Q2 2013 Earnings Call Transcript

Published: 14 Aug 2013

[Operator:]

Thank you for joining Auxilio Incorporated Management for its Second 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 employees 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 unknown risks and uncertainties including uncertainties related to product and service development, long and uncertain sales cycles, market acceptance, future capital requirements, competition from other providers, the ability of our vendors to continue supplying the company with equipment parts 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 the Company’s Form 10-K and Form 10-Q filings with the 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, please go ahead sir.

[Joseph J. Flynn:]

Thank you and welcome everyone. As we have noted during prior calls and have anticipated the tremendous growth in new business that our company experienced over the last two years has resolved within Auxilio crossing over to profitability and achieving positive income from operations for the last three consecutive quarters. Let me state upfront that we expect this trend to continue with our gross margins including overtime as our new accounts mature and by leveraging our overhead cost across a larger base of hospital customers. There are number of factors that have influenced our company achieving this milestone of profitability at this time. Some of you may recall the record breaking number of hospitals we signed in 2011 and 2012, the total of which was 47, 40 of these MPS implementations were successfully completed last year as we have mentioned in the past once hospitals were on-boarded we began to realize margin improvements after startup expenses we incur our absorb like legacy contract expire and are negotiated and the accounts mature. As we reported in our 10-Q, our recurring service revenues increased by $1.4 million or 20% in the second quarter compared to last year and approximately $4.7 million or 34% for the first two quarters of this year compared to last year as a result of the contract signed between May 2012 and April 2013. In addition, and as a direct result of our new business growth we are able to spread our operational overhead and operating expenses over a larger number of accounts. As a result during second quarter we increased our gross margins to 17% versus 13% last year. Our adjusted income from operations is 3% of revenue versus 1% of revenue last year. Our financial performance reinforces the strength of our managed print services business model for hospitals. Our ability to improve our margins on new accounts exemplifies that our company has a proven and tested print management strategy that is valuable to hospitals and our investors. We have streamlined our operating processes, more effectively we trained our employees, sound cost efficiencies while keeping a lid on SG&A expenses were possible and had a strong pipeline of potential new business, all of which are tremendous accomplishments for Auxilio and helped us cross over to profitability. Of note and in addition to our organic sales efforts Aramark Healthcare Technologies and Auxilio have initiated a strategic partnership that was announced in late May. Aramark is a leading independent provider of medical equipment management to over 1,000 hospitals in the United States. We see great synergy in this alliance that will provide us unique access to Aramark hospital customers. As we execute this mutually beneficial strategy we will provide updates in the months ahead. Coincidentally, an independent of our Aramark arrangement Mr. William Leonard the former President and CEO of Aramark until his retirement in 2004 joined our board of directors in late May. Bill has over 30 years of executive leadership experience and as deep tied in the healthcare industry. Bill is also one of Auxilio’s largest shareholders having recently purchased 6% of the company. We are also proud that we have been recognized as a gold standard MPS company by the Photizo Group as part of the research and consulting firms worldwide 2013 MPS leaders index. The index evaluates such factors as financial and performance metrics, team structure, customer profile, certified operations metrics and key performance benefits to customers. Inclusion as a member is based on demonstrated leadership and world-class service in the MPS industry. Before I review some of our specific highlights, I want to talk briefly about the healthcare industry and its continued transformation and how our company continues to be a lockstep, it is evolution and ongoing technological change. As you know, the rules are changing in healthcare and the trend is now for consolidation in hospitals and large physician practices through mergers and acquisitions to gain cost efficiencies. These conditions create both challenges and opportunities for our company. The large numbers of hospitals in a system is attracted because of the greater potential revenue for us to a large document volume production. On the other hand this trend effects the time it takes to close a deal because of the inherent complexity when hospitals consolidate in the increased number of individual in the decision making process. In this environment it is important to note that we are a proven our success at on-boarding very large geographic dispersed healthcare systems such as Catholic Healthcare East and Bon Secours Health System. In addition and as the use of electronic health records continues to evolve as it has been from many years, document production remains a staple in patient care of the U.S. whether it’s produced via a hardwired services or devices or mobile devices like smartphones and tablets in hospital, clinical and business environments. So, to summarize our second quarter 2013 highlights, we have cross over to profitability realizing positive income from operations for the last three consecutive quarters. We have improved margins in our new existing accounts and contained cost in our day-to-day operations and we have a strong pipeline that we are working hard to convert into new accounts and with that I would like to turn the call over to Paul Anthony, our CFO for financial review, Paul.

