Streamline Health Solutions, Inc.
Q1 2011 Earnings Call Transcript

Published: 8 Jun 2011

[Operator:]

Good afternoon, and welcome to the Streamline Health Solutions Reports First Quarter 2011 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Robert Blum. Mr. Blum, please go ahead.

[Robert Blum:]

Thank you, Amy. And thank you for joining us today to review the financial results of Streamline Health Solutions for the first quarter of fiscal year 2011, which ended April 30, 2011. As the conference call operator indicated, my name is Robert Blum. I am with Lytham Partners. We are the investor relations consulting firm for Streamline Health. With us on the call representing the company today are Bob Watson, President and Chief Executive Officer; Steve Murdock, Chief Financial Officer; Gary Winzenread, Senior Vice President and Chief Operating Officer; and Rick Leach, Senior Vice President and Chief Marketing Officer. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today’s call does not have a full text copy of the release, you can retrieve it from the company’s website at www.streamlinehealth.net or numerous financial websites. Before we begin with prepared remarks, we submit, for the record, the following statement. Statements made by the management team of Streamline Health Solutions during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify forward-looking statements. The forward-looking statements contained herein are subject to certain risks, uncertainties and important factors that could cause actual results to differ materially from those reflected in the forward-looking statements included herein. These risks and uncertainties include, but are not limited to, the impact of competitive products and pricing; product demand and market acceptance; new product development; key strategic alliances with vendors that resell the company's products; the ability of the company to control costs; availability of products produced from third-party vendors; the healthcare regulatory environment; healthcare information systems budgets; availability of healthcare information systems trained personnel for implementation of new systems, as well as maintenance of legacy systems; fluctuations in operating results; and other risks detailed from time to time in the Streamline Health Solutions' filings with the U.S. Securities and Exchange Commission. Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The company undertakes no obligation to publicly release the results of any revision to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. With that said, let me turn the call over to Bob Watson, President and Chief Executive Officer of Streamline Health Solutions. Bob?

[Robert Watson:]

Thank you, Robert, and good afternoon to all of you participating in today's call. Thank you for your time today and for your continued interest and support of the company. I indicated to you, on the previous quarter's call, that immediately upon joining Streamline Health, I engaged in a thorough review of the solutions, the operations and the personnel of the company. With the benefit of an entire quarter under my belt, I am fully convinced that Streamline Health has a solid portfolio of solutions and services that will support healthcare organizations in driving operational and financial efficiencies and that our solutions assist healthcare organizations in meeting the requirements of meaningful use. As we discussed before, meeting these requirements helps to make our clients eligible for significant incentive payments as outlined in the HITECH Act. After visiting or talking with many of our clients, I've discovered they share my beliefs that Streamline Health offers a strong value proposition that provides significant cost efficiencies, given our deep and meaningful integration with EMR vendors such as GE, Cerner, Allscripts, MEDITECH and Epic. From a solutions positioning standpoint, we have a clear and leverageable advantage in the marketplace, given the depth of our integration work. I've also discovered that our clients highly value the operational and technical support that our associates provide, and many of them have come to view us as a true partner who works to see them be successful. Our legacy as a Health Information Management-oriented company has successfully differentiated us from other vendors who entered the healthcare vertical from another industry focus. The importance of this legacy became evident last quarter when we saw 2 clients resist internal IT department pressure to change to a new document management system that was bundled into the deployment of a new electronic medical record system within their respective facilities. These clients stayed with Streamline Health's best-of-breed solution set rather than settling for a single-source IT product that had fewer capabilities and less functionality. In the just-concluded quarter, we have taken the necessary steps to optimize our sales results and right-side the infrastructure of the company to reflect the current revenue profile of the business and to give us the flexibility to adapt as the business grows. As you can see from today's press release, meaningful progress has been achieved, but this is a process that will take us several quarters to fully realize the benefits. We believe that, in the coming quarters, our more efficient operating cost structure will play out in meaningful reductions in our spend patterns that will have a positive impact on our bottom line results. At this point, I'd like to turn the call over to Steve Murdock, our Chief Financial Officer, for a summary of our financial results for the quarter. As you know, Steve joined us recently and brings 25 years of financial experience in the healthcare vertical. I look forward to his leadership and financial guidance in the coming years. At the conclusion of Steve's remarks, I'll provide additional perspective on the results of the quarter, and then we'll open the call for your questions. Steve?

