Q1 2013 Earnings Call Transcript

Published: 16 May 2013

[Operator:]

Thank you for joining Auxilio Incorporated Management for its First Quarter 2013 Financial Results Conference Call. This call is being broadcast live over the internet. A webcast replay will be available at the company’s website for 15 days. After reading a short Safe Harbor Statement I will turn the call over to Management. The presentations and commentary of the officers and employees of Auxilio during the course of this call as well as any responses by such officers and employee to questions posted during course of this call, contain certain forward-looking statements relating to the business of Auxilio that can be identified by the use of forward looking terminology such as beliefs, expects, anticipates, may or similar expressions. Such forward-looking statements involve known and risks and uncertainties including uncertainties related to products, services development, long and uncertain sales cycles, market acceptance, future capital requirements, competition from other proprietors, the ability of our vendors to continue supplying the company with equipment or such supplies and services and comparable terms and prices as well as other factors that may cause actual results to be materially different from those described herein as anticipated, beliefs, estimated, or expected. Certain of these risks and uncertainties are or will be described in greater detail in Company’s Form 10-K and Form 10-Q filings with Securities and Exchange Commission. 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. On the call today are Auxilio’s President and Chief Executive Officer, Joe Flynn who will deliver an overview and summary of the quarter’s business highlights and its Chief Financial Officer Paul Anthony will discuss the Company’s financial results. Joe will then provide closing remarks. It is now my pleasure to turn the call over to Joe Flynn.

[Joe Flynn:]

Thank you and welcome everyone. We had seen significant improvement in our financial performance highlighted by a $1.3 million positive swing in our earnings, compared to the first quarter of 2012. In addition our revenue increase was 54% for the first quarter of 2013 over the same period of last year. All of this improvement is due to the record breaking number of hospitals we signed in late 2011 and 2012, the total of which was 47; a tremendous achievement for our company. Our financial performance reinforces the strength of our managed print services business model for hospitals, our ability to increase our margins as our accounts mature and our strategy to reduce the time between new account implementation and profitability. As a reminder, we successfully implemented our MPS program in 40 hospitals last year. This was the largest number of simultaneous implementation in our Company’s history and as a direct result of our decision in 2011 to initiate a comprehensive national training program for our operation staff. This initiative proved to be the right investment to make at the right time. As you know a part of our startup cost include hiring staff when we sign a new contract. Our standardized training program afforded us the confidence to qualify in training teams of employees in new hospital customer locations across the country. Subsequently we managed the tremendous growth in large number of implementation very successfully. Many of these accounts are already earning us cash. Our company has gained very strong momentum and visibility in healthcare market and our business development team is working hard to use our growing market presence to attract new hospitals and hospital system that will build upon the solid foundation we have established. We have doubled the size of our national portfolio to over 80 hospitals with more than 1600 affiliated care entities across the United States. We are growing our margins and we continue to see decreases in operating expenses as a percentage of revenue which we expect to continue. As you know cutting cost that do not affect patient care is a top priority for hospitals as they continue to tackle organizational and business challenges due to healthcare reform, funding changes, regulations and mandates. It is important to note that in this atmosphere of change in hospitals, Auxilio is identified as part of the solution to improve process efficiencies in the production of documents, drive down cost in print related expenses. We have earned the confidence of our customers for service excellence and many of our customers have added more campuses to their contract over the last two years. Some of these healthcare systems includes Saint Alphonsus Health System in Idaho and Oregon; Johns Hopkins System in Maryland and Memorial Care here in California to name a few. Our success at expanding our MPS program or onboarding news hospitals in large multi-stay healthcare networks like Catholic Health East and Bon Secours Health System, or multi-hospital systems like Sharp healthcare in California demonstrates to the market that our company has the experience and expertise to execute our MPS program in care organizations of all sizes and configurations including integrated delivery network or better known as IDN. As we continue our growth trajectory, we are in lock step and well prepared to address the evolution of the healthcare industry into the future. Now, I will review a few of our highlights. Our improved earnings for Q4 2012 and the first quarter of 2013 was driven by the record breaking number of hospitals we implemented in 2012, as well as a strong focus on margin improvement and cost containment in our day to day operation. We are currently engaged in several brand new hospital implementation including Sharp Healthcare and Citrus Valley heath partners in California, a new contract we announced earlier this year. Once fully implemented, and startup cost has been absorbed these nine hospitals will increase our recurring revenue and soon be driving additional margin and we have a very strong pipeline that we are working hard on. And with that I would like to turn the call over the Paul Anthony our CFO for a financial review. Paul?

