Streamline Health Solutions Inc (STRM) 2009 Q1 法說會逐字稿

Hello, and welcome to the Streamline First Quarter 2009 Financial Results Conference Call. All participants will be in listen-only mode for this event.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Joe Diaz. Mr. Diaz, the floor is yours, sir.

Thank you, and thank all of you for joining us today to review the financial results of Streamline Health Solutions for the first quarter of fiscal year 2009, which ended on April 30, 2009. As the conference call operator indicated, my name is Joe Diaz. I'm with Lytham Partners. We are the financial relations consulting firm for Streamline Health.

With us on the call representing the Company today are Mr. Brian Patsy, President and Chief Executive Officer and Mr. Don Vick, Interim Chief Financial 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 if off the Company's website at streamlinehealth.net or numerous financial sites on the Internet.

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, healthcare regulatory environment, healthcare information systems' budgets, availability of healthcare information systems' trained personnel or implementation of new systems, as well as maintenance of Legacy systems, fluctuation in operating results and other risks are detailed from time to time in Streamline Health Solutions filing with the US 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 Brian Patsy, President and Chief Executive Officer of Streamline Health Solutions. Brian?

Thank you, Joe, and good afternoon, everybody. This afternoon, Don Vick, our Interim Chief Financial Officer, will summarize our financial results. And then after Don's remarks, I'll briefly highlight our first quarter results and then we will open it up for the usual question and answer session.

At this point, I'd like to turn the call over to Don Vick. Don?

Thanks, Brian. I would like to highlight the more significant aspects of the financial results of our first quarter of our fiscal year ended April 30 here in 2009. Revenues for the first quarter of 2009 increased 3% to $3.8 million, compared with $3.6 million in the first quarter in 2008. Net earnings for the quarter were $16,000 or $0.00 per fully diluted share, compared to a net loss of $815,000 or $0.09 per fully diluted share in the first quarter of 2008.

System sales increased 12% to $347,000 in the first quarter of 2009, when compared with the first quarter of 2008. The increase in system sales for the quarter reflects modest increases in direct software license and third-party software license sales.

Services, maintenance, and support revenues for the first quarter totaled $2.7 million, reflecting a 12% increase over the $2.4 million of services, maintenance, and support revenues in the first quarter of 2008. Revenue growth was principally driven by an 11% or $195,000 increase in maintenance revenues, and a 12% or an $89,000 increase in professional services revenues.

This increase in professional services is especially notable, in that we continued to defer revenues associated with one large application hosting services client where revenues, including professional services for that customer, are deferred until customer acceptance, which is expected in the second and third quarters of 2009.

Application Hosting Services revenues declined by approximately $204,000 or 23% in the first quarter of fiscal 2009, primarily due to the previously announced loss of a large customer in July of 2008. New Application Hosting contracts signed throughout 2008 will generate incremental revenues in the coming quarters. When the new Application Hosting Services are totally implemented, these new customers are expected to generate revenues to approximate 85% of the revenues attributed to the loss of this large customer. Development of new application hosting customers going forward will drive future growth.

Total operating expenses declined by more than $700,000 to $3.7 million for the first quarter of 2009, from the $4.4 million for the comparable period in 2008. This was primarily a result of Company-wide cost reductions initiated in the third quarter of 2008. During the just completed quarter, selling, general, and administrative expenses decreased by $384,000 and product research and development expenses decreased by $373,000

As detailed in our conference calls last year, the Company has experienced a shift away from its traditional purchase model of software sales, towards a large increase in demand for our software as a service offering. Near the end of the third quarter, the Company reduced company-wide headcount to reduce expenses and cash flow needs to offset some of the effects of the slower revenue ramp-up and the upfront cash needs of the SasS model. These actions were the primary driver to cause expenses in the first quarter to drop by over $700,000 when compared against the first quarter of fiscal 2008.

While our expenses have been reduced due to the cost-cutting measures noted above, we continue to make significant investments in development, primarily on the activities relating to the re-architecture, enhancement, and internationalization of our products, to fuel the continued growth expected in Canada and our other international markets through our partners TELUS Health and GE Healthcare.

These product improvements should continue to drive growth in our US markets, as well. As such, it is worth pointing out that we capitalized approximately $949,000 of software development costs in the first quarter of 2009, versus $900,000 in the comparable period of 2008. These development costs are in addition to those reported in the income statement.

