Streamline Health Solutions, Inc.
Q2 2011 Earnings Call Transcript

Published: 13 Sep 2011

[Operator:]

Good afternoon, and welcome to the Streamline Health Solutions Reports Second 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 Robert Blum of Lytham Partners. Please go ahead.

[Robert Blum:]

Thank you, Amy, and thank you all for joining us to review the financial results of Streamline Health Solutions for the second quarter of fiscal year 2011, which ended July 31, 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 statements

[Robert Watson:]

Thank you, Robert. And good afternoon to all of you participating on today's call. We thank you for your time today and for your continued interest and support of the company. With 2 quarters of tenure behind this management team, we are making real and meaningful progress towards transforming Streamline Health into a world-class market-facing healthcare information technology company. As I noted in prior calls, this is a process, but we are well engaged in the orderly transition steps that this team committed to when joining the company. I will go into more detail on our progress against our strategic plan after Steve Murdock's review of our Q2 financial performance. However, before passing this call to Steve, I do want to draw your attention to one of our announcements made during the quarter and highlight the meaningful use certification of accessANYware 5.1. This is an important step in the previously discussed process of transformation. This product will be commercially released later this year, and we'll do so with certification for meaningful use already in place. This is an important step for Streamline Health. The power of this product to support the needs and requirements facing our clients is indicative of not only our movement towards being more market facing, but also our commitment to our current and future clients. 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. 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 H. Murdock:]

