Q3 2013 Earnings Call Transcript

Published: 15 Nov 2013

[Operator:]

Thank you for joining Auxilio Incorporated Management for Third 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 the Auxilio during the course of this call as well as any responses by such officers and employees to questions posted during the 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 terminologies such as beliefs, expects, anticipates, may or similar expressions. Such forward-looking statements involve known and unknown risks and uncertainties including uncertainties relating 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 and other factors that may cause actual results to differ materially from those described herein as anticipated, believed, 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 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 Chief Financial Officer Paul Anthony who 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 Joe.

[Joe Flynn:]

Good afternoon and thank you for joining us today. During the third quarter we reported solid financial results from our company’s efforts in executing our MPS strategy. We increased recurring service revenue as a result of our growth over the last two years and we improved margins in our new and existing accounts. I am pleased to report that after our breakout financial performance in the second quarter of 2013 when we announced our company had crossed over to profitability the third quarter marks a full year of achieving positive adjusted income from operations. In addition in this quarter we continue to see dramatic improvement in earnings compared to both the third quarter last year and the second quarter of this year although we don’t expect earnings to be as high over the next couple of quarters because of anticipated new account implementations we are pleased with our progress and are positioned well to capitalize on new business opportunities in our pipeline. We expect our earnings improvement to give us a good base to absorb new accounts without compromising our ability to turn a profit. If you have been following Auxilio for a while, you may recall the record breaking number of hospitals we signed in 2011 and 2012, the total of which was 47. 40 of these hospital implementations were successfully completed last year. This year we executed the remaining 7 hospitals and have added seven new locations thus far. As a reminder when we close a deal and begin the implementation phase, we assume all print related expenses for new accounts upfront from day one. While these expenses are significant and include hiring personnel, training and taking on the entire responsibility for all devices, supplies, leases, maintenance and other services, it is an important differentiator for our company and a key selling point for hospitals. Hospital implementations, when we fully execute our MPS program, can take between 1 to 12 months depending on the size of the account. This impacts the time it take for us to realize a profit. Given the significant number of new accounts we on boarded in 2012 and 2013 and having assumed all expenses for each, our financial performance over the last year is a significant accomplishment for our company. Also it gives me great pleasure to report that our company continues to expand within our current customer accounts, which is indicative of the effectiveness of our Managed Print Services program and the continued need to reduce costs by healthcare organizations. We have earned the trust and confidence of our customers and as a result, they routinely expand their business partnership with us as their preferred Managed Print Services provider. As an example of our latest customer expansion, Sutter Health of California signed a five year contract for its East Bay region of hospitals, including Alta Bates Summit Medical Center, Eden Medical Center, Sutter Delta Medical Center, and the Sutter East Bay Medical Foundation. We first implemented our MPS program in Sutter's California Pacific Medical Center in its West Bay Region in 2005. We later extended California Pacific's contract another five years in 2010 and added the remaining three hospitals affiliated with the West Bay Region. With this latest expansion, which we announced in September, Auxilio now services a total of seven hospitals in the Sutter Health network, two medical foundations and hundreds of their medical and administrative entities that represent over 3,000 beds and more than 30,000 employees and physicians. Earning Sutter Health East Bay Region of hospitals speaks volumes about our MPS program and deepens our penetration in California's healthcare industry. Over the years, we've earned numerous other expansions of new hospital accounts within our customer networks including St. Joseph's Health System in California, Johns Hopkins Health System in Maryland, St. Alphonsus Health System in Idaho and Memorial Care in Southern California to name a few. This is low hanging fruit and our sales team is focused on deepening relationships with our current clients. Furthermore, our on-site hospital operations teams are working hard to deliver consistent high standards of customer service excellence to realize more of this organic growth opportunity for our company. Before I summarize this quarter's highlights, let me take a moment to comment on the healthcare environment and the impact it is having on our business development efforts. As you are all aware, Healthcare Reform is wreaking havoc on our industry. Hospital decision makers are focused on the immediate impact of the Affordable Care Act as they maneuver internal concerns like challenges stemming from state and federal health insurance exchanges, transition to ICD-10 code sets and abundance of new HIPAA regulations, decreases in Medicaid and Medicare funding, general physician dissatisfaction health reform e-record compliance and staffing issues. This current state of affairs in healthcare is causing our sales cycle to be longer. As such, we are highly focused on building up our network of influence within our customer portfolio working closely with our channel partners to open more doors to hospital decision makers and educating hospitals that validate the evidence that MPS is a necessary solution to improve print environment efficiencies, reduce volume and cost and to comply with advanced technology federal mandates. According to last month’s results of the Healthcare Information and Management Systems Society Analytics research survey of senior hospital IT executives, the most common means of sharing patient information is by fax, confirming that paper-based data plays a prominent role in the exchange of health information and therefore should be managed for cost and efficiencies. As a HIMSS Analytics’ Senior Director of Research advised in the report’s conclusion, “for the foreseeable future information exchange among healthcare providers will continue to include information that is documented and stored on paper, as such health care organizations need to have sound strategies in place for exchanging paper-based records”. Coincidental, yet timely to the HIMSS Analytics research results our company released a new case study in September which was produced in cooperation with Barnabas Health in New Jersey. The case study address the collaborative work performed by Auxilio’s on-site team, the systems IT departments and the EHR software provider for the successful integration of the hospital system’s print infrastructures and advanced technology platforms at six of its hospitals. Barnabas Health helped proved Auxilio’s MPS strategy and expertise was integral to the system’s six go lives over a period of about 14 months. As the only MPS company that works exclusively in hospitals, we are at the forefront of supporting healthcare organizations with e-record, federal mandates as they work toward meaningful use compliance. So to summarize our third quarter of 2013 highlights, we have realized positive adjusted income from operations for the last four consecutive quarters. We have implemented 54 MPS programs in as many hospitals in two years and expect to continue to see improved margins on all these accounts. We continue to see the financial benefit of leveraging our overhead cost across a larger base of hospital customers. And we are focusing our sales efforts on expanding more of our current network of hospital systems into new business and working hard to convert our pipeline into new accounts. With that I would like to turn the call over to Paul Anthony, our CFO for a financial review. Paul?

