Q4 2014 Earnings Call Transcript

Published: 31 Mar 2015

[Operator:]

Good day and welcome to the Auxilio Full Year 2014 Results Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Matthew Selinger with MZ Group. Please go ahead, sir.

[Matthew Selinger:]

Thank you, operator. Good afternoon and welcome everyone to Auxilio’s full year 2014 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 beginning the formal remarks, I would like to remind everyone that the presentations and commentary of the officers of 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, key vendor relationships 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 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 turn the call over to Mr. Joe Flynn. Joe, the floor is yours.

[Joe Flynn:]

Thank you, Matthew and thank you everybody for joining today’s call. The past year has been transformative for Auxilio and the most pivotal since the Company’s inception. The reputation that we have built around our Managed Print Services or what we term MPS business platform, has enabled us to sign the largest contracts to-date with some of the largest healthcare providers in the nation. To complement this growth, we acquired Delphiis to launch the Security Solutions Group and expanded our offerings with recurring higher margin revenue in a space that is experiencing exponential growth. For the call today, I’d like to start by providing an update on both service lines, then turn the call over to our CFO, Paul Anthony to discuss the financials and then I’ll wrap it up by providing our outlook for 2015. On the last call, we were in the final stages of negotiating two significant MPS contracts with some of the largest healthcare systems providers in the United States. These are Tier 1 players with the nationwide presence. We are pleased to report that both of these deals have closed. The first is a five-year $18 million contract with the largest region of a top 10 U.S. health system. This contract was commenced on February 2nd as to Auxilio’s business partnership and extends the terms of two existing contracts within the same health systems network of hospitals and furthers our penetration with this large multi-location health system. This is a great demonstration of how we can grow within a system. In 2005, Auxilio first implemented its MPS program in one of this system’s local hospitals which has now grown to serve three of the health system’s five regions, representing over 2,000 beds and more than 17,000 employees. The expansion of this contract demonstrates the growing demand for Auxilio’s unique MPS programs in large multi-location health systems. The second win announced about two weeks ago is the largest in Auxilio’s history with a health system serving 86 hospitals nationwide. This is a five-year MPS contract with one of the largest health system in the United States converged with an existing Auxilio customer. The contract extends and expands Auxilio services agreement with the entities currently under contract. The expansion of services is expected to generate up to $50 million in revenue over the next five years. The implementation starts this summer and will take about 18 months to complete. The system’s coast to coast coverage across 21 states expands Auxilio’s footprint into the Midwest in area where the Company previously had no presence in a geography with several new key customer targets. These deals are result of us executing on our business, staying focused, persistent and most importantly, delivering meaningful savings to our customers. We have become a clear leader and trusted partner through our unique vendor neutral MPS solution methodology. Our proven approach to cutting cost by improving operational efficiencies related to document production and information sharing in modern hospitals is completely unique in this industry. These wins are the combination of a lot of hard work and consisted execution over the past several years. And I want to congratulate the team at Auxilio for their efforts and dedication. In addition, this enhanced visibility will enable us to deliver double-digit revenue growth over the next two years. For those of you on the call today who are new to the story, you may be asking yourselves, how were we able to do this. We promised considerable savings between 10% and 30% by simplifying all aspects of print for our customers and we deliver on this promise. This is translated into larger and larger opportunities and equally as important, significant penetration, across existing customers as demonstrated with the highlighted wins. As consolidation proliferates within a healthcare industry, we are seeing strong opportunities across our client base and throughout the country and the industry. We expect this to continue to be a meaningful driver of future MPS growth. Auxilio’s reference list continues to grow and is no doubt the reason we are invited to more RFPs or overcoming obstacles with Tier 1 healthcare providers that a few years ago seem beyond reach. The work isn’t done here. As we implement these programs, there are human resources and stacking needs along with capital commitments from Auxilio to get these projects fully integrated. While growth comes with its own set of challenges, we are confident that we have all the pieces in place to ensure proper execution. While the MPS wins have built a strong base for growth, I’d like to turn our attention to our securities solutions group in area which the management and board are equally excited about. The July 2014 acquisition and integration of Delphiis has gone according to plan while growth has thankfully exceeded our expectation. The team continues to experience incremental revenue opportunities with existing customers by expanding the scope of these agreements. This is a testament to our ability to effectively implement comprehensive risk and information security programs that solve the critical problem. HIPAA compliance and large scale security breaches that have cost healthcare providers hundreds of millions of dollars are the reasons why this is a top priority at the executive level. This could be clearly seen in the occurrences such as the highly publicized Anthem cyber attack where approximately 80 million customers and employees were compromised. Leaders are finally realizing that it is costing healthcare organizations more to not fix the problem than it is to build out the necessary processes and procedures in a hospital security environment. The size and scope of these projects are impressive which confirms our belief that the growth potential for this vertical is significant and that we are in the right place at the right time. We recently expanded and defined our security offerings into four primary areas

