Streamline Health Solutions Inc (STRM) 2013 Q3 法說會逐字稿

Good day everyone. Welcome to the Streamline Health third-quarter earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Randy Salisbury, communications and investor relations. Please go ahead, sir.

Thank you for joining us to review the financial results of Streamline Health Solutions for the third quarter of fiscal year 2013, which ended October 31, 2013. 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 Bob Watson, President and Chief Executive Officer, and Nick Meeks, Senior Vice President and Chief Financial Officer. At the conclusion of today's prepared remarks 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 press release you can retrieve it from the Company's website at StreamlineHealth.net or at 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 within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those reflected in the forward-looking statements included herein. Please refer to the Company's recent press releases and filings with the US Securities and Exchange Commission including our most recent Form 10-K and 10-Q reports for more information about these risks, uncertainties, assumptions, and other factors.

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 revise these forward-looking statements.

On this call the Company will discuss non-GAAP financial measures such as adjusted EBITDA. Please refer to our earnings release for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. These non-GAAP measures not include any items of income and expense that affect operations and other companies may calculate these non-GAAP measures differently.

With that said, let me turn the call over to Bob Watson, President and Chief Executive Officer. Bob?

Thank you, Randy. Good morning to all of you participating on today's call. Thank you for your time today and for your continued interest in and support of our Company.

As stated in our press release on November 14, 2013 in which we provided our preliminary Q3 financial results, we continue to build our SaaS and recurring maintenance and support revenue streams. During the quarter our sales organization was successful in its effort to shift a large license transaction in its quarterly forecast to a SaaS delivery model sales opportunity. We expect that contract to close in the current quarter.

As a Company we continue to embrace and emphasize with our clients and net new sales prospects the benefits of acquiring our solutions by way of our SaaS delivery model. That said, with the movement of a sizable perpetual license sale to SaaS revenue for the quarter was $6.7 million.

Our bookings in the third quarter were up 23% sequentially, which continues to be a positive trend for our business. Bookings plus renewals in the third quarter were approximately $10 million. Our indirect sales channel strategy paid a dividend in the quarter as we gained a significant contract from a client of one of our distribution partners.

We also closed a significant multiyear maintenance and support renewal in the quarter with a large multi-facility client. We think this is particularly worth noting given that the client conducted a complete review of all of their technology providers, and chose to keep only a few of their existing partners, of which we were one.

More on the specifics of our quarterly performance in a minute, but as I have done in these quarterly calls during 2013, I would like to take some time to review another of our key strategic objectives from our five-year plan. You may recall that in the beginning of the fiscal year we completed a five-year strategic plan detailing our key areas of strategic focus and that we would discuss our strategic initiatives as appropriate throughout the year.

The first one of these strategic areas of focus was solutions optimization, which we worked quickly to bring to market in Q1 with internal resources. This solution provides enhanced post-implementation support to ensure that our analytics clients maximize their return on investment. Since initializing this endeavor we have had six clients sign up for the solution.

Last quarter I reviewed our second strategic objective, and that was our intention to develop and deliver a solution in the area of clinical analytics in Q1 2014. Since we last spoke, we have made major progress toward this strategic objectives as evidenced by our announcements in late October of an exclusive 15-year licensing agreement with Montefiore Medical Center, Bronx, New York to commercialize their clinical analytics platform that has been successfully in use at Montefiore since 2002.

We think this asset is a critical component of our analytics and population health management strategy and will materially accelerate the development of our entire analytics solution suite.

During the quarter we also successfully began managing a multiyear contract with the Bronx RHIO, a health information exchange. Our clinical analytics platform has been deployed as a core platform of the RHIO, and enables providers throughout the Bronx to access critical patient information across multiple healthcare providers as part of a strategy to deliver high-quality medical care to all of the residents of the Bronx.

The platform allows healthcare providers to assemble all of the clinical data available from the multiple care delivery points in the Bronx including lab results, ambulatory encounters, and prior acute care visits. This deep, rich clinical information assists caregivers by allowing them to draw actionable conclusions on demand. This real-time access to the clinical history across multiple care settings is designed to improve patient care, safety, and clinical outcomes.

With the clinical analytics platform in our portfolio, we believe we are well-positioned to commercially deliver a market-changing clinical analytics solution in the first quarter of next year as we discussed last quarter.