[Paul Anthony:]

Thanks Joe. For the three months ended June 30, 2013, Auxilio reported recurring service revenues increased by $1.4 million from new contracts closed between May 2012 and April 2013. However, total revenues were $9.8 million a decrease of 8% when compared to total revenues of $10.7 million in the same period of 2012 due to a drop in equipment revenue. Equipment revenue was $800,000 in Q2 as compared $3.1 million for the same period in 2012. Cost of revenue was $8.2 million for three months ended June 30, 2013 as compared to $9.3 million for the same period in 2012. This decrease was due to the drop in equipment revenues offset by additional staffing and service costs from the higher recurring service revenue. Gross profits for the second quarter of 2013 was $1.6 million or 17% of revenues compared to $1.4 million or 13% of revenues for the same period of 2012, this improvement is a direct result of large group new facilities that we added in 2012 coupled with reduction in cost as Auxilio’s program matures within these new accounts. Operating expenses for the second quarter of 2013 were $1.4 million compared to $1.5 million in the same period of 2012. Net income for the second quarter of 2013 was $97,000 or zero cents per share, compared to a net loss of $27,000 or zero cents per share in the same period of 2012. Auxilio continues to show improvement in the non-GAAP measure of adjusted income from operations, excluding $119,000 in charges related to stock based compensation, we achieved positive adjusted income from operations of $324,000 in the second quarter of 2013 compared to income of $75,000 after excluding charges of $121,000 related to stock based compensation and $69,000 in charges related to stock granted for marking activities for the second quarter of 2012. We had cash balance of $2 million and $500,000 borrowing on our line of credit compared to $2.2 million and $528,000 borrowed against our line of credit at December 31, 2012. For the six months ended June 30, 2013 Auxilio reported total revenues of $19.9 million an increase of 16% compared $17.3 million in the same period of 2012. Recurring service revenues increased 33% from new contracts however this increase was partially offset by the decrease of 48% in equipment revenue. Gross profit for the six months of 2013 was $3.2 million or 16% of revenues compared to $1.7 million or 10% of revenues for the first six months of 2012. Operating expenses for the first six months of 2013 were $3.1 million compared to $3 million in the prior year period. Net loss for the six months of 2013 was $133,000 or $0.01 per share compared to $1.6 million or $0.08 per share in the first six months of 2012. Excluding $316,000 in charges related to stock based compensation and $190,000 in charges related to stock granted for marking activities we achieved adjusted income from operations of $612,000 for the six months of 2013. Compared to an adjusted loss from operations of $928,000 after excluding charges of $213,000 related to stock based comp and $204,000 in charges related to stock granted for marking activities for the same period of 2012. Now, I would like to return the call to Joe.

[Joseph J. Flynn:]

Thank you, Paul. Our concentration remains centered on the following. A, keeping focus on providing our customers with exceptional customer service; B, continuing to improve our margins on all existing accounts; C, employing a continued and disciplined approach in managing our overhead expenses and D, working to enhance our pipeline to capture more market share. These goals are clearly laid out for our team and we will take every opportunity to continue our success, we expect to improve margins and grow revenue into the future. We look forward to updating you on our progress. And with that operator, I would like to open the lines for Q&A.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions) Our first question is from the line of Ken Nagy, please go ahead.

[Ken Nagy:]

Hi, thanks for taking my call and congratulations on another strong quarter. Just wanted to, you see more synergy with the Aramark deal then with the Sodexo just because they’re a little bit more inline with what you do?

[Joseph J. Flynn:]

Yeah, good question. I will talk to say it’s early days with that particular relationship for share of their business line related to clinical technology management which is actually the biggest of all those service companies, they’re probably the largest in that field. It’s very much inline with our business model so there is a lot of synergy there, customers understand their model and our model, is the management then do the management of equipment, so is definitely a lot of synergies there. I will note that the Sodexo has a similar business that competes directly with Aramark in that area, but probably not nearly as big as Aramark. But, we’re excited about that I think, it will be easier discussion because we will be talking directly to CIOs versus people in the past and we expect to be maybe talking to people who are on the food service or Chief Operating Officers. We like to try to sell at the CIO level and the Aramark relationship keeps us more directly inline with that.

[Ken Nagy:]

Great, thanks, got it.

[Operator:]

Next question is from the line of Ross Silver, please go ahead.