[Paul Anthony:]

Thank you Joe. For the three months ended March 31, 2013, net revenue was $10.1 million and increased to 54% when compared to $6.5 million in the same period of 2012. The increase in revenue has primarily result the addition of the six new recurring revenue contracts starting during 2012. We also recorded approximately $1.2 million equipment revenue during the quarter compared to approximately $630,000 for the same period in 2012. The increase is due to primarily to the increase in our customer base. Hospital revenue for the first quarter of 2013 was $8.5 million as compared to $6.1 million for the same period in 2012. As a reminder, we expect higher cost of revenue to the start of our engagements with most new customers due to our service business model. Gross profits for the first quarter 2013 was $1.6 million or 16% of sales, compared to $350,000 of 5% of sales in the first quarter of 2012, reflecting the maturing of our customer base and our focus on margin improvement. Operating expenses were $1.7 million for the first quarter of 2013 or 17% of sales compared to $1.6 million or 24% of sales in the same quarter of 2012. Net loss for the quarter was $230,000 or $0.01 per share, compared to a net loss of $1.6 million or $0.08 per share in the first quarter of 2012. Regarding our improvement in the non-GAAP measure of adjusted income from operations, excluding $197,000 in charges related to stock based compensation and $190,000 in charges related to stock granted from marketing activities, we achieved positive adjusted income from operations of $289,000 in the first quarter of 2013, compared to a loss of $1.0 million after excluding charges of $92,000 for stock based compensation and $135,000 for stock granted for marketing activities in the first quarter of 2012. We have cash balance of $2.7 million with zero borrowing to our line of credit compared to $2.2 million in cash and $528,000 borrowed against our line of credit at December 31, 2012. Now, I would like to return the call to Joe.

[Joe Flynn:]

Thank you, Paul. In summary, our first quarter results build off from the momentum we gained in 2012 when we signed a record setting number of new hospitals and successfully completed the largest number of MPS implementations in one year in our history. Our investment in our operation training program has paid off as we have standardized our implementation infrastructure to execute our MPS program in large healthcare system simultaneously and successfully. As we continue growing stronger and building our company, our concentration is on our four key priorities. One, keeping focus on providing our customers with exceptional customer service; two, continuing to reduce the time to reach profitability in all existing accounts; three, working to enhance our pipeline to capture more market share and four employing a continued and disciplined approach in managing our cash. We intend to continue to take advantage of every opportunity to advance our business objective and return value to our shareholders. We look forward to updating you on our progress. With that operator, I would like to open the line for Q&A.

[Operator:]

Thank you sir. We will now begin the question and answer session. (Operator Instructions). Our first question is from the line of Ross Silver with Vista Partners. Please go ahead.

[Ross Silver:]

Just two questions for your, one is if you could give us some sort of color on the size of your sales pipeline and sort of how that's trending going forward as you continue to see consolidation amongst the hospitals and then the second question is in terms of the time for immigrating these clients, have you seen that continue to reduce in terms of duration of the immigration process?