The third objective from our five-year plan is to provide our clients and sales prospects with patient access solutions. The definition of patient accent access solution is by design fairly broad, but includes scheduling, insurance verification, and propensity to pay as possible components of this offering.

Based on our belief that payment models are changing and that there will be increased economic pressure on the consumer as part of this change, and that healthcare providers will enter into risk-based or outcome-based payment contracts with insurers, we believe it will be more important for healthcare providers to be able to access and utilize any information available about a patient at the access point in their health system. This access point could be a scheduling event or simply a registration or ignition event. The information gathered as a patient initializes engagement with a health system is a critical step in the process of triggering our entire analytics platform, both clinical and financial.

As payment models change, our clients and prospects are joining or developing accountable care organizations where they assume some degree of economic risk and have to clinically manage a population of patients. We believe being able to offer a solution at the point where a patient first engages with the healthcare provider, regardless of the care setting, is critical to delivering those healthcare providers prospective clinical and financial intelligence about that patient.

In essence, a patient access solution would trigger our clinical analytics and population management capabilities to deliver actionable knowledge and predictive analytics to care providers prior to the clinical encounter. A solution like this could drive a healthcare provider's ability to manage the patient in a care pathway and may lead to better quality outcomes, lower readmission rates, and improvement in the provider's overall clinical and operational efficiency -- all of which impacts their operating margins.

We plan to go to market with this third objective in fiscal year 2014 because we believe that the marriage of improved clinical outcomes with financial margin management is important to our clients and prospects in this environment of changing reimbursement models.

Before returning to this quarter's financial results, I want to take this time to thank those of you are participated in our recent public offering. As you know we completed a follow-on public offering of 3.45 million shares of our common stock priced at $6.50 that generated net proceeds to the Company of $20,750,000. I'm pleased to report that the offering was oversubscribed and that many of our current institutional shareholders took part in the secondary offering. Your continuing continued support is greatly appreciated and does not go unnoticed by the Company.

Returning to this quarter's financial results, I want to remind everyone that the projected at the beginning of the year that our coding solutions, or Collabra sales, would occur more in the second half of the year, which we are seeing, and that they would be weighted to a perpetual license model rather than our SaaS-based model. This has largely been the case.

For example, as you know, there was a multimillion dollar Collabra perpetual license contract in late Q2 this fiscal year. However, as we moved sales prospects through the sales pipeline in the last three months, our teams have been very successful in converting potential perpetual license opportunities to the SaaS delivery model opportunities. This is clearly the desired outcome as we are committed to building this company for the long run.

It is also a better delivery model for our clients in a time when capital access continues to be more constrained for them. That change in revenue mix, however, has affected our topline revenue forecast for the balance of fiscal year 2013 and 2014 as well.

Therefore, last month we provided updated financial guidance for fiscal year 2013 revenue in the range of $29 million to $31 million. And we offered our first look at projected revenue for fiscal 2014 in the range of $35 million to $37 million based on an organic growth rate of 20%. This fiscal year 2015 projection does not reflect any potential revenue from inorganic growth options.

As we heard earlier, revenue for the quarter was $6.7 million. Approximately 80% of that revenue is recurring, of which 34% is SaaS revenue. New contract bookings were $6.5 million in the quarter, a 125% increase as compared to Q3 of fiscal year 2012. Further, those new contract bookings were an increase of 23% over Q2 of this year. We continue to invest in our sales organization and as we move into fiscal year 2014, we expect the sales organization to grow by approximately 20%.

Our backlog at quarter end was $55 million, up from $48.7 million in Q3 last year and up from $51.9 million in the previous quarter. This is a 13% increase over the prior year and a 6% increase over Q2 of this year.

Finally, as we did last quarter, I want to remind everyone that most of our implementation timing is driven by our clients. And given the many demands their IT departments are facing, we are rarely able to move as quickly as we wish we could. We continue to see this resource issue among our clients and it continues to have a negative impact on our revenue recognition.

I mentioned last quarter that we were understaffed in our implementation department but that is no longer the case. We have hired new associates and are now at full headcount.

It also bears noting that for Q3, and likely continuing through Q1 of 2014, we will see some negative margin impact on our maintenance and support line as we provide our clients with in-version upgrades to comply with the forthcoming ICD-10 change. These in-version upgrades are included in our support agreements and therefore are not billable.

This primarily impacts our AccessAnyWare and Collabra clients and will, over time, reduce our own direct cost of support as clients are standardized on the same version. This is a key component of our strategy to seek margin improvement as we scale this enterprise.