Thanks, Bob. I'd like to highlight the more significant aspects of the financial results through the second quarter ended July 31, 2011. Total revenues for the 3 months ended July 31 were $4.1 million compared to $4.7 million in the comparable quarter of 2010, a decrease of 11%. On a year-to-date basis, total revenues for the 6 months ended July 31, 2011, were $8.3 million compared to $8.2 million for the comparable prior-year period. Professional services revenue decreased 7% over the prior comparable second quarter, while on a year-to-date basis, professional services revenue increased 18% over the prior-year comparable 6-month period, primarily as a result of meeting milestones on systems implementations and services sold in prior quarters. Recurring revenue for maintenance contracts increased $300,000 or 16% over the prior comparable second quarter as a result of revenue recognized from backlog and from commencement of maintenance periods subsequent to the second quarter of 2010. For the 6 months ended July 31, 2011, revenue for maintenance contracts increased 13% over the prior comparable 6-month period. Additionally, recurring revenue from software-as-a-service increased $29,000 or 3% over the prior comparable quarter. And year-to-date, software-as-a-service revenues increased 13% over the prior year-to-date period as a result of achieving go-live status for one large subscription customer sold in 2010. Total operating expenses for the 3 months ended July 31, 2011, were $4.1 million compared to $4.7 million in the comparable quarter of 2010, a decrease of 12%. For the 6 months ended July 31, 2011, operating expenses were $8.5 million compared to $9.4 million for the comparable prior-year period, a decrease of 10%. The decrease is primarily a result of a decrease in capitalized software amortization as older components of previously capitalized software became fully amortized in 2011. The overall decrease was somewhat offset by increases in stock-based compensation, allowance for doubtful accounts and accruals for severance costs. The cost of system sales for the second quarter were $628,000, a 20% decrease over the prior comparable quarter. And on a year-to-date basis, cost of system sales decreased 23% over the prior comparable period. The decline was primarily a result of a the decrease in amortization of the capitalized software, as previously mentioned, as well as a decline in sales of third-party hardware and software over the prior comparable periods. The cost of services, maintenance and support was $1,156,000 as compared to $1,379,000 for the prior comparable quarter, a 16% decrease. And year-to-date, the cost of services, maintenance and support decreased 10%. The quarterly and year-to-date decreases were primarily a result of staff reductions in the area of Revenue Cycle Management Consulting, as well as a reduction in the cost of third-party provider maintenance contracts over the prior comparable periods. The cost of software-as-a-service was $418,000 for the second quarter compared to $472,000 for the prior comparable period, a decrease of 11%. And on a year-to-date basis, the cost of software-as-a-service decreased 8% over the comparable prior period. The cost of software-as-a-service operations is relatively fixed but is generally subject to annual increases for the goods and services required. The decrease is a result of renegotiation of third-party license and maintenance agreements, as well as reductions in staffing, which is offset by an increase in depreciation on infrastructure due to growth in hosting center operations. Selling, general and administrative expenses for the second quarter were $1,583,000 as compared to $1,506,000 for the prior comparable quarter. On a year-to-date basis, selling, general and administrative expenses were $3,247,000, a 1% increase over the prior comparable year-to-date period. The increases of respective comparable periods are results of increases in equity awards, performance bonus accruals, investor relations expense, allowance for doubtful accounts and severance costs. Product research and development expenses for the second quarter were $342,000 compared to $567,000 for the prior comparable quarter, a decrease of 40%. For the 6 months ended July 31, 2011, research and development expenses were $760,000, a decrease of 27% over the comparable prior year-to-date period. When examining total research and development expenditures, capitalized software development costs must be considered. The company capitalized $606,000 in software development costs for the second quarter as compared to $578,000 for the prior comparable quarter and capitalized software development costs of $1,391,000 for the 6 months ended July 31, 2011, compared to $1,274,000 for the comparable prior year-to-date period. Therefore, total research and development costs for the second quarter were $948,000 or a 17% decrease over research and development costs of $1,145,000 for the prior comparable quarter and were $2,151,000 or a 7% decrease over the prior year-to-date period. The decreases in research and development expense and the offsetting increases in capitalized software development costs were primarily due to an increase in costs eligible for capitalization, decreased product support costs and reductions in development staffing as we increased our use of third-party outside development contractors. The company incurred an operating profit for the quarter ended July 31, 2011, of $20,000 as compared to an operating loss of $28,000 for the prior comparable quarter. For the 6 months ended July 31, 2011, the company incurred an operating loss of $234,000 compared to an operating loss of $1,229,000 for the comparable period -- prior year-to-date period. The $995,000 decrease in the operating loss is a result of the items previously discussed. As a result, the company incurred a net loss for the second quarter ended July 31, 2011, of $7,000 and a net loss of $288,000 on a year-to-date basis or $0.00 and $0.03 per share, respectively, compared to a net loss of $75,000 or $0.01 cent per share in the second quarter of 2010 and a net loss of $1,252,000 or $0.13 per share on a year-to-date basis for the prior year. New bookings for the second quarter, primarily consisting of professional services and third-party hardware and software, were $1.9 million. Total backlog at the end of the quarter ended July 31, 2011, was $18.1 million compared to $18.9 million at July 31, 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. Second quarter and year-to-date software-as-a-service revenues are primarily generated from previously reported backlog. In our earnings release, we've included a table reconciling our net loss to the non-GAAP financial measure 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 noncash charges, we feel that adjusted EBITDA is a more meaningful measure in understanding our underlying cash-based earnings. For the 6 months ended July 31, 2011, adjusted EBITDA was $1,549,000 compared to a corresponding adjusted EBITDA of $766,000 for the prior comparable year-to-date period. We'll continue to provide this non-GAAP financial measure in future earnings releases. Our cash balance at July 31, 2011, was approximately $578,000 with $1.25 million drawn on our line of credit. Our cash cycles are still very dependent on seasonal patterns of prepaid annual maintenance fees from our customers, and we'll 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 continued to monitor our expenses, cash balances and collections carefully to ensure that we remain on plan. And we believe we have the appropriate capital resources available to operate our business going forward. That concludes my review of the financial results for the second quarter. Let me now turn the call back Bob Watson. Bob?