[Paul Anthony:]

Thanks, Joe. For the 12 months ended December 31, 2014, the Company reported revenues of $44 million, an increase of 2.5% year-over-year which does not give a clear definition of performance given that equipment sales decreased $2.3 million year-over-year. In addition, $18 million contract announced in December did not commence until last month, so there was no contribution in 2014. For 2014, net recurring severance revenues increased $1.1 million which included $3.3 million in new contracts and the addition of Delphiis contributed $1.2 million in revenues. This was partially offset by a non-renewing contract, lower volume with some existing customers due to the consolidation of operations, and the impact from the severe storms that hit the East Coast at the beginning of this year. Company experienced a smaller number of equipment refreshes in 2014 when compared to 2013. As we’ve stated previously, equipment sales fluctuate from year-to-year based on a number of factors and should not be utilized to gauge our growth performance. Gross margins were 18.7% of sales an 80 basis-point increase over the 17.9% in the year ago period. Operating expenses for fiscal 2014 were $6.6 million compared to $5.9 million in the prior year period, majority of this increase was due to the acquisition of Delphiis. Net income for the fiscal 2014 was $1.3 million or $0.06 per share which was in line with the same period a year ago. During the course of the year, we made improvements to our balance sheet with remaining holders of the $1.7 million of convertible promissory notes issued in July of 2011 which included several Board members elected to convert their entire unpaid principal into the equivalent of 1.7 million shares of common stock. This eliminated a majority of our existing debt. We ended the December with 23.6 million diluted shares outstanding. At December 31, 2014, the Company had $4.7 million of cash and cash equivalents. Cash provided by the operating activities in fiscal 2014 was $1.5 million compared to $2.6 million during the same period in 2013. Working capital improved to $2.8 million at December 31, 2014, compared to $0.3 million during the same period in 2013. Company also maintains a $2 million accounts receivable baseline of credit which can be utilized to help fund some of our growth initiatives. We believe our balance sheet and credit facility are sufficient to help fund the recent growth in our MPS business. We now greatly enhanced our visibility and we estimate year-over-year revenue growth of at least 20% excluding any variances in equipment sales. We are excited about 2015 and look forward to reporting our progress on the Q1 call. I’ll now turn the call back to Joe.

[Joe Flynn:]

Thanks, Paul. As you could tell, we’re really excited about the future of Auxilio in our next chapter as a public company. Our core MPS business is in the best position since we started this business and we’re proving that our teams conserve any size of origination while delivering on our promises. We believe that gross prospects for the Security Solutions Group are significant and we’ll leverage our presence in over 200 hospitals across the U.S. to capitalize on this rapid growth opportunity. In summary, we are looking to accomplish the following during 2015. One, do a successful job implementing on the recent large scale MPS customer wins; two, sign additional MPS business; three, successfully launch new security group software and assessment products, further expanding our offering, creating a seamless end to end offering, this includes the successful integration of Redspin; four, winning more business on the securities side of the equation including announcing our first existing MPS customer win; five, diligently working on key acquisitions to further strengthen the security business. During the coming months, I will be travelling to handful of cities across the U.S. for an organized road show. If you are interested to meet with us or schedule a call, please coordinate with MZ Group. Lastly, securing up and uplifting to a major exchange is also a key corporate goal and as our growth starts to become apparent in our reported financials, we hope to make this a reality. I would like to thank you for your continued interest in Auxilio. We appreciate everyone joining today’s call. Paul and I will now open the floor to any questions. Operator?

[Operator:]

Thank you [Operator Instructions]. And we’ll go first to Jeff Bash of General Pacific Partners.

[Jeff Bash:]

While you don’t probably expect the sales cycle to shrink, in fact I think you even said it may get longer with the larger deals, do you see Auxilio getting brand recognition; so in effect the size of your pipeline will grow significantly and we’ll see these announcements more often even if the sales cycle continues to be painfully long?

[Joe Flynn:]

I think that we definitely are -- in our pipeline continue to see health systems that are of the larger level coming in. I definitely do not see in MPS side of the sales cycle shortening. Certainly we are seeing both opportunities where we don’t have RFPs where we’re kind of sole sourced and we’re in contract negotiations as well as RFPs, quite large RFPs, we’re definitely seeing that the trend towards the decision being made at the health system level versus the individual hospital or even the regional section of a hospital system which again the larger the deal, the more likely the sales cycle is going to be longer. So, we’ve got quite a lot of hospitals to implement here in the next 18 months, not only with the one we just announced but others that we anticipate coming at us. So, our team is going to be quite busy with that. At the same time, we’re continuing to try to build that pipeline understanding that these deals are definitely 12 month sales cycles.