As a result of the items noted above, our operating improvement for the first quarter of 2009 was $28,000, compared with an operating loss of $813,000 in the first quarter of 2008. This reflects the significant improvement in operating income of $841,000 over the comparable period last year. Total backlog at the end of the quarter is $24.3 million, representing an increase of 59% over the comparable backlog of a year ago.

Growth in the backlog was primarily driven by a large increase in SasS-based hosting services contracts won throughout 2008. Backlog declined by about 7% since the end of January, reflective of the Company recognizing revenues from sales made in 2008, and the suspension of one small hosting client during the quarter due to economic factors. The $1 million plus increase in Streamline Health Software Licenses Backlog in the current quarter is the result of the recently announced Canadian contract.

Our cash at April 30, 2009 was approximately $1.1 million, with $800,000 still drawn under the line of credit. Our cash cycles are still very much dependent upon our seasonal patterns of prepaid annual maintenance billings to our clients. While there were not many such billings to collect in the first quarter, we expect to collect nearly $2.7 million of such billings in the second quarter. We continue to monitor our expenses, cash balances, and receivables carefully to ensure they are on plan.

That concludes my review of the numbers for the quarter. Let me now turn the call back to Brian Patsy. Brian?

Thank you, Don. My comments today will be very brief to allow more time for the question and answer session. I'll focus my remarks on two important areas; one, our progress in transforming our business from the traditional licensing model that resulted in large swings in our revenue and earnings performance to a SasS-based model that will drive predictable and sustained revenue and earnings growth; and two, additional details on our recent new contract in Canada through our partnership with TELUS Health. After my remarks, we will conduct our question and answer session.

Regarding our progress in transforming our business to a SasS-based model, we have made significant inroads over the past few quarters. As we have discussed on numerous occasions, we have experienced a fundamental shift in the market demand that prompted us to change the focus of our business model to providing software as a service via our Hosting Center.

The challenge in managing such a shift was realigning our operating plans to better match our cash flows to the elongated revenue streams associated with the SasS-based subscription services, and the upfront capital requirements to set up hosting center infrastructure for each new SaaS customer.

In spite of these challenges, the opportunities in focusing on the SaaS delivery model are numerous. One, our revenues are much more predictable, and therefore our business is much better poised for sustained revenue and earnings growth. Two, SasS-based solutions are a much better fit in today's healthcare economy, where capital dollars and customer resources are extremely scarce, to implement the traditional purchase solution.

And three, our SasS-based solutions provide us with a significant competitive advantage in the marketplace because there are few competitors with comparable offerings, we already have an impressive installed base of SasS-based customers, we have a wealth of experience since our first customer went online in 1998, and finally, we boast an unparalleled level of service in excess of 99.9% uptime since 1998.

As you may know, our business has traditionally been cyclical, with our first quarter being our most challenging and our last quarter the most rewarding. However, as a result of our focus on SasS-based market opportunities over the last year, we have made meaningful progress in achieving our strategic goal of becoming consistently profitable.

For example, in last quarter's earnings remarks, I indicated that our goal by early 2010 was to expand our SasS-based customer base to the point that our recurring revenues and predictable Professional Services revenues would cover our fixed operating costs and costs of goods, exclusive of variable third-party component costs, such that any revenue from new customer contracts would drop to the bottom line.

Because of the operating efficiencies we implemented last year and the surge in SasS-based contracts over that period, we are well ahead of schedule in achieving our goal; that is why I'm very much encouraged by our Q1 results. In spite of the fact that we signed a significant new customer in Canada, of which the revenue is not expected to be recognized until our fourth quarter, we were still able to achieve a small profit in our most challenging quarter of the year.

At this point, I'd like to comment on our recent new contract in Canada through our relationship with TELUS Health. As we announced last week, we secured a new contract in excess of $1 million for our Document Workflow Solutions to be integrated into the electronic medical records solution for multiple facilities within another leading Canadian healthcare region. This is the second Canadian contract won within the past year.

Together, these two contracts, which are licensed transactions as opposed to SasS-based contracts, cover 18 total healthcare facilities across a broad Canadian region. As a result of these two contracts, pending the general availability status of our next-generation multi-lingual product release, we expect to recognize approximately $1.6 million in Streamline Health's Software Licensing revenues plus additional implementation services in our fourth fiscal quarter.

Additionally, we expect future associated revenues and/or backlog to increase several million dollars, as a result of anticipated installation and maintenance service fees over the term of the agreement.