[Stephen Murdock:]

Thanks, Bob. I'd like to highlight the more significant aspects of the financial results for our first quarter ended April 30, 2011. Total revenues for the 3 months ended April 30, 2011, were $4.1 million compared to $3.5 million in the comparable quarter of 2010, an increase of 17%. Professional services revenue increased 53% or $348,000 over the prior comparable first quarter, primarily as a result of meeting milestones on system implementations and services sold in prior quarters. Recurring revenue from maintenance contracts increased $192,000 or 10% over the prior comparable first quarter as a result of revenue recognized from backlog and from commencement of maintenance periods subsequent to the first quarter of 2010. Additionally, recurring revenue from software- as-a-service increased $75,000 or 9% over the prior comparable quarter as a result of achieving go-live status for one large client subscription sold in 2010. Total operating expenses for the 3 months ended April 30, 2011, were $4.4 million compared to $4.7 million in the comparable quarter of 2010, a decrease of 6%. The decrease is primarily a result of decrease in capitalized software amortization as older components of previously capitalized software became fully amortized subsequent to the first quarter of 2010, and cost-saving measures implemented to reduce infrastructure cost. The overall decrease was somewhat offset by increases in stock-based compensation, allowance for doubtful accounts and accruals for severance costs. The cost of systems sales for the first quarter was $548,000, a 27% decrease over the prior comparable quarter. The decline was primarily a result of the decrease in amortization of software -- of capitalized software, as previously mentioned. The cost of services, maintenance and support was $1,334,000, as compared to $1,382,000 for the prior comparable quarter, a 3% decrease as a result of staff reductions in implementation services, BPM consulting and reductions in the costs of third-party maintenance contracts. The cost of software-as-a-service was $436,000 compared to $457,000 for the prior comparable period. The decrease is a result of renegotiation of third-party license and maintenance agreements, which were offset by an increase in depreciation on infrastructure as a result of growth in hosting center operations. Selling, general and administrative expenses for the first quarter were $1,665,000 as compared to $1,698,000 for the prior comparable quarter. Decreases in salaries, commissions and professional fees were offset by an increase in stock-based compensation relating to the new management team, allowance for doubtful accounts and severance cost. Research and development expenses for the first quarter were $418,000 compared to $470,000 for the prior comparable quarter, a decrease of 11%. When examining total research and development expenditures, capitalized software development costs must also be considered. The company capitalized 787 -- excuse me, $785,000 in software development costs for the first quarter as compared to $696,000 for the prior comparable quarter. Therefore, total research and development expenditures for the first quarter were $1,203,000 or a 3% increase over research and development expenditures of $1,166,000 for the prior comparable quarter. The company incurred an operating loss for the quarter ended April 30, 2011, of $254,000 as compared to an operating loss of $1,201,000 for the prior comparable quarter. The $947,000 decrease in the operating loss is a result of the items previously discussed. As a result, the company incurred a net loss for the first quarter ended April 30, 2011, of $281,000 or $0.03 per share compared to a net loss of $1.2 million or $0.13 per share in the first quarter of 2010. New bookings for the first quarter, primarily consisting of professional services and third-party hardware and software, was $791,000. Total backlog at the end of the quarter ended April 30, 2011, was $17.7 million compared to $18.6 million at April 30, 2010, and $17.6 million at January 31, 2011. The majority of the backlog is related to software-as-a-service and maintenance contracts, versus software licensing sales. First quarter software-as-a-service revenues are primarily generated from previously reported backlog. In our earnings release, we have a table -- we have included a table reconciling our net loss to the non-GAAP financial measurement of adjusted EBITDA. We define adjusted EBITDA as net earnings or loss, plus interest expense, tax expense, depreciation and amortization expense of tangible and intangible assets and stock-based compensation expense. Given the relatively large amount of non-cash charges, we feel that adjusted EBITDA is a more meaningful measure in understanding our underlying cash-based earnings. For the 3 months ended April 30, 2011, adjusted EBITDA was $630,000 compared to a corresponding adjusted EBITDA of negative $225,000 for the prior comparable quarter. We will continue to provide this non-GAAP financial measure in future earnings releases. Our cash balance at April 30, 2011, was approximately $482,000, with $1.5 million drawn on our line of credit. Our cash cycles are still very dependent on seasonal patterns of prepaid annual maintenance fees from our clients, and we will continue to use our availability on our line of credit to supplement our cash needs in those quarters where prepaid maintenance fees are not as substantial as other quarters. We continue to monitor our expenses, cash balances and collections carefully to ensure that we remain on plan, and we believe that we have the appropriate capital resources available to operate our business, going forward. That concludes my review of the financial results for the first quarter. Let me now turn the call back to Bob Watson. Bob?