[Paul Anthony:]

Thanks, Joe. For the three months ended September 30, 2013, Auxilio reported recurring service revenues increased by $1.3 million from existing and expanding contracts. Total revenues increased by $2 million to $10.8 million for the three months ended September 30, 2013 as compared to the same period in 2012. Equipment revenues were $1 million as compared to $200,000 for the same period in 2012. Cost of revenues were $8.6 million for three months ended September 30, 2013 as compared to $7.4 million for the same period in 2012. The increase in the cost of revenues for the third quarter of 2013 is attributed primarily to the service cost to support the new recurring service contracts and expanded support areas among existing contracts, as well as the increase in new equipment placed. Gross profits for the third quarter of 2013 was $2.2 million or 21% of revenues compared to $1.4 million or 15% of revenues for the same period in 2012. This improvement is the result of the increase in recurring service revenue and margin improvements from both new and existing accounts. Operating expenses for the third quarter of 2013 were $1.4 million compared to $1.7 million in the same period of 2012. This drop was due to lower sales commission as a result of fewer hospitals going live this quarter compared to the same quarter last year. Auxilio improved its non-GAAP measure of adjusted income from operations in the third quarter 2013 to $950,000 or 9% of revenue compared to a loss of $180,000 or 2% of revenue in the same period last year. We do not expect the non-GAAP measure of adjusted income from operations as a percent of revenue to stay this high over the next couple of quarters due to some new account implementation starting in late fourth quarter and into early 2014. Net income for the third quarter of 2013 was $811,000 or $0.04 per share compared to a net loss of $660,000 or $0.03 per share in the same period of 2012. This improvement was a direct result of the improvement in gross profit. For the nine months ended September 30, 2013, Auxilio reported total revenues of $31 million, an increase of 19% when compared to $26 million in the same period of 2012. Recurring service revenues increased 27% from expanding contracts and new contracts that were implemented during 2012. Cost of revenues were $25 million for the nine months ended September 30, 2013 as compared to $23 million for the same period of 2012. The increase in the cost of revenues for the first nine months of 2013 is attributed primarily to staffing and service cost to support the new recurring service contracts and expanding support areas among existing contracts. Gross profit for the first nine months of 2013 was $5.4 million or 18% of revenues compared to $3.1 million or 12% of revenues for the same period of 2012. Operating expenses for the first nine months of 2013 were $4.5 million compared to $4.8 million in the same period of 2012. Net income for the first nine months of 2013 was $379,000 or $0.03 per share compared to a net loss of $2.3 million or $0.12 per share in the same period of 2012. Auxilio improved its non-GAAP measure of adjusted income from operations for the nine months ended September 30, 2013 to $1.6 million or 5% of revenue compared to a loss of $1.1 million or 4% of revenue in the same period of 2012. At September 30, 2013 our cash and cash equivalents were $3.1 million and during the nine months ended September 30, 2013 our cash provided by operating activities amounted to $1.1 million as compared to $1 million used for operating activities for the same period in 2012. This improvement in cash provided by operating activities in 2013 is primarily result of improved margins being generated from our recurring service revenue contract. The cash used for operating activities for 2012 was due to the cost incurred to implement those new recurring service revenue contracts. Now I would like to return the call to Joe.