I will now turn the call over to Nick Meeks, our CFO, to review more of the specifics of the third quarter with you. Nick?

Thank you, Bob, and good afternoon everyone. I would like to review some factors underlying the financial results for the quarter ending October 31, 2013.

Adjusted EBITDA for the quarter was $0.6 million compared with $1.6 million in the same quarter of last fiscal year. Let me start by noting that during this period last year we experienced a trough in hiring and a peak in vacancy which had a positive effect on our adjusted EBITDA for that quarter.

So, turning to operating expenses for this third quarter, three items deserve special mention. First, we began recording consulting expenses related to our SOx compliance effort. Second, we made substantive investments in our quota-carrying salesforce. And, third, we closed the gap in the implementation associate hiring, a shortfall that Bob mentioned in last quarter's conference call.

Moving now to nonoperating expenses, let me speak to two items that contributed significantly to our net loss in the quarter. Similar to our most recent quarters, we incurred a charge of approximately $400,000 to mark to market the outstanding warrant liability on our balance sheet. And as stated in our press release on November 14, we completed the final earn-out settlement with Interpoint Partners, an acquisition we made in December of 2011.

The settlement expense of $4.1 million was comprised of three parts: a $1.3 million cash payment, a $900,000 note maturing over three years, and 400,000 common shares of Streamline stock which had a $2 per share nominal value as defined in the original purchase agreement, but which accounting standards dictated that we mark to market at the end of this quarter. We will certainly subsequently mark those shares to market in January when they are issued, and that will be the final accounting event for this earnout.

Finally, I want to comment on our cash balance. We ended the quarter with $4.3 million of cash on the balance sheet. This number is net of a $3 million payment related to clinical analytics software transaction with Montefiore Medical Center that was announced during Q3. Absent that investment our cash balance would have been $7.3 million, up $1.9 million in the third quarter.

As I mentioned in our first-quarter earnings call when I had just taken the CFO role, our Company would improve his cash balance every quarter for the remainder of fiscal year 2013. I'm pleased to report that we are just doing just that.

As Bob already mentioned, after the quarter closed we conducted a successful follow-on offering, completed on November 22, generating net proceeds to the Company of $20,750,000 in cash. Clearly these numbers do not include those cash proceeds.

That concludes my remarks about the third quarter of this fiscal year. I will now turn the call back over to Bob Watson, our CEO. Bob?

Thanks, Nick. As we have noted today and in prior calls, we will continue to focus on the long-term strength and stability of our revenue stream by driving, whenever possible, our sales contracts to the SaaS model. And when renewing our maintenance and support agreements with perpetual license clients, to make those agreements long-term as well.

We will continue to seek incremental revenue and bookings from cross-selling our solutions into our existing clients. In fact, subsequent to the end of Q3 we cross-sold our analytics solution to a longtime client of our enterprise content management solution, or AccessAnyWare.

Cross-selling will continue to be an important part of our growth and momentum, especially as we add new clients via acquisition. Our cross-sell teams have done well. However, we believe the runway for growth from this avenue remains significant.

In terms of our net new clients our analytics solution suite is driving the opportunity for growth. We materially expanded that solution during the quarter with the addition of the clinical analytics solution discussed earlier. Overall our analytics suite continues to gain demonstrable traction with sales prospects that are seeking to improve their decision-making based on the actionable knowledge we can deliver them by mining their financial, and now, their clinical data.

As I said before we believe that healthcare organizations seek actionable knowledge, not just information. Our solutions give them the actionable knowledge to enable them to perform better, both clinically and financially.

In closing, I want to thank our entire team of associates for their hard work, results, and support of management's strategic plan. We have seen our teams grow and mature during this fiscal year. The knowledge that we have learned this year positions us well as we move into 2014.

As I've said before, this is not a sprint. This is a marathon and we are still in the first 10 km of the race. I will now turn the call over to the operator for our question-and-answer session. Operator?

(Operator Instructions) Matt Hewitt, Craig-Hallum Capital Group.

Good afternoon, gentlemen. Thank you for taking our questions. First one for me, the deal that would you were able to convert at the end of the third quarter from perpetual license to SaaS, could you give us a little bit of color as far as who that customer is? I don't know if you are willing to give us the size of that opportunity. Any details, I guess, would be helpful.