Let me conclude my remarks by reiterating that in spite of our first quarter traditionally being our most challenging quarter, we are pleased with our results. We are ahead of our 2009 business plan in revenue, and well ahead in profitability thanks to the efficiencies we implemented the second half of last year, and the SasS-based contracts secured last year that we are now implementing.

We provided annual guidance last quarter as we moved into our new fiscal year. And because of the improved predictability of our many SasS-based contracts, Q1 unfolded as expected or better. And finally, with the expectation of approximately $2 million in recognizable revenue from the two large Canadian contracts in our fourth quarter, contingent on general availability of our multi-lingual release, we anticipate revenue in the $17 million to $18 million range for the year and a return to profitability. This concludes my formal remarks.

I would like to turn the call over to Joe for the question and answer session. Don Vick will also be available for this quarter's discussion.

Thanks, Brian. And with that, I'd like to turn the call over to the conference call operator to provide instructions for queuing up for Q&A.

Yes, sir. We will now begin the question and answer session.

(Operator Instructions)

Your first question comes from Tom Carpenter with Hilliard Lyons.

Hi. Good afternoon, Brian, and Don.

Hello there.

Hello there.

Can you give us an idea of what the spending environment is like in the hospital industry on both large hospitals and smaller facilities? I think you -- when you spoke last time, you talked about possible budget freezes and we've seen that echoed across other providers.

Tom, this is Brian. There is no question that the financial situation tightened considerably starting in the Fall of last year with the economic troubles that the country had. We felt that starting in the Fall time frame, as I said, specifically there were two deals that we had queued up that literally got pushed out until this year because of lack of capital. Both of those deals were, at the time, purchase deals and we've re-engaged with one of them to flip it over to the SasS-based model, and we're still in discussions with them.

In addition to that, one of our existing customers where we have a blanket contract for many facilities had a capital freeze. And that capital freeze obviously didn't affect our SasS-based subscription model, but it did affect us in that they were not able to buy the hardware, the locally installed hardware such as scanners, to move forward. So one of those deals was basically put on hold.

And we're now seeing, Scott Boyden, our Senior VP of Sales and Marketing, has told me that really a broad brush across the entire market, capital dollars are scarce or nonexistent and that everyone is looking for alternative ways to implement technology. And the subscription model is going to the head of the class in terms of our focus. So it's a case of good timing on our part that we've remodeled our whole business model towards a SaaS solution. And I think that bodes well for us going forward but, needless to say, it's still a difficult market.

Sure. With the stimulus plan and the funding becoming available for reimbursement of hospitals to implement an electronic medical record that facilitates an electronic health record, are you seeing greater interest in the product? Or, you think that really starts happening later this year and early '10?

Well, it's a mixed bag, Tom. We -- it's interesting in terms of our installed base, I'm out along with Scott and his sales team. And, it really depends on the institution. Some of them are actually starting their budget cycles now in anticipation of receiving some stimulus dollars to implement or fully implement an electronic medical records solution because of the timing of having to get that installed by a specific date or the money goes away.

Others are waiting and staying on the sidelines; waiting to see further clarity in terms of how do they qualify for the money. So some are moving faster; some are slowing down. But clearly, I think by the end of this year as there is more clarity and visibility in terms of how to get a hold of those stimulus dollars, I think things will begin to accelerate.

All right. That sounds good. Don, when you were speaking -- you mentioned something about 2Q '09 and more cash coming in. I missed that. I think the phone faded in and out.

This goes back to what I was alluding to on our last conference call that one big impact on our cash flow has to do with the timing of our customer annual maintenance contract renewals. And typically, what we see there is obviously fourth quarter we have a huge influx of those. So, we have some real big collections in the fourth quarter.

First quarter tends to be weaker on a pattern perspective and then in second quarter is where it picks back up again. And that's what we're seeing here in the second quarter. We have in excess of $2 million of those renewals coming in here in the second quarter.

That will be a nice shot in the arm.

Yes. Definitely.

Two final questions, and then I'll jump back into queue. Brian, how many new wins did you have in the first quarter?

Well, one large transaction, some smaller ones that aren't worth discussing in this earnings call -- but one significant transaction that involved numerous hospitals in Canada.

Okay. I saw that release. And then, I'm slightly confused on the -- I'm sorry, the gross margin for the ASP product during the quarter. I thought it might have picked back up after the first quarter since your revenue also moved up. Maybe you had a lot of installations in the quarter, and that weighed it down.