[Robert Watson:]

Thanks, Steve. As related to the quarter, we are obviously pleased with the 17% increase in revenues versus last year's first quarter. Professional and maintenance services revenues increased 21% over Q1 2010, and recurring revenues from our software-as-a-service clients increased 9% relative to the same prior period. Going forward, we believe that the recurring revenue of our software-as-a-service model will be a growth driver of this business. We will be dedicating a great deal of time, effort and resources to grow this critical component of the overall business. The retention rate of clients that engage Streamline Health through the software-as-a-service model is well over 90% because of the superior operational and financial results that our solutions will provide and the leading-edge service that we provide those clients. We offer a compelling value proposition that generates consistent results and high client satisfaction. The primary goal is to position Streamline Health to consistently grow annual revenues at a 15% or greater annual rate and to grow adjusted EBITDA, less capitalized software, at an equal or greater rate year-over-year starting in 2012. However, we are pleased that, in our first full operating quarter of fiscal 2011, we achieved double-digit revenue gain and substantially reduced our operating costs. On a non-GAAP basis, adjusted EBITDA, less capitalized software, was a negative $155,000 for this quarter compared to a negative $921,000 in the prior year quarter. While the nature of our revenue will feature some lumpiness due to product mix and the natural variability of hospital IT purchase patterns, we believe we are off to a good start in fiscal 2011, and we expect that EBITDA in the second half of the year will more fully reflect the expense reductions initiated in the just-completed quarter. We continue to anticipate that revenue for fiscal 2011 will be down slightly from 2010. This is reflective of our retailing of the sales processes and the shifting of certain sales opportunities away from the traditional license sale model to the software-as-a-service model, which reduces recognized revenue in the near term in exchange for long-term revenue stability. This strategy is central to our operating expansion plan. During my last call, I introduced you to 5 strategic areas of focus that I believe will help us transform our business. Those points included

[Operator:]

[Operator Instructions] Our first question is from Joe Mondillo with Sidoti & Company.

[Joseph Mondillo:]

I was wondering, you touched a little bit about the hospital IT purchase pattern. Could you give us a little bit more color on what you're seeing in the industry right now?

[Robert Watson:]

Now, one of the trends that's a result of the sort of push to meaningful use and the attempt to get the stimulus dollars is that the IT departments are overwhelmed. So a couple of things happen when they get overwhelmed. It tends to slow down their purchasing of things not directly related to the core EMR. So now our advantage in that kind of environment is our ability to shift people to the software-as-a-service model. But the primary impact is just the departments are overloaded with demands being placed on them as they roll out the EMRs. And I think I mentioned this on the last call, I think we're in the position that the second phase of the advanced directives part of the HITECH Act is really where our solutions come into play. So I think we're adequately positioned but there's just some variability in timing in the purchases.

[Joseph Mondillo:]

Okay. And I just have one other question. How much is the credit revolver, currently?

[Robert Watson:]

$3 million.

[Joseph Mondillo:]

$3 million. And in your opinion, how much cash do you need to run the -- to fully fund the business?

[Robert Watson:]

I mean, our current line of credit and our history of 65% or so of our revenues being recurring, I think we're in a perfectly fine position to run the business as we run it today. I think we're in good shape. And the answer to your question is -- simple answer is, I think we're in a good shape on the cash side so...

[Operator:]

[Operator Instructions] The next question is from Mark Cahill, [ph] a private investor.

[Unknown Speaker:]

When do you expect to be done with the bulk of your hiring? I understand you always look for new talent, but when do you expect to be done with the bulk?

[Robert Watson:]

Yes, we do have a sense of urgency around it. I mean, for the most part, I think we're -- by the end of this quarter, early Q3 at the outside, we'll -- I think we'll be done with our -- any significant hiring. But we're -- one thing we've put in place by putting in place someone who's actually in the role of human capital. I think we're continually looking to improve our mix of talented resources and associates. So again, it's all part of the process, but the bulk of the hiring, by the end of the second quarter, early third quarter, is finished.

[Unknown Speaker:]

Okay, and I understand that there's always kind of a lag when you hire someone, they've got to get educated on the way the company's run, the products, et cetera. When do you think these new hires, particularly the sales and marketing side, will do -- when will they be ready to run rather than walk?