[Jeff Bash:]

The $15 million deal, you said you’d be starting implementation I think you said in the summer and take 18 months or so. There is a little difference in the normal size deal where implementation might take two or three months and you can then expect the contribution from the deal to the bottom line. Do you have a view as to how soon after you’re starting implementation, that might start contributing to the bottom line?

[Paul Anthony:]

Jeff, this is Paul. It’s still little early to tell. In these deals where we get into the larger size, we go in with less than complete information. We really have more information about some of the larger areas. And so I don’t anticipate this necessarily being much different than what we would experience in the past. The difference that we do see though is once we get that first wave done, we are -- we have been successful in the past in the subsequent waves moving to profitability sooner than a brand new account. And so, with that being said, we would expect a traditional cycle in the beginning but as we start adding these and begin later in the implementation, the add-on facilities should come in and get the profitability little sooner.

[Jeff Bash:]

And Joe, I think on the last call…

[Paul Anthony:]

This is the reason why we spread it out precisely because we know we’re going to have a lot of upfront cost. We don’t want to commit to standing up 55 hospitals in a three-month period that would extraordinarily painful, financially and physically for us as you can imagine.

[Jeff Bash:]

Yes, I got it. On the last call, I think you said that you thought you might make up the equipment sales shortfall versus 2013 through the first three quarters and the fourth quarter that evidently didn’t happen. Do you expect it to happen shortly or is it may never happen?

[Paul Anthony:]

We still -- we do continue to expect to see some equipment sales that had pushed out from prior periods. But overall, I would say in general, we’re continuing to see a little bit of a change in the marketplace as it relates to how hospitals are financing equipment these days. Traditionally, the hospitals would finance their equipment pretty consistent through a lease -- some form of lease or financing mechanism and refresh every five years. As a result of some of the financial activities that are going on in the industry as well as some of the accounting activities that are driving changes in how they record some of this activity or potentially could record some of this activity, we’re seeing a lot of customers moving away from financing and getting into purchasing. And when that occurs that can in many cases delay and also provide us potentially the opportunity of lessening the amount of purchases necessary to support the organization. So although we did see a delay in what we expected in Q4, overall we’re also seeing that our equipment purchases are starting to come back a little bit as hospitals are taking different approach as to how to financing and trying to drive more cost out.

[Jeff Bash:]

Okay. Last year, you did have some weather impact and I know the Northeast was pretty poor this winter. Do you expect any material impact this year or not material?

[Paul Anthony:]

Not material from the weather, no. We didn’t see anything that in the primary areas that were hit, Boston and some of those other areas we haven’t seen anything that has shown us that weather related issues that would hit our account base specifically.

[Joe Flynn:]

One of those accounts was Barnabas. And Barnabas, you might know Jeff, acquired Jersey City Hospital. I don’t know if you saw that in news there locally in New Jersey.

[Jeff Bash:]

Yes that’s in my neighborhood.

[Joe Flynn:]

They added that to our portfolio which increased the volume at that location, at that health system for us.

[Jeff Bash:]

And one question on Redspin. Is there any additional color you can add at all? I’m looking for kind of like not materially dilutive over the Company is profitable, I know nothing specific but just some general additional color?

[Paul Anthony:]

Yes, it’s very similar to Delphiis from that perspective. It was an entity that kind of was on their own about breakeven and is kind of crossing over with some of the changes in healthcare marketplace into profitability. So, we expect it at least from an earnings perspective to be accretive relatively quickly.

[Joe Flynn:]

They were around a little bit longer then Delphiis; they’ve been in business for I think just about five years. And so it had a little more history; had a little more infrastructure and I guess from a business standpoint they are a little further along just a straight up start up.

[Jeff Bash:]

Now, is one going be integrated the other run side by side or how do you exactly vision…

[Joe Flynn:]

We had the luxury currently of being able to allow them to run separately but most definitely within the next 90 days or so, my goal here is to definitely especially on the sales and marketing side, integrate them because there is opportunities for up-selling Redspin customers Delphiis security program development of forensics and that’s I think out. Redspin is sort of the tip of the sphere because everybody has to do penetration testing and HIPAA compliance testing and things like this. And so, there is a lot of up-selling opportunities from Redspin’s existing customer base into Auxilio’s Securities Solutions Group and vice versa. They actually have a much larger customer base because their transactions are lot smaller. So that’s really where I see the synergy. How we end up marketing it as a joint entity is still being crafted, literally as we speak. But in the short-term we’re going to run them separately and then find those points where we can join them together and then eventually integrate both together. That makes sense.

[Jeff Bash:]

Okay. Thanks for your good work. And I will leave the floor at this point.

[Operator:]

And we’ll go next to JD Abouchar of Graham Partners.

[JD Abouchar:]

Quick couple of questions, first on OpEx in 2015. Does that get affected by the ramp up of the new hospitals or is that more effect to margins? In other words as revenues grow, should we start to see some leverage in the OpEx line?

