Streamline Health Solutions, Inc.
Q4 2012 Earnings Call Transcript

Published: 24 Apr 2013

[Operator:]

Good day, everyone, and welcome to the Streamline Health Solutions Fourth Quarter Earnings Results Conference Call. Today's call is being recorded. And now, your host for today's call, Mr. Randy Salisbury, Head of Communications, Investor Relations. Mr. Salisbury, please go ahead, sir.

[Randy Salisbury:]

Thank you for joining us to review the financial results of Streamline Health Solutions for the fourth quarter of fiscal year 2012, which ended January 31, 2013, and for the fiscal year ended the same date. As the conference call operator indicated, my name is Randy Salisbury, and I manage Communications and Investor Relations here at Streamline Health Solutions. Joining me on the call today are

[Robert E. Watson:]

Thank you, Randy, and good morning to all of you participating on today's call. We thank you for your time today and for your continued interest and support of our company. As we enter this management team's third year with the company, it's clear to me that we are making meaningful progress toward becoming the world class healthcare information technology company that we aspired to be when we arrived in early 2011. We believe that the continued momentum in the closure of new sales contracts speaks to the fact that our solutions improve our client's operating and financial performance, because you cannot successfully sell into today's tumultuous healthcare provider marketplace if your solutions do not deliver meaningful return on investment for your clients. Looking back at the fourth quarter, we are very pleased with our financial performance for the period. Revenue and adjusted EBITDA increased 49% and 11% respectively, over the same quarter a year ago. We believe that this is further proof that with our expanding suite of solutions, we continue to become more integral partners, as opposed to vendors, with our clients. In our opinion, there were a number of highlights in the fourth quarter. First, we closed new sales contracts with a total contract value of $5.5 million and $2.3 million in renewals. We expect approximately $1.5 million of these new sales contracts to be recognized in the first 12 months from the date of signing. Second, we closed our first accessANYware sale since 2010, with Hartford Hospital in Hartford, Connecticut. It is important to note that when we originally forecast this opportunity for the year, it was as a perpetual license sale, not as a SaaS-based sale. However, our team did an excellent job of repositioning the purchase decision from that model to a recurring revenue model, which is what we prefer. While we would have recognized significant near-term license revenue in Q4 2012, had it been sold as a perpetual license, we believe strongly that the SaaS configuration delivers greater benefits to both Streamline Health and our client over the entire term of our relationship. Third, we secured another new OpportunityAnyWare client, Crozer-Keystone Health System, Philadelphia, Pennsylvania. Sales in this solution suite remained strong throughout 2012. And fourth, we generated nearly $1.9 million in total contract value from net new sales and renewals of our Collabra suite of solutions, which is made possible by our Q3 acquisition of Meta Health Technology. I think it's important to note that the length of term of many of our new contract bookings during fiscal year 2012 were longer than we anticipated. We view this lengthening of the contract term as a positive development, and that our clients are making longer commitments to our solutions and to our company. In addition, as noted earlier with the accessANYware sale in Q4, we continue to aggressively reposition the purchase decisions of our sales prospects, when possible, to the SaaS model. That decision does, however, mean that there was less near-term revenue recognition. However, even with that disciplined decision-making, we were comfortably within the range of our internal forecast for net revenue in fiscal year 2012 and the quarter. We are also proud of our overall performance for fiscal 2012. Revenue and adjusted EBITDA increased 39% and 52%, respectively, over fiscal year 2011. More importantly, our composition of revenue continued to improve, in my opinion. For example, our SaaS-based revenue continued to increase as a percentage of our overall revenue in 2012. Specifically, our revenue was comprised of 31% SaaS, 47% maintenance and support, 6% license and 16% professional services. In fiscal year 2011, our revenue composition was 24% SaaS, 52% maintenance and support, 4% license and 20% professional services. During 2012, there were a number of key accomplishments in our view. First, new contract bookings for the year were $18.7 million, exceeding our internal fiscal 2012 sales plan by approximately 37%. Adjusting for the impact of sales of the Collabra suite, acquired through the Meta Health Technology acquisition, we exceeded our internal fiscal 2012 sales plan by 27%. Second, renewals, which we do not project to provide guidance on, were also impressive at $9.4 million in 2012. Third, the acquisition of Meta Health Technology enabled us to add a new suite of solutions in the coding and clinical documentation improvement arena through our suite of solutions. Fourth, we recruited very talented personnel at all levels, but especially at the most senior levels, to help us meet the demands of our new and existing clients and to maintain our pace of growth. Fifth, we successfully transitioned our headquarters to Atlanta, which affords us access to a very talented pool of potential associates, given the high density of health care information technology companies in metropolitan Atlanta. All in all, we believe our company's vision for our future growth and development is on the correct pathway to continue to transform this company into a world-class, health care information technology company, delivering solutions that improve our client's operating and financial performance. I will provide additional perspective on our company's improving market position and continuing growth prospects, including a look at our strategic goals for 2013, after Steve Murdock, our CFO, reviews the specifics of our fourth quarter and year-end performance. Steve?