[Joe Flynn:]

I will take that. Well to answer your question, with regards to our pipeline, as I have mentioned in the past, it’s a bit of a change from when we first started this business and even since 2009 when health curriculum got going. Outside lines used to be, three to four years ago individual single hospitals and our pipeline now actually is heavily weighted towards multi-hospital system and I think that reflects what’s going on in the market place where healthcare system as a corporate office of the system re starting to make decision on a top-down basis. In other words, individual hospitals are losing their ability to make individual decisions on what types of vendors they want to work with. So our pipeline is pretty full of those as I mentioned; either a large section of the healthcare system or a large heath care system itself. And then in terms of the second question, can you remind us.

[Ross Silver:]

About integration.

[Joe Flynn:]

Yes integration implementation, our goal with integration is; particularly if its multi hospital, we try and spread it out overtime. We try to give ourselves; the larger the health system is, the more time we would like to have to onboard all those hospitals. In some cases, we have that opportunity in the health systems. For example, Sharp allow us a 12 months period to implement eight or nine hospitals in the case of Sharp. In other cases like Catholic Health Care East where they wanted to realize their savings in a specific fiscal year, and that was one of the reasons why last year at this time we spent so much in the first quarter because we were onboarding. Our first way the Catholic Health East was very large and they have a lot of outflows of expenses. So, ideally we would like to spread out around presentations over a 12 month period, if it’s a large system but if it’s a medium sized system, we would like a six months period. Hope that answers your question.

[Operator:]

Our next question is from the line of John Gay (ph), a Private Investor.

[John Gay:]

It looks like you are all ready to smell the fresh air on the bottom side of the earnings statement. I was curious in SEC release on how our returns are just to the after you had some experience with this hospitals. Is that when you get together with them on a periodic stations and then determine whether the new savings and what have you proposed market is split, how does that work?

[Joe Flynn:]

The way it typically works when we sign a new contract is that there has been an amount of savings in year one, there is obviously a five year savings target. There is an amount in year one in which we are held to in terms of hitting that target based on our pricing and the current expenses that they are incurring and our pricing and then it's up to us to hit that savings. We mean quarterly in every single hospital we're working, whether it’s a healthcare system or the individual hospital; we meet quarterly with what we call an operating council and as part of our contract; we make sure there is an operating account we have all of our key stakeholders meeting with on site management team and typically someone from the executive team is in that meeting where we are reviewing both the savings goals that we have committed to, as well as any operational or strategic initiatives that we have for the quarter. So that's all we viewed on our quarterly basis with each client, very regularly across every hospital that we work in. And in terms of that, with shared savings that only comes when we agreed to volume reduction initiatives that's actually extra savings with our client. Rest we freed (ph) to regarding target saving volume reduction of 10% with one client and that equals a $100,000. Whatever we negotiated in terms of savings, we will split that savings with them but that's over and above the operational savings we guarantee.

[John Gay:]

Quick question Joe, regarding the move a year ago to enter into a large trading program has produced some pretty good results for it. Are you still adding to that trading core or?

[Joe Flynn:]

Absolutely we made an investment. Actually we started that investment; later part of 2010 in anticipation of the market change where we knew that we're going to be dealing with large implementation versus one off; one or two hospitals here or there, and we wanted to make sure we had standardized practices which is really our IP; standardize practice across all jobs that we have in the company. We are up to a 180 employees right now and we are constantly refining that and particularly after last year, we had so many implementations simultaneously. We saw what really worked in the training program and the onboarding program that we created, we saw what works, we learned from some of our mistakes and we're constantly refining that and we have one person who, that's his entire job, that's what he does for us. He runs that whole program for us. And it’s a senior guy in our organization.

[Operator:]

(Operator Instructions). There are no further questions in the queue. We will turn the call back over to you for closing remarks.

[Joe Flynn:]

Thank you all very much and thank you operator and thanks everybody for joining us today. We look forward to speaking with everyone again, either before or at our second quarter 2013 earnings call in August and of course any of you can always call me at any time. Have a wonderful day and thanks for attending.

[Operator:]

And ladies and gentlemen that does conclude our conference for the day. We'd like to thank you for your participation. You may now disconnect.