[Robert Watson:]

Thanks, Steve. As it relates to quarter 2, we're obviously pleased with the decrease in expenses versus last year's second quarter. We have been able to make infrastructure cost reductions despite the heavy burden of severance in both quarters of 2011. The slight decline in revenue for the second quarter is consistent with our previously stated guidance that management expects revenue for fiscal year 2011 to be flat or slightly down for the year. As I stated in the previous call, our sales organization is very, very focused on transitioning current clients that are on maintenance agreements to the software-as-a-service revenue model to expanding the footprint of our product mix in those clients and to driving our net new sales prospects to the software-as-a-service model versus the historical model of a perpetual license. As we noted in the prior call, the retention rate of clients that engaged Streamline Health through the software-as-a-service model is well over 90%. This is because of the superior operational financial results that our solutions deliver and the leading-edge service that we provide those clients. Our value proposition to our current clients and sales prospects is further enhanced by the meaningful use certification of accessANYware 5.1. It should also be noticed that accessANYware 1.9 SP3 [ph], the next version of accessANYware built on the platform which most of our clients are on today, is scheduled for meaningful use certification testing in Q4 2011 and will be commercially available first quarter of 2012. AccessANYware 5.1, built on our newly re-architected platform, will be commercially available later this year. As we've stated previously, we believe that 2011 is the year to position Streamline Health for significant annual growth rates consistent with other high-growth healthcare information technology companies. While our revenues are up slightly year-to-date, our forecast for 2011 fiscal year remains flat to down slightly. However, we are already seeing meaningful improvements in adjusted EBITDA despite the dual burden of high severance costs, as noted earlier, and the cost of on-boarding new executives and associates. Year-to-date, adjusted EBITDA is up 100% from the corresponding period in 2010. This is material progress by any measure. During our prior calls, we introduced the 5 areas of strategic focus as we transform Streamline Health. I would like to take a moment and comment on our progress in each of those points. For the purposes of level-setting what those points were, I will summarize them

[Operator:]

[Operator Instructions] And our first question comes from Joe Mondillo at Sidoti.

[Joseph Mondillo:]

Just real quick. You guys had commented that the cash balance is now at $580,000. How much availability do you have on that line of credit?

[Robert Watson:]

The total line of credit is $3 million. We're currently drawing down $1.2 million to $1.8 in availability.

[Joseph Mondillo:]

Okay. And how much cash do you, I mean, foresee needing for the rest of this year to run the business?

[Robert Watson:]

As Steve stated in his comments earlier, the combination of the current cash and availability under our Fifth Third line are more than substantial, enough to carry us through the year. If you look at historical patterns here, cash collections are actually quite cyclical. Cash goes up in the third and fourth quarters as we prebill maintenance agreements, annual maintenance agreements in the fall. That cash comes in during the Q1 and 2. We tend to borrow against that line to some extent. And in fact, in the second quarter, we actually paid down the line from its peak. So we've been -- we're quite confident there's plenty of cash available for our core business needs.

[Joseph Mondillo:]

And I'm just looking at the CapEx. I guess this is 6 months through. Can you give us any sense of what further spending you guys will see in -- for the rest of the year?

[Robert Watson:]

On the CapEx side, there should not be substantial spending at all at this point. I mean, there will be a few hundred thousand dollars or something of that order of magnitude. But I don't think it's significant between now and the end of the year.

[Joseph Mondillo:]

Okay. So what is maintenance CapEx for the company?

[Robert Watson:]

Total maintenance CapEx. Do you know, Steve, offhand? It's not a very big number for us. I can get back to you on that, Joe. Sorry about that.

[Joseph Mondillo:]

Okay. And how long -- what is the transition time for somebody who is using a historical model to software-as-a-service?

[Robert Watson:]

Well, that -- it's going to vary on a couple of things. One is the -- and this happens even with new customers. It's the availability of our hospital clients' own IT resources. They have to put everything in a queue and we get somewhere in the queue. So that affects the timing. We don't have any control over that. In a --

[Joseph Mondillo:]

Okay. And how long did it take for St. Vincent's to move from the old model to the new model?

[Robert Watson:]

They are still on the maintenance model. When are they scheduled, Gary, to transition to software-as-a-service? First quarter of next year before the transition happens. It takes about 9 months.

[Joseph Mondillo:]

Nine months. Okay.