[Stephen H. Murdock:]

Thank you, Bob. I would like to review some of the more significant aspects of the financial results for the quarter ended January 31, 2012, and for our fiscal year 2012. Revenue for the fourth quarter was $6.7 million, a 49% increase over the fourth quarter of last year. This included $2.1 million in revenue related to the acquired Meta Health business. Our operating income performance was negatively affected in Q4 by certain nonrecurring expenses, primarily associated with the acquisition of Meta Health Technology and other strategic moves made during the quarter. Operating expenses increased approximately $3.5 million during the fourth quarter over the prior-year period, contributing to an operating loss of $1.2 million, compared to an operating profit in the prior year quarter of $116,000. The net loss for the fourth quarter was $7.8 million or $0.63 per share, compared to breakeven performance in the fourth quarter of last year. As stated in our third quarter earnings call, we anticipated taking an additional $500,000 in nonrecurring charges pertaining to severance costs as we realign our headcount, following the Meta Health transaction in Q3. The fourth quarter results included a total of $780,000 of nonrecurring charges, which included additional severance costs related to the relocation of our headquarters to Atlanta. In addition, as stated in our third quarter earnings call, during the quarter, we recorded a $5.9 million noncash, one-time charge for the conversion of the notes issued as part of the private placement investment in Series A Preferred Shares, as approved by our shareholders at the October 31, 2012, special meeting. Excluding nonrecurring items, net loss for the fourth quarter was $1.1 million or $0.08 per share. As Bob mentioned, new bookings for the fourth quarter were $5.5 million, and contract renewals were $2.3 million. Our total backlog was nearly $51 million at the end of Q4. Approximately $43 million of this backlog is related to maintenance and support in SaaS contracts. Cash from operations and cash collections were $7.5 million at the end of the fourth quarter. 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 and tax expense, depreciation and amortization expense of tangible and intangible assets, stock-based compensation expense and nonrecurring expenses, such as severance cost. Given the relatively large amount of noncash charges in certain nonrecurring expenses, we feel that adjusted EBITDA is a more meaningful measure in understanding our underlying cash-based earnings. For the 3 months ended January 31, 2013, adjusted EBITDA was $1.7 million, compared to a corresponding adjusted EBITDA of $1.5 million for the prior comparable period. We will continue to provide this non-GAAP financial measure in future earnings releases. Looking back, I believe fiscal year 2012 was another very productive year for our company. Revenue increased from $17.1 million in fiscal year 2011 to $23.8 million or 39%. On a same-store basis, fiscal 2012 recurring revenue increased 26%. Recurring revenue totaled $18.5 million or 78% of total revenue for the year. Gross margins improved 400 basis points from 48% to 52% in fiscal 2012. And adjusted EBITDA grew 52% from $4.3 million in fiscal year 2011 to $6.6 million in fiscal year 2012. That concludes my remarks about our specific financial performance. I will now turn the call back over to Bob Watson, our President and CEO. Bob?

[Robert E. Watson:]

Thanks, Steve. As most of you know by now, I always take time to review and update our stakeholders on the progress we are making on our strategic goals for the year. Since we have a lot of ground to cover today, including a look ahead, I promise to be as brief as possible. Last year, we had 4 strategic goals for our company to accomplish. First, to continue to focus on scaling and managing our infrastructure cost to help us sufficiently and effectively grow our business. Specifically, we wanted to keep pace with, if not lead slightly, the client demand we projected for 2012. A critical part of this infrastructure remains quality people, the human capital you have heard me talked about over the last couple of years. I mentioned a number of times in 2012 that we would continue to invest in the human capital resources to support our anticipated growth, and we most certainly did so. As noted in various press releases, 2012 was the year we began to consolidate our associates into the Atlanta market. As you know, we officially moved our headquarters to Atlanta in the second half of last year, leveraging the office space we acquired in the Interpoint Partners transaction in December of 2011. At the beginning of the last fiscal year, we had 13 associates working in our Atlanta office. Today, we have nearly 75. And for the first time in my tenure, all of our company's executive leadership that reports directly to me, except our sales leadership, shares the same office space. Although we eliminated, as you know, the Senior Vice President and Chief Operating Officer role during the fourth quarter, we created 2 new senior leadership positions in the company

[Operator:]

[Operator Instructions] And for our first question, we will go to Matt Hewitt with the Craig-Hallum Capital Group.