[Joe Flynn:]

Thank you, Paul. Our concentration remains centered on the following; keeping focus on providing our customers with exceptional customer service, continuing to improve our margins on all existing accounts, focusing our efforts on closing new business and continue to expand our pipeline to capture more market share. We will take every opportunity to continue our success, develop our staff and improve margins to grow revenue into the future. We look forward to updating you on that progress. And with that operator, I'd like to open up the lines for Q&A.

[Operator:]

(Operator Instructions) We have a question from the line of [John Jay] [ph]. Please go ahead.

[Unidentified Participant:]

Hi Joe, great quarter, I think you finally got into the sunlight. I was curious about the one comment made little earlier about the state of healthcare market in the country today. And the likely of the decision making by the hospitals you're talking, has that been so significant is it expanding or are they shutting down, what is the state of that?

[Joe Flynn:]

John first of all, how are you? And thank you very much for your nice comments. What we've noticed specifically over the last couple of months since there has been a lot of turmoil with the roll-out of the exchanges, administration particularly at the health system level is really I guess the best term to describe it is a little freaked out. And so a lot of these kind of operational decisions that we're currently working on with some of the people at the operational level of the hospitals that kind of have been put on hold or has been stalled out a little bit. It certainly doesn't mean that they are not focused on the same things that we’re focused on before, which is try to save as much money as quickly as possible. Just given a little bit of the uncertainty and the roll-out exchanges, I think it’s got administration in general just a little bit kind of like deer in the headlight. So that’s caused some delays in some of the deals that we've been working on.

[Unidentified Participant:]

It seems to me that what you do should make some [inaudible] more quickly because you are going to guarantee them of savings, why wouldn’t they [exempt] [ph] on that I would think?

[Joe Flynn:]

Part of it is, again this is -- the commitments that they’re making to us are three to five year commitment and so I think that’s probably a little bit of the -- I wouldn’t say the word concern, but a little bit of where it’s delaying a little bit it’s okay, if we're going to be making these commitments, what does it mean and how does it impact the hospital. So certainly you’re right because of our cost savings initiatives you would say they would go quicker. But as I said always hospitals are not really businesses, they’re really just learning how to become businesses in this environment and they don’t necessarily operate in the way in which Paul and I run, for example Auxilio where we can react quickly or we can make quick decisions, but it doesn’t work that way in charitable organizations, maybe a society, certainly everybody in our pipeline, we don’t have anybody in our pipeline as a for-profit hospital, because there’s very few of them US. So there is just a lot of uncertainty and kind of turmoil at the administration level and not to say that our pipeline isn’t growing, it’s just getting, we found that this fall in particular a little bit harder to get over the finish line on some of these contracts we're negotiating.

[Unidentified Participant:]

But they are getting closer I suspect?

[Joe Flynn:]

Somewhat, absolutely.

[Unidentified Participant:]

[Inaudible] Hawaii, I think a while back, any feedback on [inaudible] out there?

[Joe Flynn:]

On which one, say that again?

[Unidentified Participant:]

The ones in Hawaii?

[Joe Flynn:]

It’s still in progress like all of the deals, there one would be nice because we can go back to Hawaii. It’s still in progress and we’ll see where it goes.

[Unidentified Participant:]

Okay. Well, congratulations, I think it’s a great quarter.

[Operator:]

(Operator Instructions) I am showing no further questions at this time, please continue.

[Joe Flynn:]

Okay. Well, again, thank you all for joining us today and thank you operator. We look forward to speaking with everyone again when we report our year-end earnings. So have a wonderful day. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.