfront assessment work, we do that on an annual basis but each one of those assessments will be followed by remediation or basically fixed work where when we discover those vulnerabilities we find solutions to fix those. Which also by the way includes and will include any vulnerabilities around the print infrastructure which we already manage. So it was kind of an interesting opportunity for us. This is not a large health system and it is actually a good cross-sell opportunity because what we have found is that our larger health systems – larger health systems most of our customers are large multi-state health systems or in multiple location. Lot of times they already have entrenched – they might have their own security operation that does this work already internally or they have very large prints consulting firms like the Lloyd and so forth. So this particular customer was kind of perfect because they're kind of a small-to-medium sized group and they've been, so it was a perfect fit for us. We were the right price and we were right sort of size company to perform these services. But more importantly also is one of the things that we're excited about is that we're going to be able to deploy one of the tools we bought in from the Delphiis acquisition, which is sort of an automation tool for risk assessment. And they were very excited about that tool and we've got it now implemented and it's going very well. And its helping us do our job better. And it's giving them a lot of the immediate visibility in some of the issues that we're finding in the assessment. So it's kind of a full package deal that we've got here with this particular customer and so we're looking for more opportunities to do that as we gloat in the marketplace

[Operator:]

Hey Mr. Chapman anything further.

[Bill Chapman:]

Now that's it. Thank you.

[Joe Flynn:]

Thank you.

[Operator:]

[Operator Instructions] Gentlemen we're standing by with no further questions I'd like to turn it back to you for any closing or additional comments.

[Joe Flynn:]

No I just want to thank everybody once again for joining the call and look forward to talking to you soon. Thank you.

[Operator:]

This concludes today's conference we do thank you for your participation. You may now disconnect.