[Robert Watson:]

Well, we -- Rick and I sort of look at this as we're in a -- that there are 4 phases to this

[Unknown Speaker:]

I noticed Mr. Waters has a dual responsibility

[Robert Watson:]

All of those client -- external market-facing roles report to Rick. And that's -- Gabe does have a dual role, but again, it's -- as you know, in the business development side of things, that they have peaks and wanes and valleys in the way in which they -- those types of conversations occur over time. Having Gabe also responsible for direct sales activity in the West allows us to better leverage his time.

[Unknown Speaker:]

Right. I noticed in your comments that he's already got ideas, and that's just ideas for international prospects and partners. Do you think he'll stick mostly with U.S. and a little bit of international presence?

[Robert Watson:]

Of course. Don't misinterpret that comment. We are not going to lose focus on our 2011 plan. We are committed to a plan, we're staying on that plan. Now that being said, given the fact that Gabe and others of us on the team have experience in markets outside of North America, we will opportunistically respond to those opportunities. And that -- is it a key, central part of our strategy for 2011? It is not. But we will devote some energy to it when it's appropriate.

[Unknown Speaker:]

Good. I noticed in your -- some of your operating comments, you talked about migrating existing clients to the software-as-a-service model. In the past, some of these clients, they paid upfront in the license model. Are you talking about those types of clients, getting them to the SaaS model?

[Robert Watson:]

Yes. We have a certain portfolio of clients that are currently paying us maintenance that are on older versions of the product. Part of our sales strategy as we take them down the migration path to upgrade to either 1.9 or 5.1, when it's available, is to put forth a plan that says, "Rather than going on a maintenance agreement with us, outsource it to us in our software-as-a-service model and use our data center." And that's quite attractive to them. It takes out the costs of them having to acquire and support third-party hardware and software. It reduces their own internal IT resources devoted to the project because that burden falls to us. We had one customer, as we just noted, just make that switch in the last couple of weeks. So that's a model that I think, for Streamline, is very, very, very good opportunity for us to grow our recurring revenue base in an accelerated fashion.

[Unknown Speaker:]

Okay, good. In the last call, you had mentioned GE and their change in their -- kind of a policy change in their marketing. They're not going to go after new customers. And I think you said that they were still devoted to current customers. Let's see, I saw a recent article that kind of negated that comment, so I just wanted to get clarification here. It sounds to me like, and I think you said this in the last conference call, GE is still pursuing sales to current customers.

[Robert Watson:]

I knew somebody was going to ask me the GE question, Mark. I think it's going to come up every call. So the answer is -- the deal that we were just talking about, where the client shifted from maintenance to our software-as-a-service model, was actually a GE client. There are opportunities in the current GE installed base. We do know -- I mean, the facts are that GE's Centricity platform has been pummeled by the folks at Epic and that they are losing some market share to Epic. That's a fact. We do know that GE's customers are having challenges getting up to meaningful use, and there is an internal focus on that at GE this year. That being said, like I said in the last call, there are opportunities for us to sell into the current installed GE base.

[Unknown Speaker:]

Right, okay. Two other questions. In your opening comments, you had mention a new 7-year deal. Was that after the quarter ended?

[Robert Watson:]

That was after the quarter ended. That was what we were just talking about -- it was some of the key.

[Unknown Speaker:]

All right. And one last question now regarding meaningful use. I've read articles that other companies, HIT companies have brought out products. Yes, they're technically meaningful products but the usability of these products is in question, yet. If it takes 10 minutes to download something, it's aggravating. Do you reckon the others hear comments like this about usability versus meaningful use?

[Robert Watson:]

Well, the reality is, yes, we do hear those kind of -- I mean, there is always a question of usability and user satisfaction. We think, for example, that one of our leverageable core competencies in that regard is that, because our integration with EMR vendors is so deep, complete, it puts us in a position that for our clients, where they have the opportunity to use us as part of their meaningful use strategy, we can give them a solution that doesn't impact their performance. They're a very key part of this, so -- but we do hear it. I mean, there are challenges. I mean, anybody who's installing an EMR in any facility of any size -- I mean, I don't care whether you're a 100-bed hospital or a -- 1,000-bed hospital, the business process change that comes with it is material. Along with that, there are functionality challenges in some of the products. And I just -- but we've tried to focus on -- again, historically, Streamline has done a very, very good job at this. And under various guidance and leadership for the last 3 years on the operations side of our business, I think we've been very, very mindful of the usability of our product and its performance under pressure. We're looking forward, obviously, to getting the 5. x product into the U.S. market, which I think, will further improve not only our integration, but our performance and user friendliness. I think those are all key parts of the strategy here that we're going to continue to not lose sight of.