[Matthew Hewitt:]

My first question, related to that, the Hartford deal, you mentioned that the customer elected to go with the SaaS model. How big was that? If you want to generalize it, that's fine, but I mean, was it $1 million plus, or how large was it?

[Robert E. Watson:]

The transaction in terms of total contract value was in excess of $2 million. Had we configured it as a perpetual license, the Q4 license fees would have been in the $1 million range. But, like -- as I try to be clear in the call, Matt, I think you've gotten to know this management team over the last year or so and one thing we try to be very, very clear about with everyone is that we're very disciplined about how we're going to go about doing this. And we're -- we think it's appropriate for the long-term revenue visibility of this enterprise to continue to push our sales prospects down the path to Software as a Service as opposed to perpetual licenses, and we're going to continue to do that as often as we can, during the course of the year.

[Matthew Hewitt:]

Okay, and I appreciate that and think it's a great decision. I was just trying to understand here the delta versus -- set expectations in the quarter. Regarding the SaaS component of your revenues, it was up smartly year-over-year, so great performance. But there was a bit of a dip from Q3 to Q4. Was there anything quirky that occurred, that would've caused that modest decline?

[Robert E. Watson:]

We mentioned we have some accessANYware clients falling off, starting in Q4 and into Q1 of this year. And there was some impact as a result of some of that.

[Matthew Hewitt:]

And then, and I guess staying with that, the accessANYware component, it sounds like you're going to lose some more here from prior issues, but you lose those here in the first quarter, but you're also talking about 20% growth for the segment this year. Is that -- it's basically flat year-over-year, the first half of the year, and then you're going to see a pretty dramatic increase or how should we be thinking about the trajectory as this year goes?

[Robert E. Watson:]

So let's talk about that. So in the first 2 quarters of the year, on a maintenance and SaaS revenues of those clients fall off, will decline. As we install getting online Hartford and any other accessANYware client in Qs 3 and 4, you'll start to see that number trending back up to where it should be. So the 20% growth number on that segment is net of those terminations.

[Matthew Hewitt:]

Okay, that's helpful. Shifting gears a little bit more on the macro side -- and thank you very much for the commentary about ICD-10 and some of the issues that you've been seeing. There's been some more surveys that have come out here recently, you've been talking about how the hospital and hospital systems appeared way behind on the curve of getting this stuff implemented, 55% at this point have just started to select the vendors. How is that going to ramp here over the -- we've got 5 quarters until that goes live. I mean, is it going to be coming over the sides of the boat pretty dramatically over the next couple of quarters? Or how do you see things playing out? And it sounds like it's going to be a little bit slower, based upon your commentary, but they're running out of time.

[Robert E. Watson:]

They're not going to make it. I mean, the reality is, that when 10/1/2014 arrives, our view is that a significant number of health systems will not be prepared for the conversion. It will -- in our conversations with our sales prospects, we actually have focused a lot on what happens after the 1st of October 2014. So I think, when we think about the sales ramp, I think we'll start to see, as I mentioned earlier, that the processes for decisions around this are almost all now competitive. And the competitive bid process for the health care provider marketplace has run the same way for the last 30 years. It's a relatively long process. And as you note, they're just entering that decision cycle. We think the decision will get made in Qs 3, 4 of this year and Q1 of next year. They'll be some pressure on vendors like ourselves to ramp the -- our implementation teams as fast as possible to accommodate that. But at the end of the day, I think there's going to be a lot of people on that, that are not going to be ready, really, until the first quarter of 2015. That's an interesting market dynamic. It puts -- we see it as one where our opportunity, because of our analytics suite, puts us in the position to help them analyze the impact of that, in those months before they're live. So it's a couple of positives for us. I think the negative is that decision cycles get pushed out a little bit. But -- and if we do perform on the sales side as we expect, there'll be some pressure on our professional services organization to ramp as well.

[Matthew Hewitt:]

Okay. Maybe one more for me, and then I'll jump back in the queue. You mentioned that there had been some disruptions with from -- on the competitive side in the ICD-10, where customers weren't happy with implementations. Maybe describe a little bit what you're hearing from customers as far as what those issues are, and how your Collabra suite is the solution to those issues?