[Robert Watson:]

Technically,, it can be done much sooner. I mean, there's not a technical constraint. It's actually a resource constraint on our client's side for the most part. We experience it even with new sales.

[Joseph Mondillo:]

Okay. And I guess my last question was in regards to standard registry. You guys had spoke a little bit about it. Can you provide us a little bit more color? I mean, how much revenue were you guys generating from that agreement? And what can we see going forward from this agreement? I know you guys said that you're going to change the agreement around. Is it more -- how is that going to work?

[Robert Watson:]

Well, I was trying to be a bit more subtle in my prepared remarks when I used the phrase "not productive." There was absolutely no revenues generated by that channel since that channel has been in place. And in our analysis, it's really a simple reason for that. And I don't quite understand how the company got itself in that position, but it predates me. But the current construct of the agreement with Standard Register limits them to a single product. And that single product is large and complicated, not the kind of product that the department level-facing account managers and salespeople at Standard Register can appropriately sell. Essentially, they were given the rights to sell an enterprise product as opposed to a departmental product. The Standard Register team is primarily departmentally focused. And so we believe the pathway to making that agreement productive is to broaden the product mix they're allowed to sell on a distribution basis. And then the large-scale enterprise opportunities that they identify will be handled by our sales team, but they will be compensated as a referral agent, not as a distributor. And that's the general concept of it.

[Joseph Mondillo:]

Okay, okay, okay. And I kind of get what you're saying. All right. Yes, Go ahead. I'm sorry, Bob.

[Robert Watson:]

No, no, that's fine. Go on ahead.

[Joseph Mondillo:]

So -- that's all I had right now. I'll hop back in the queue.

[Operator:]

[Operator Instructions] And our next question comes from Frank Sparacino at First Analysis.

[Frank Sparacino:]

I had more of a general question. Just curious what you're seeing from the hospital clients today as it relates to meaningful use and their ability to spend. Also what they're prioritizing spend on today and how that's impacting you?

[Robert Watson:]

Yes. It's interesting when the entire meaningful use opportunity was foisted upon us by the federal government a couple of years ago, it created a challenge for vendors like Streamline and some of us who are departmental level solutions, because a requirement of Phase 1 meaningful use is to demonstrate meaningful use of an enterprise-wide EMR or EHR. So the spend, the IT spend and the IT resource deployment for the last couple of years has been focused on the deployment of the core EMR. That being said, they are now starting to get their stimulus payments. They are collecting the cash that was promised by the federal government. And IT resources are freeing up to begin to look at the Phase 2 opportunities, which is where we fall in. There are several categories in Phase 2 where our meaningful use certification, we feel like, should have a positive impact on our sales timelines and our positioning with our clients. So the last 2 or 3 years, it's been a bit of a drag on the sales engine, if you will. I think as we go into 2012 and we start to approach 2015 where there's penalties for failure to meet meaningful use, we feel like there should be some positive pull-through for our applications.

[Operator:]

The next question comes from Mark Cahill [ph], private investor.

[Unknown Speaker:]

What is the -- are you near completion of accessANYware 1.9, 5.1, whatever you want to call it?

[Robert Watson:]

Well, there's 2 different products. So 5.1 is scheduled to be generally available or commercially available this fall, late this fall, fourth quarter timeframe. AccessANYware 1.9, which is an upgrade to the current platform, not a completely new platform -- 5.1 is a completely new platform. AccessANYware 1.9 SP3 [ph] is scheduled for meaningful use certification in the late third, early fourth quarter of this year. And it should be commercially available sometime in the mid to late Q1 of 2012.

[Unknown Speaker:]

Is 1.9 the one that's currently in beta at a customer?

[Robert Watson:]

Both of those are in some stage of beta.

[Unknown Speaker:]

Okay. Regarding...

[Gary M. Winzenread:]

I'm sorry. Just to be clear -- this is Gary. The 1.9 platform has been GA [ph] in previous versions for a couple of years. The 5.0 architecture is the newer piece, as he mentioned. So 1.9 SP3 [ph] is not a huge and significant release like 5.1 is.