[Ross Silver:]

Congratulations guys on an awesome quarter, it’s definitely very exciting. I have just a question as it relates to revenues as well as gross margin. So, in terms of revenues, the current run rate is that something we can expect kind of going forward for the next couple of quarters and as far as gross margins, is that something where we can expect improvement in the next couple of quarters or do you see it sort of flatting out at kind of the 17% level?

[Paul Anthony:]

This is Paul. I mean, at this point we are definitely expecting to see revenues increases as we completed some final implementations at the Sharp Health System here in the second quarter, so I anticipate we will see some additional increase from some of the recent customers then ideally we will also start to see some additional customers coming in the fall and continues to see that, that revenue increase. We will continue to see some fluctuations in the equipment revenue as you know the equipment revenue is kind of off and on, it’s five year convergent cycle and so the timing of that is really unpredictable or at least it’s not as certain on a quarterly basis, it can be. From the margin perspective we are definitely looking for improvement in the margins and continuing to see that improve in the next few quarters and it’s literally tell where we, where and when we think it’s going to start to flat line, but at least at this point I think we’re pretty confident that we should see those numbers increase over the next few quarters.

[Ross Silver:]

Great and then one last question as far as your sales pipeline, have you seen any sort of reduction of interest let’s say from this quarter last year versus now just given some of the consolidation that’s happening in hospitals, I mean, have you seen it sort of slowdown in potential opportunities or do you still see being sort of a robust environment for the opportunities for your services?

[Joseph J. Flynn:]

I think it’s surely robust environment, we’re definitely seeing a couple of things as we ahead in 2014 with reimbursements, Medicare and Medicaid reimbursements changing. Hospitals are, it is definitely a slowdown in decision making process, there is more people involved in getting contract closed, taking a little bit longer than normal, there’s no longer, in our pipeline right now I would say there are no individual hospital. In our world, in the managed print services where this is very much being done at the corporate level, at the health system level, so what we seeing are large health systems in our pipeline, large-to-medium sized health systems in our pipeline that are taking a corporate level look at this, and not, I think the days of individual hospitals making decision done are over. So that’s good in a sense that the size of the contracts that we are looking at are quite large, the down side is going to take longer to close, but once we get them up and running then we see that revenue and benefit from it.

[Ross Silver:]

Great. Congratulations again on a fantastic quarter. Thanks guys.

[Joseph J. Flynn:]

Thanks Ross.

[Operator:]

(Operator Instructions) Our next question is from the line of John Gay, please go ahead.

[John Gay:]

Hi Joe, very nice quarter again.

[Joseph J. Flynn:]

Thanks John.

[John Gay:]

I was thinking that you last announced new customers were back in April I think?

[Joseph J. Flynn:]

It’s right.

[John Gay:]

So, with six months leverage or expenses and so on, this would be a pretty well of course, this overhang expenses in the couple of months, is that right or not?

[Joseph J. Flynn:]

Well, yeah. I mean, you got as Paul mentioned earlier, we anticipate margins continuing to improve because we have a larger base of customers now. Obviously we are working on some deals right now that we hope to close here between now and end of the year which we have already sort of baked into our numbers going forward. So, I mean, I think from the standpoint of getting the company crossed over into profitability, we feel very comfortable that we are going to remain there.

[John Gay:]

Okay. Thanks.

[Joseph J. Flynn:]

All that growth, tremendous growth we had in the last three years, over a period of time we absorbed it, do what we said, we were going to do which is get the company profitable and do what we can to continue to increase our profit margins going forward. Now, we have a larger have base.

[John Gay:]

You will make a nice progress Joe, keep up the good work.

[Joseph J. Flynn:]

Thank you so much.

[John Gay:]

Okay.

[Operator:]

(Operator Instructions) We will have a follow-up from the line of John Gay, please go ahead.

[John Gay:]

No, I was curious how many personnel do you have now, do you have now about 180 or something like that, I think…?

[Joseph J. Flynn:]

Yeah, they were just over 200 now.

[John Gay:]

Well. Very good. Keep the good business.

[Joseph J. Flynn:]

That’s right.

[Paul Anthony:]

Exactly, we agree.

[Operator:]

At this time there are no further questions in the queue. I’d like to turn the call back over to Mr. Flynn for closing remarks.

[Joseph J. Flynn:]

Well, thank you operator and thanks everyone for joining us today. We look forward to speaking with everyone again when we report our third quarter earnings and have a wonderful day.

[Operator:]

Thank you ladies and gentlemen that does conclude our conference for today, we’d like thank you for your participation.