I will give you what I can give you, obviously. The client or potential client is a nontraditional buyer, which frankly in my own view is probably a reason we had the late in the game shift from perpetual license to SaaS.

The other part of that transaction, when it switches like that in the last three or four days of the quarter, it takes a while to redo the legal work. We are negotiating that agreement now. We are in several turns of it. As I said earlier in the prepared remarks, we expect that agreement to close this quarter.

Okay. Great. Thank you. The clinical analytics licensing agreement that you guys said eventually would become an acquisition, but the licensing agreement; how quickly do you think that you can get that integrated with the rest of your analytics platform? What kind of demand are you anticipating for that offering?

So our plan is to analyze our market planning in January, train our sales organization in January, and start to move forward with sales on that solution in the third quarter of fiscal 2014. That said, there is -- as you know, you follow the market -- so there is tremendous activity around alternative care organizations, risk-based payment contracts, need to drive clinical information to the front end of the care process. We think that it should be a pretty significant, as I said, in the call for us; I think a market-changing thing for us as we go into 2014.

Okay. Maybe a couple more from me and then I will hop back into queue. Could you provide a little bit of an update on the Collabra suite? Obviously it's been a hot topic this year.

We know it's going live October 1. We know that hospitals are behind the curve as far as getting some systems implemented and ready to go. But as you talk to customers, what are you hearing from then as far as their desire to get that implemented as quickly as possible?

And as it relates to you, obviously you've got people implementation team, it sounds like now. How quickly can you flip the switch and get them the systems they need?

You know, it's interesting. I think I said this on part of the calls and I think it's worth noting. First, I think if an organization hasn't started deployment of computer-assisted coding by now, it's unlikely that the computer-assisted coding component would be online by 10/1/2014.

That said, we publicly announced a month or two ago a concurrent dual coding solution which essentially allows the case, the coding [in nine], the codes for 10 are suggested to the coder and then the coder has to make the decision as opposed to the computer making the decision. We think those types of offerings that are essentially bridges to solve the problem are critical, given the fact that decision-making by many of the hospitals has been delayed for any number of reasons -- internal resource constraints, acknowledgement that they didn't have the resources to take on the challenge of something like that.

From our standpoint we think that the market for the Collabra suite is -- this is not a Y2K problem. I mean, this is an opportunity where the potential growth for us plays out well into 2015 as well, because people are just not going to be ready.

Okay. One more for me and then I will hop back in the queue. You mentioned some nice additions to sales headcount and implementation headcount. Where does your sales team stand today? Obviously it sounds like you are going to add 20% to that next year, but where does it stand today?

I think we are approaching what I would consider to be our full pool in terms of sales. We actually just hired someone else today. So that team continues to mature.

We have been pretty pleased with our ability during the last quarter to fill in for the two planned and -- the two departures that we talked about in the last call. One was planned and one was unplanned. We continue to be able to attract, we think, a sales team that comes with a positive track record and a level of maturity that differentiates us from our competitors. We are pretty pleased where we are at in that process.

Where are you sitting today, number wise?

You know, we are somewhere between 12 and 14. It moves around a little bit just because of puts and takes. But the entire sales and marketing organization itself is 16 -- we were talking about quota-carrying in the earlier number. But we are at about 16 people and the sales and marketing organization today.

Okay. Great. Thank you. I will hop back in the queue.

Frank Sparacino, First Analysis.

Hi guys. I just wanted to start with ICD-10, in terms of the earlier comment about the negative impact of maintenance and the support side of things and just wondered if you could elaborate a little bit more in terms of what's required in your side, above, obviously, upgrading the systems for ICD-10. Does that suggest that you have additional staff? What investment do you need to make in order to get your clients up?

So, we've made those investments during the quarter, and I think in terms of headcount investment. So anyone who is a client of our -- any of our core solutions inside the Collabra suite and certain of our AccessAny clients where we provide them coding workflows, those mainly -- port agreements require that we upgrade them to be compatible with ICD-10. Not computer-assisted coding, not concurrent dual coding but their current version of software is compatible with the ICD-10 code.

So there is some level of work -- we probably have at least a dozen or so of those projects in process at the moment and that will continue. That number ofprojects will increase through at least the first quarters of 2015, which creates a little bit of a margin drag as I said in the prepared remarks, on our maintenance and support line.

That said, at the end of that process we should have some consistency in terms of version control. Everybody will be on the same platform, so that we should then easily be turned back to our traditional margins in that area. That's a near-term, three quarter kind of impact.