[Paul Anthony:]

As it relates to this fall, JD; as it relates to 2015, we saw an impact in OpEx specifically as it related to the acquisition of Delphiis and the drive towards starting this diversification strategy. On a go forward basis, the MPS wins are definitely going to see some OpEx increase as a result of the sheer size of the two deals. So we will see some increase in the short-term but it will be -- should be quickly leveraged as those accounts become fully implemented.

[JD Abouchar:]

Okay. So at the end of the day, at the end of 2015, OpEx in terms of percent of revenues should be flatter down versus 2014 as a percent of revenues?

[Paul Anthony:]

Once we take into account integration of Redspin and some other things, 2015 is probably going to be closer maybe the same and then 2016 is we have to start to see. Because again we’re looking at an 18 month implementation for the larger deal and so that’s going to have. So, ‘15 you are not going to see that; ‘16 you’re definitely started to see that.

[JD Abouchar:]

Got you. But that’s inclusive of the Redspin acquisition as well?

[Paul Anthony:]

It would be. Yes that would be because there is not a lot of G&A in the Redspin acquisition.

[JD Abouchar:]

On the security side, both Delphiis and Redspin, how much of that is sort of one-time project nature and how much of that has some sort of a referring component? Obviously it’s not going to be nearly as good as the MPS business but is there a nature of once you’re in there that you sort of always going to be doing annual or quarterly check or some sort of consistency?

[Paul Anthony:]

As it relates to Redspin, absolutely Redspin’s business is traditionally a repeat business; it’s not necessary recurring but they do have most of their business, almost 50% plus is repeat business. And so they -- it’s whether quarterly or annual and as long as you’re doing your job, you’re going to be most likely be invited back. On the Delphiis side, that is traditionally more project based for a portion of it and then the portion related to their software application and their managed services is traditionally on an annual cycle and is on renewals and such?

[Joe Flynn:]

On the Delphiis side, the project as Paul mentioned is time limited but it usually goes. What we’re seeing is that these projects last up to a couple of years; it’s at least a two-year project and it can extend even longer, but it’s not contracted as such. We’re just seeing that happen because once they’re in the door and they’re doing the work and the teams are on the ground, it’s very difficult to put them to be replaced and it’s actually difficult for the hospital and health systems to find qualified personnel to replace the Delphiis and now Auxilio personnel that are on the ground.

[Operator:]

[Operator Instructions]. And we’ll go to John Gay of The Quiet Investor.

[John Gay:]

Hi, Joe and Paul; it looks like another nice wind up to the season but I was curious about the Redspin acquisition. How was that constructed I didn’t get a chance to read the report?

[Paul Anthony:]

We’re going to be putting that out here in the next few days; we’re not -- since we haven’t closed the deal yet, we’re not providing those details yet, but you’ll see something here real shortly.

[John Gay:]

Okay, very good. Last year at the Annual Meeting, shareholder approved once for something reserve split; where is that hanging at the moment?

[Paul Anthony:]

Right now it’s still depending. What we’re going to be doing is looking to probably go out and refresh that. It’s all part of what we’re looking at related to analyzing an opportunity to up list is what the primary goal is for that. So, that as you know that expires in May. And so it’s going be our expectation to put that back out to the shareholders to allow for the opportunity to let that option continue.

[John Gay:]

Okay. Reverse splits tend to be negative in terms of stock pricing unless the price starting is multiple prior to the reverse as small and absolute cycle [ph] affect this back afterward. You have what I foresee to be something like a patient quarter in fourth quarter. And assuming that those are possible in the coming quarters without too much input from the expense side of the new contracts, I would presume that the stock currently is about 10 times what would be maybe a combination of all those quarters. Are you aware of the possibilities that unless that happens, the stock could take kind of a hit?

[Paul Anthony:]

It’s definitely something we’re working with our advisors on as the Board and management evaluates what we do. And obviously we appreciate any comments that you had on this calls and we’ll take all of that into consideration.

[Joe Flynn:]

Yes, I think it’s one of the reasons why, John, we’re not rushing; you see what I mean. We’re trying to be cautions with this.

[John Gay:]

Okay, alright.

[Joe Flynn:]

I think we like to be on a major exchange certainly as a public company, but better off be on a major exchange; it’s got the timing; go to be right; pieces have to fall into place. And we just want to have all options on the table if that makes sense, but we don’t want to rush.

[Operator:]

And there are no further questions from the phone lines. At this time, I would like to the turn the call back over to Auxilio’s CEO, Joe Flynn for any additional or closing remarks.

[Joe Flynn:]

Just want to thank everybody once again for being on the call and thanks for your continued support. Please keep your eye on us in the marketplace and have a great day.

[Operator:]

And this does conclude today’s conference. We thank you for your participation. You may now disconnect.