Yes What you're seeing there is we've got some increases in depreciation and all, just as we've built up the data center due to the increased customer load. We also had a one-time charge, I think it was around $65,000 or so, just for some licenses that we've purchased that will not really be fully deployed. So, there's a one-time expense there of $65,000 for that. But, in general, what you're seeing there is just some of the build-up, primarily due to depreciation relating to the increased investment in the data center.

Okay. Is it fair to see that we'll see sequential increases the rest of the year?

You will, other than that one-time charge will certainly not reappear.

Right.

And the depreciation will continue to grow over time. It may not be quite as spiky as it was here this quarter. Then obviously, from a margin perspective, we're still feeling that effect of the loss of our customer from last year.

Okay. Very good. Thanks, guys.

(Operator Instructions)

Our next question comes from Bill Bunn with Fort Washington Investment Advisors.

Good afternoon.

Good afternoon, Bill.

Hi, Bill.

I've got two general categories of questions, so I'll start with the boring one first and it has to do with cash and cash flow, and how it flows through your financial statements. Cash flow is down $2 million -- and I appreciate that you're on that schedule, and you'll get a big slug-in this quarter. But cash was down $2 million, and it looked like it was flowing through various deferred revenue accounts.

Yes. That is correct.

Could you briefly explain to me how that works, and what we're seeing when we see it flow through like that?

Sure. Absolutely. It comes right back to what I was just mentioning about the pre-paid maintenance contracts, the annual contracts. And what happens there is when we have these large contracts where a customer will pay for a year in advance, when they pay for that year in advance obviously we get the cash so the cash will come and obviously show up as cash on the balance sheet.

But likewise, what will happen at that time is there's an increase in deferred revenue because we've set up deferred revenue. Then what happens is over the life of that contract, which in this case were annual maintenance contracts, so over that 12-month period that deferred revenue is amortized into revenue and then that's where it will decline.

So, what you saw here in the first quarter is you see there's some of that decline is just the fact that we didn't have a lot of new deferred revenue coming on, but you have amortization of what was pre-paid in the fourth quarter.

So in the second quarter, you'll get cash and then that deferred revenue line should --

Should go back up.

Go back up. All right.

That's correct.

And this is Brian. Our two quarters where that is bursty is Q2 and Q4.

All right. Thanks. Second category has to do with implementation. You've got the Catholic Healthcare West, which was a total of 41 facilities. You were working on three. Are those implementations for those three on schedule at this point?

Two of the three are done. One of the three was deferred due to economic conditions.

And done means that you --

I'm sorry. It was suspended. Not deferred.

Okay. Two of the three are done. One was suspended? Is that because of the economy, or was that -- ?

Yes. The capital freeze -- we hadn't started that one. The capital freeze got them.

Okay. Now, done means that you've received revenue at this point and cash flow, or is that still coming?

No. It looks like the timing is going to be interesting because it's right at around a quarter break. So, we need to see when some of the specific milestones are met.

Okay.

But basically, we've got some acceptance criteria on that contract, and we've deferred the revenue on it until the acceptance criteria is met. And once the acceptance criteria is met, then we'll be able to recognize the revenue. So the revenue that we're talking about is not just the hosting revenue, but also even Professional Services.

So you haven't seen that in our --

So you haven't seen it as of Q1.

No. I haven't seen it recognized, but you've actually received cash?

We've received -- yes. We've received cash on several of the billings, such as the Professional Services and some of the billings for the Hosting Services.

Now that you've got two out of the three complete, are you anticipating that you'll be getting into conversations with the other 38 or so?

First of all, let me -- if you go back to prior earnings call, I want to clarify that we didn't sign a blanket contract for all 41 facilities. There was a number of facilities, but it wasn't 41. There were certain criteria that had to be met for us to implement our solution in certain environments. So, it was a number lower than 41. So please understand that.

Secondly, there is still a capital freeze there. And so, the fortunate thing for us was the first two were far enough along that the equipment had already been ordered. So, we're waiting for that capital freeze to be released before we can negotiate further locations, and there should be more. But that probably won't happen until the second half of the year.

All right. And then as far as the TELUS-related contracts in Quebec, how is that implementation moving at this point -- the multi-lingual product? Are you on schedule there?

We are on schedule. And we are scheduled for delivery of the new code on July 31.

The reason I ask is that you've done a lot of expense control, and there's less money being spent on things like R&D and such. And I'm never really sure if you've cut too much with this heavy implementation schedule or whether you're going to be able to do it despite that.