[Unknown Speaker:]

Okay. Regarding your Standard Register comments, as I recall, Standard Register needed a lot of handholding a few years back. Will Rick and his team require more educational seminars for this new arrangement that you came up with?

[Robert Watson:]

Well, Mark, I mean, I think, actually, the fact that the handholding was required was indicative of why the agreement was nonproductive and reflected the fact that the opportunity was really limited to an enterprise version of what we do as opposed to the departmental version. There is going to be some spool-up time in terms of educating and training their market-facing personnel, but the opportunity for them is to continue to have conversations inside facilities and inside conversations at the levels they're used to speaking, though I think it should be much more productive for us because those assets will be speaking to the people they normally speak to as opposed to being asked to go talk to a CFO or someone they don't normally talk to in the process.

[Unknown Speaker:]

No, it's certainly understandable, yes. I think you also mentioned in your comments there another distribution channel that you hopefully are going to get on the books by fourth quarter.

[Robert Watson:]

I did say that.

[Unknown Speaker:]

Can you give us any more color? Or shall we just wait?

[Robert Watson:]

I'm not going to provide any additional color. But as I said in the prior 2 calls, too, I think in the very first call, I did, and then at the end of the first quarter, that the relationship with GE is good. Unfortunately, the relationship with GE limits some of the opportunities that we're able to see in the marketplace. If you think about it from a just sort of logic standpoint, GE is only going to get invited in the table if it's a large-scale enterprise-wide EMR decision, of which there might be 20 to 25 of those a year, all right, which GE is going to win 20% to 25% of it, or 4 or 5 deals. And of those 4 or 5 deals, 3 or 4 deals are going to have document management in it. And Streamline will get 3 or 4 deals. We actually think the number of available decisions in a year at the departmental level is probably north of 150 decisions in each of the next couple of years. So the challenge for us is how do we get invited to the party 150 times? It's not going to happen with GE. It's not going to happen with a direct sales force. It's going to happen by intelligently selecting partners who have relationships at the departmental levels that matter to us. And we are very focused on trying to make intelligent, thoughtful decisions about who our partners will be going forward in that area, and there's some opportunities for us. So we're pretty pleased with the progress we're making. It's a little bit like slogging uphill in a snowstorm, but we're making progress.

[Unknown Speaker:]

All right. Now you make it sound very logical. It sounds like the marketing staff, the hiring phase is coming to its completion. Do you anticipate hiring more implementers in 2012?

[Robert Watson:]

Well, actually, in the current forecast, despite the growth, we have nominal additional hiring forecasted for our operations team primarily because of some of the changes we made internally about how we run the business on a day-to-day basis. We think we have better visibility and the ability to -- better visibility into the use metrics for the personnel on that team. So we think we can actually drive more revenue and more opportunities with the same number of bodies we have today through better efficiencies and better planning. I think Gary's team and the folks that work directly with -- on the implementation side have done a very, very good job of embracing some ideas we've had about how to -- no pun intended here, how to streamline the implementation process. And so I feel like we're in really good shape on the personnel side.

[Unknown Speaker:]

Okay, good. Also in your comments, you mentioned the webinars have been very effective. Has that become one of your favorite marketing tools?

[Robert Watson:]

Well, if it doesn't cost me having to put somebody on a plane, I'm always a fan of that. And actually, it's worked out all right. We've had good participation. Our current clients enjoy the opportunity to tell their peers and colleagues all the smart things they've done with us. And it's a low-cost avenue to get touch points with current clients and with even new sales prospects. So we will continue to make use of that medium and any other medium that we can that we think is a low-cost avenue to getting us an opportunity to be invited to more of those 150 decision points I mentioned a few seconds ago.

[Unknown Speaker:]

All right. Would you be posting any of these replays on your website?

[Robert Watson:]

We do not, for client confidentiality reasons.

[Unknown Speaker:]

Okay. Next question is regarding kind of a new product-type question. As your marketing staff interacts with the customers and you do the give-and-take process, do you expect to get new product ideas from these discussions?