And can you quantify at all, Bob, I mean is it 100 basis points? What is the extent of the impact?

You know, it's -- let me think about this; so if our margins in that business are -- we are probably talking about probably 100 basis points kind of number. I think you are probably in the ballpark. (multiple speakers)

What I was going to say was that I will try to give you a little more clarity when we do the Q4 call a couple months from now. I don't think it's going to be any worse than 100 basis points impact.

Fair enough. And then lastly, I just wanted to kind of dig in. If we look at -- obviously bookings this year from a SaaS perspective are going to be down significantly from the prior year, which was very strong. But other than that I'm just trying to figure out exactly what's happened on the OpportunityAnyWare side of things this year versus last year as to why we have seen the momentum slow in that business.

I think there has been some momentum slowness, but again, I don't think it's driven by anything other than decision cycle lengthening for our clients. This is a very big, difficult time for health systems, Frank. I mean, they are faced with trying to decide what to do about ICD-10.

We got a little bit of good news around the pushing out of meaningful use Phase II and III. I think what we've seen is that the opportunities in the pipeline continue to -- analytics continues to represent more than 50% of the pipeline. It continues to grow as the pipeline grows. I think the decision cycles of gotten a little longer.

And I don't think that's reflective of anything other than the fact that the amount of noise and pressure that CFOs are under today -- it's a really difficult time to be a hospital CFO. The road they're facing in front of them is quite complicated, and so any slowdown in that particular solution is primarily reflective, I think, of that pressure.

The other thing we've seen, too, is that in 2012 the average terms were 60 months. We've seen a shortening of terms just because of competitive pressures from our competitors, meaning that our competitors are offering shorter-term arrangements. We are pretty much stuck on the five-year term; we've backed up to the four-year terms this year, which has had an impact on bookings.

Okay. Great. Thank you.

Matt Hewitt, Craig-Hallum Capital Group.

Just a follow-up on the acquisitions. You had previously discussed in your press release, you've got one that you were expecting to close this quarter. Have you been able to garner any additional details for us on the second one?

I think that one was a little bit more vague. Just trying to understand the opportunity there; when do you think that may close? Is that potentially a Q4 event or do you think that may be more likely Q1?

I think it's more likely a Q1 event. The challenge on that particular acquisition and the reason we provided less information is we are still awaiting audited financial statements. The company had not gone through an audit process; they are in the middle of it now. As you can imagine, for a relatively young company going through an audit process for the first time can be a little bit complicated. But from a timing perspective it's a Q1 opportunity for us.

Okay. And remind me -- but I think first acquisition which should close this quarter was sold as a perpetual license. I would expect that you will be able to convert that to a SaaS offering. How quickly can you do that? How quickly can you get that integrated in with the rest of your platform?

You know, again, as we did with Meta, so if you go back to August 2012, Meta was primarily a perpetual license business. They had some term licenses, but for all intents and purposes it was a license business as opposed to any other delivery model. It took our sales organization the better portion of 14 months to reposition the buyers in the pipeline to consider those solutions on a SaaS basis.

In that particular case the technology effort, developing effort to move that platform to SaaS -- most of that work had been done by the prior management team, so the real development effort around Meta has been integrating it with other solutions.

As it relates to the proposed acquisition, again you have a situation where it's a relatively mature company. Their solutions are deployed in clients that actually -- at the client site they essentially deploy it as if it were was SaaS-based, so that the actual development work to make it available in a SaaS model is not the significant amount of work.

The real work is around integrating that solution with AccessAnyWare, Collabra, and the OpportunityAnyWare suite, which today includes the clinical analytics from Montefiore. So, there is some work in our own development cycle. As it did with Meta, you are looking at a 9 to 12 month development cycle to get it ready. In the meantime, the solutions will be sold as is.

I think it's important to note, as we highlighted in our investor presentations posted, is that a certain number of the current clients of acquisition number one are current clients of Streamline. In effect that gives us live lab to continue integration work. In many of those cases we are taking feeds from that particular solution today. So some of the work has been done. It's really a quite positive outcome for us.

Okay. Great. Thank you very much for the update.

And at this time there are no further questions in the phone queue.

Thank you all for joining us today and we appreciate your continued support and interest in Streamline. We will look forward to talking to you at the end of the next quarter. Thank you.

This does conclude today's conference. We thank you for your participation.