That's a great question, Bill. And let me say this is that, first of all, Gary Winzenread, the Senior VP of Development, has done a remarkable job in helping Streamline Health become more efficient. And his motto is, do more with less and he has backed it up in reality. And what he has done is he has taken our architecture, and he has designed it from the ground up. And what he's done is building sub-components that are reusable.

And so, his whole mission and whole philosophy was a much higher percentage of re-use of code. And that was a problem for us, candidly, prior to his arrival. So as he gets into this project deeper and deeper beyond the 50% completion, the economies that he gains are phenomenal. So the closer we get to completion, the more efficient we get, the more code we reuse, and so he literally is doing more with less. And the proof of that is we're on schedule.

All right. Thanks. I'm done.

(Operator Instructions)

And our next question comes from [Mark Cahill].

Good afternoon, gentlemen. Just one quick question regarding the multi-language facility. Spanish language, I would imagine that would be attractive to the Catholic Healthcare West, given its large California base.

This is Brian, Mark, and hello there.

Hi.

Yes. It should be attractive, not only to Catholic Healthcare West, but to any institution that has a multi-language environment. And, interestingly enough, Spanish is clearly a need in the South along the border states, but there are other languages that I think could be of advantage. We've heard of some interesting -- Vietnamese, for example. Our first delivery will be French Canadian.

And keep in mind, although our new architecture supports multi-language, there still is the need for the language conversion itself. But we're very excited, Scott Boyden in particular, of marketing the advantages of clicking a button and converting on the fly to any language that the user would like to see. And, it obviously opens up whole new marketing opportunities for us through our business partners GE Healthcare and TELUS Health internationally.

How quickly would it take to convert your (inaudible) to the Spanish language?

Well, there are companies out there that do the heavy lifting in terms of the actual raw conversion, and it's not that expensive. And, frankly, I don't know the time frame, but it's not unreasonable. I'm thinking a couple of months to do this and that includes the translation of all the documentation, as well.

Right. Last question is regarding the application hosting revenue line. I saw that it did go up almost about $100,000 from last quarter.

Which one was that, Mark?

The ASP line.

Oh. Yes.

Is that -- I'm assuming that you're going to get Cincinnati Catholic Healthcare and what other ASP deals online. Is that revenue line item going to advance quicker than you thought?

I don't know that it's going to advance any quicker than we thought. As we've said in the press release and all, based on our estimates at this point in time the new contracts that we signed last year look to approximate about 85% of what we lost from the loss of the big client that we had last July. And that pattern -- that still seems to be holding. It was just that ramp-up during the year until we get to, say, fourth quarter, which is where we're saying that we should achieve that approximate 85% number.

And, Mark, this is Brian. It isn't necessarily quicker; it's just more determinable. And the beauty of that, as you obviously know, is that we can very accurately predict our revenue streams for the next 12 months based on these implementation cycles, with the one caveat is if the customer delays the implementation cycle due to economic reasons or lack of resources on their side, that would slip the revenue. But these are fixed contracts, they are uncancellable in that regard once they start, and it's a beautiful thing. We sleep a lot better at night with those kinds of contracts in place.

Right.

As opposed to the purchase model, where you have a sales cycle of six to nine months, sometimes a year to 18 months and at the end, you have the risk of losing to someone else.

Right. One last question. Generally, do you think you'll have your operating expenses under $4 million throughout the year?

Under $4 million per quarter?

Right.

Well, first of all, you can see that we lowered our operating expense by $700,000. We do have plans for some modest increases in personnel over the remainder of the year. We're being very diligent on those. So, operating expense will go up as we add a small contingent of new resources, primarily to help us implement.

And so, that $700,000 could decrease -- per quarter, decrease could wane a little bit as we add resources. My guidance at the beginning of the year was about a 5% increase in operating expenses over the year -- to give you some color commentary.

Right. Okay.

And this is Don. One other thing to keep in mind there, if you're looking at the operating expense line, that includes some costs of sale. So you have to watch that because say some quarter we do have a big purchase deal that has a bunch of hardware or third-party software, that kind of thing, the operating expense could go up incrementally for that cost of sale item. So you've got to be careful if you just hone in only on the operating expense line. You may want to look at the individual lines that make that up to have a more meaningful understanding.

Understood. Thank you. That's it for me. Thank you.

We show no further questions at this time. I would like to turn the conference back over to Mr. Brian Patsy for any closing remarks.

Once again, I wanted to thank everyone for your participation in this quarter's conference call. And we look forward to having you join us again next quarter.

And thank you, sir. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.