[Robert Watson:]

Well, again, if you go back and look at the transcript of the April 10-K call, one of the points we made about -- one of my observations then was that this organization was oddly internally focused and not as externally focused. So the realignment of all the market-facing members of our team under a single leadership in Rick Leach's organization, I think, gives us an avenue, by the very nature of that kind of alignment, that we are more market-facing today, and I think I made the statement earlier on the call today that we are becoming more market facing. And what that means is it will help guide product development in a way that's much more disciplined, much more structured than it has been in the past. Now when you have a broader pool of associates that are interfacing with current clients and sales prospects on a daily, weekly or monthly basis, you get much better input about where the market's going and where we need to think to stay ahead of the game.

[Unknown Speaker:]

Okay, good. Just a couple more questions. Regarding the meaningful use extension deadlines, what I'm reading is that customers are still overwhelmed, they're going to be clamoring for an extra year between Phase 1 and 2. Does that work to Streamline's advantage?

[Robert Watson:]

I don't think it works to a disadvantage. I think time will show whether or not it's an advantage. I don't think it's necessarily a disadvantage because there are -- of the folks that are already in our pipeline, our sales pipeline, they've already made the decision to start moving down a path towards adding this kind of functionality to their mix of EMR vendors. So it's not going to change the process, I don't think, for the people -- is it going to slow people coming into the sales pipeline? I don't think so, either. I mean, I just think it's -- I think even if they give them another year, it's still only a year. And it takes them a year to make a decision. So it's not -- I don't see a negative necessarily. But again, I don't see a positive in it, but I think it's a net neutral.

[Unknown Speaker:]

Yes. From another angle, does it give you a chance to increase your volume of potential customers?

[Robert Watson:]

That's probably true. I mean, that's -- I'd give you that point. I mean, I think that's probably true.

[Unknown Speaker:]

All right. Okay. Last question. This might be a little early to ask, but are you able to give us any color on building your pipeline foundation?

[Robert Watson:]

Do you want to be more specific?

[Unknown Speaker:]

Well, are you getting a good quality pipeline of existing customer business or new customer business?

[Robert Watson:]

All right. Let me answer that because I said this earlier in the call and I want to -- we made a statement in the earlier call about the improvement in the sales pipeline dollar value since the beginning of the year. I mean, the other part of that story that's not necessarily evident in that statement is that one of the first things that Rick and I did when we came in here with support from Gary and Trish Wharton, who runs our accounts management team, was to really assess the quality of what was in the pipeline that was delivered to us. So we were able to clean that out and we've been able to add significant real and meaningful opportunities to the pipeline. And we will continue to do that. Will we shorten the sales cycle from 9 to 12 months? We're going to try everything we can to do that. But I will tell you that we believe, and you've seen it in the press releases and you'll continue to see it, is that there is real, demonstrable growth in our current customer base. Those sales cycles are shorter. Those implementation timelines can be, in some cases, shorter. Not always, but can be. But I think we've done a very good to excellent job in the last 6 months of quantifying and moving prospects through the pipeline. But like everything else, it's a process, Mark [ph]. I mean, it takes time and you've got to go one foot in front of the other. It's mind-numbingly boring at times but you have to go through the steps to get to the end. But things are moving through. We have a very tight process that, again, a process that was never in place in the past for evaluating the stage of where our prospects are in the sales cycle. So I'm quite comfortable with the forward progress we've made.

[Operator:]

[Operator Instructions] There are no further questions at this time. We can turn the call back over to Bob Watson for any closing remarks.

[Robert Watson:]

Again, my thanks to everyone for participating on today's call. In the past 2 quarters, we have taken demonstrable steps in implementing what management believes is a solid strategic plan. This team is focused on delivering results for our clients and our shareholders. As each day passes, we will make progress towards our goal, and we have a lot to look forward to. And I look forward to talking to you again at the conclusion of the current quarter. Have a good evening and thank you very much for joining us.

[Operator:]

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