[Unknown Speaker:]

Are you trying to emphasize quality and get your class ratings up at the KLAS ratings?

[Robert Watson:]

Yes. I mean, all of us in the business have to. It's sort of one the lesser evils. You have to live with it, and we're going to focus on it. I mean, I think, in the past that, historically, the organization hasn't been as friendly towards the rating agency, if you will. And so I think there are things that we can do with our customers and with the rating agencies to help them understand why a best-of-breed product like this has value, has relevancy and is a better option for a healthcare provider than a product. I mean, one of the things we try to -- as we think about product positioning here, that were talking about it, but we're positioning our solutions versus a product. The 2 clients that were being polled by IT to try to get them to switch out to a product tied back in the management solution and they decided to stay with us, is a perfect example of why we're relevant and why we're relevant in the long term. And that's the -- I don't think that's a conversation, a message that's been clearly articulated, historically. And we will articulate that better with our customers so they understand when they get called by KLAS how to answer the question. And we'll also tell the story to marketplace that way, so our new prospects will understand why this is important. There is a place for a best-of-breed solution in this space.

[Unknown Speaker:]

Right, now, that sounds good. One last clean-up question. There was 2 add-on deals announced in the fourth quarter. Were those add-on deals to a hosted agreement or to an upfront license agreement, do you know?

[Robert Watson:]

They were not software-as-a-service. They were add-up -- one was an upgrade, and the other was an add-on to an existing license agreement.

[Unknown Speaker:]

They get implemented in 2011, do you think?

[Robert Watson:]

Yes, both of them.

[Gary Winzenread:]

One is already.

[Robert Watson:]

One of them is already, and Gary just said one of them is already up.

[Operator:]

[Operator Instructions] And our next question comes from Sam Rebotsky with SER Asset Management.

[Sam Rebotsky:]

When we -- this particular quarter, the loss was significantly less, and you indicated that the next quarter, the significant part of the improved profitability should be in the second half. How should we look at your performance as far as -- should we look at significant contracts that are taking place, that you're getting, that you're announcing? Should we look for any dollar amount of contracts to sort of when you will achieve profitability? And with visibility going forward, how should we look at this?

[Robert Watson:]

Yes, I think there's a couple of key things to note here. One, because we're focused on the shift of existing licensed customers to the software-as-a-service model, and that we have gone back to people in the sales pipeline that were originally looking at a licensed sale and have moved them towards the idea of moving to the software-as-a-service model -- yes, a couple of things happen. Near-term, that's going to affect near-term revenue recognition, but will put us in a position going into 2012, '13, '14, '15 where the predictability of our revenue will be quite solid. So I'm judging our performance as I look at the number of deals and transactions that we do where we've created a long-term, stable revenue stream.

[Sam Rebotsky:]

Yes, that sounds good. Well, good luck in achieving your stable revenue stream, and hopefully, that there will be more recognition, I guess, when they see you accomplish this.

[Robert Watson:]

It's -- we're telling the story against what we're executing on. Yes, we think there is a tremendous opportunity to do this. We've shown some early returns, which are quite positive in that regard. It creates an opportunity for us to move our recurring revenue number from 65-or-so-percent last year up to -- it ought to be a significant number of percentage points higher that -- than that as we get out beyond 2012, 2013. And it does a couple things. It also, in addition to the stabilizing the revenue, removing the lumpiness from it, it also creates a degree of stickiness with our customer base that the cost of separation becomes exceedingly high.

[Sam Rebotsky:]

There's no doubt that these contracts keep getting additional contracts with the revenue -- the visibility of revenue going forward within your time. It should create the profitability, which is where -- which is what I'm looking forward to and, frankly, increasing the size of the revenue, in addition, because they create a profitability should you cover your fixed costs, and that should be good. So that's what I'm looking forward to, your achieving.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Watson for any closing remarks.

[Robert Watson:]

Again, my thanks, everyone, for participating on today's call. In the past quarter, we have taken some initial steps in implementing what we believe is a solid, strategic plan. We have brought on board some of the critical team members to get us where we want to go, and we firmly believe that we can and will achieve our goals in building an innovative, healthcare IT solutions provider that can grow consistently and profitably and drive enhanced shareholder value. We have a lot to look forward to. I look forward to talking to you again at the conclusion of the next quarter. Thank you. Have a good evening.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your telephone line.