[Robert E. Watson:]

Now here's -- that's a good question. Thanks for asking that, actually. So the fundamental issue that we hear in the marketplace is that most of the competitive products that are available in the marketplace that had, had near-term or early adopters sale success, were solutions that had originally been developed on the professional side of healthcare, meaning, radiology practices, other hospital-based physician practices, as opposed to the core acute-care enterprise. And those involve entities that -- those are built -- our competitors bought those smaller companies. When they took those solutions that were provider-focused and moved them to acute care-focused, the implementation process, everyone thought, would be just as straightforward. It is not. It is incredibly complex. You can't do it, even one facility at a time, which is what people were trying to do; you have to do it department by department by department, inside the hospital, which elongates the installation cycle and creates some frustration among those early adopters. In our world, our solution -- underlying solution, as you know, we get the NoPPs from a third party, was designed and deployed in a provider acute care setting. Their deployment model, which we have adopted as a deployment model that's department by department, and we think that's the right way to go about it. It's costlier, it takes longer, but it gets done right. And the conversations we're having with our prospects in that arena are about, yes, this is a little more costly, yes, it's going to take longer, but it's going to be done right. And that's how we see it playing out.

[Operator:]

[Operator Instructions] And with a follow-up question, we return to Matt Hewitt.

[Matthew Hewitt:]

All right, gentlemen, going to keep going down the list here. Gross margin in the quarter came in versus the past few quarters. I was just curious if there were -- if this was a mixed issue, or if there was something else that we should be aware of?

[Stephen H. Murdock:]

No, I don't think it was a -- it wasn't necessarily a mix issue, Matt. I mean, I think adding this quarter, the Collabra suite had some impact on that. But if you look at the maintenance and support, that overall gross margin was 52%. But if you look at the breakdown of that, our SaaS gross margins, our maintenance and support gross margins continue to increase, and we think that will continue.

[Matthew Hewitt:]

Okay. So we should see that gross margin picking up here in 2013?

[Stephen H. Murdock:]

Yes.

[Matthew Hewitt:]

Okay, perfect. As far as the personnel is concerned, it sounds like you made great strides here this past year. One of the sticking points that you've previously mentioned, Bob, related to the implementation teams. And could you update us on where you stand with that team today, and your anticipation as this year progresses, especially if we do see this [indiscernible] business for the Collabra suite?

[Robert E. Watson:]

Yes, look, it's -- the advantage of being in the Atlanta market is that there is a readily available pool of associates. And by available, meaning, they are generally employed by our competitors, but we think we offer an attractive work environment, an attractive opportunity. And we've been quite successful through Q4, and so far into Q1 of 2013, in terms of our recruiting efforts. If you go back to last year at this time, we were lagging on hiring, if you remember? We called that out in this very same call last year. We are -- currently, I think we're still short a few people, but we're pretty close to full plan in terms of our associate count today. So again, I think it's helped us being in this market, and firmly anchoring ourselves here.

[Matthew Hewitt:]

Okay, good. And I guess one last one for me. Cross-selling, you highlighted as one of your goals for this year. Maybe -- could you provide any details on how you did, maybe in the back half of last year, fourth quarter in particular, the discussions that you've been having, the opportunities there? I think you've previously talked about this becoming a very much bigger component and you even reiterated it here today. But were there any anecdotal stories that you could talk about from the last quarter?

[Robert E. Watson:]

Well I -- the reality is, we acquired the 30-some odd clients, 200-plus facilities from the Meta transaction in the middle of Q3. Q4 was really about introducing ourselves to those clients and getting them in some stage of the sales pipeline. We've continued to invest significantly in our account management team, that's the team that's responsible for the cross-selling. We just added some into that team in the last week. So really, as I mentioned in the call, expect that portion of our revenue to -- or contracts for the year to be greater than 50%. We now have, as a result of some of the cross-sell activities last year, a decent number of our clients that have multiple solutions from us, which helps in the referencing. So somebody who has accessANYware has the OpportunityAnyWare suite, those kinds of opportunities, we did very well with that last year. The other thing worth noting about our sales pipeline is that 30% of our current pipeline is in the coding arena, up from virtually 0 in Q3. So big jump in the coding side, and a significant portion of those opportunities are cross-sell opportunities. So we're very encouraged by the work our team has done in that regard.

[Operator:]

[Operator Instructions] And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Salisbury, I will turn the conference back over to you for any closing remarks.

[Randy Salisbury:]

Thank you, Rufus, and thank you all for your continued interest in and support of Streamline Health Solutions. We look forward to seeing many of you weekend in our first annual Investor Day Conference to be held down in Clear Water Beach, Florida. Should you have any additional questions or need additional information, I can be reached at [e-mail]. In the meantime, we look forward to speaking with you again on our Q1 earnings call this coming June. Thank you, and have a good day.

[Operator:]

And ladies and gentlemen, this will conclude today's conference. Thank you for your participation.