Streamline Health Solutions Inc (STRM) 2016 Q2 法說會逐字稿

Good day, and welcome to the Streamline Health reports second-quarter 2016 financial performance conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Randy Salisbury, Chief Marketing Officer. Please go ahead.

Thank you for joining us to review the financial results of Streamline Health Solutions for the second quarter and first half of fiscal year 2016, which ended July 31, 2016. As the conference call operator indicated, my name is Randy Salisbury. As Senior Vice President and Chief Marketing Officer here at Streamline Health, I manage all communications including investor relations.

Joining me on the call today are David Sides, President and Chief Executive Officer; and Nick Meeks, Senior Vice President and 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 it from the Company's website at StreamlineHealth.net or at numerous other financial websites.

Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team at 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 press releases and filings made with the US Securities and Exchange Commission, including our most recent Form 10-K 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 that 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 website at StreamlineHealth.net and our earnings release for a reconciliation of such non-GAAP measures to the most comparable GAAP measures.

Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. These non-GAAP measures do not include certain 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 David Sides, President and Chief Executive Officer. David?

Thank you, Randy, and good afternoon, everyone. Today, I want to comment on our second-quarter performance, an update on our investment in sales and spend a few minutes on the market's reaction to our Looking Glass solutions under MACRA.

As released earlier today for the second quarter of fiscal 2016, we generated revenues of approximately $7.4 million, a 10% increase over the first quarter of this year, including approximately $1 million in perpetual revenue as expected. Recurring revenues were 77% of total revenue for the second quarter. Professional services revenues in the quarter were $548,000, a decline from Q1 of this year, which at $691,000 was the high watermark of my tenure as CEO so far.

In Q2, we were working on several large projects that will start amortizing upon go-live in the second half of this year. In addition, in the quarter we find a relatively large perpetual license contract, implementation of which will be meaningful to professional services revenue, again, in second half of the year.

Revenues for the second quarter were down about 14% over the same quarter a year ago, but approximately half of the difference attributable to the perpetual license revenue realized in Q2 last year of $1.6 million versus the $1 million in perpetual license revenue in Q2 of this year I just mentioned.

The other half of the difference is attributable primarily to the one-time release of revenue in Q2 last year after satisfying some client revenue recognition criteria. Revenues for the first half of fiscal 2016 were $14 million, approximately 5% lower than the same period last year and, again, primarily attributable to the difference in perpetual revenue booked in the second quarter of each year, respectively.

Turning our attention now to adjusted EBITDA, we generated approximately $1.6 million of adjusted EBITDA in the second quarter, more than 2.5 times greater than the $600,000 generated in Q1 of this year. Adjusted EBITDA was down approximately 16% as compared to second quarter a year ago. And, again, the difference is primarily attributable to the difference in amount of perpetual revenue booked in the quarters.

For the first half of fiscal year 2016, we have generated approximately $2.2 million in adjusted EBITDA, more than 3 times greater than the $600,000 of adjusted EBITDA generated in the first half of last year.

In GAAP terms, our net loss for the second quarter was $700,000, a substantial improvement over the $1.5 million net loss in the first quarter of this fiscal year. Our balance sheet continues to improve, and Nick Meets will provide greater detail on that in a few moments.

I am encouraged with the strengthening of our financial performance, as it gives us greater ability to be more active in the marketplace regarding strategic acquisitions. We have stated consistently throughout this fiscal year that when we find the right asset or assets, augment our core mission of assisting health care providers to secure accurate reimbursement in a timely fashion, we will acquire them. Our thinking at this time would be to use a combination of cash on the balance sheet and debt so that there will be no shareholder dilution.

As of this date, we continue to pursue this strategy and will of course announce any deals should one come to fruition.

Now let's turn our attention to our investment in sales and marketing.

Last quarter, I stated that the biggest area of opportunity for our Company remains sales and our quarterly bookings performance. Although the $1.7 million in bookings for the second quarter was an improvement over Q1, it is still not up to our expectations. However, as stated in previous earnings calls, I believe that our investment in sales and marketing will deliver growing quarterly bookings in the quarters to come as the moves that Shaun Priest has made in his short tenure as our Chief Growth Officer begin to bear fruit.

I continue to feel positive about our potential to increase our quarterly bookings performance in the second half of this year based on the internal progress I am seeing. Let me take a moment to share with you what some of these moves and improvements in sales are without getting too far in the weeds for competitive reasons.

Shaun's initial focus, primarily during the second quarter of this year, was to increase the activity in the top of our sales funnel. To that end, we engaged with two nationally recognized lead generation firms, the kinds that secure one-on-one meetings with C-suite-level executives. Both companies have delivered numerous high-level meetings, and part of our current pipeline includes these newly established leads. In each area, and with each resource, we have instituted this (inaudible) focus that we believe will improve the likelihood of success.

Our inside sales team numbers three people today, and their focus is also to (inaudible) create additional pipeline specifically for the Looking Glass solutions that are in greatest demand today, such as CDI encoding along with clinical analytics. More about those solutions in a minute.

[Al Walsh], our Vice President of Channel Partners, has added a junior channel partner manager on the West Coast to continue to build the top of the funnel through reseller partners who have their own sales resources and prospects. Al has done a nice job of expanding our list of reseller partners to include more consulting firms and expansion of an existing relationship with a large national partner, and he has opened up conversations with numerous other potential channel partners.

Al also works directly with our strategic partners like Optum 360 and NantHealth. Recently, NantHealth announced the signing of a new client, Banner Health in Arizona. Our Looking Glass clinical analytics solution was part of that sale.

As an aside, note that I mentioned in the Q&A session in April during our Q4 and fiscal 2015 year-end call that we were working on another reseller agreement with a large health care IT supplier that would be a really good channel partner for us. That we believed we would be able to publicize the agreement in the not-too-distant future. We are still working on this new channel partner arrangement, but one of these large national partners did sign an important expansion of their reseller partnership with us.

NTT Data, who has been reselling our Looking Glass surgery scheduling solution for a few years, expanded their relationship with us and has signed to resell our Looking Glass clinical documentation improvement technology with PhysicianQuery.

NTT Data is a leading business and IT services provider. Their solutions are installed in hundreds of hospitals and thousands of post-acute-care facilities in the United States and over 40 countries worldwide. They are part of the $100 billion NTT Group.

Reseller partners of this size can and many times do take a long time to select solutions to resell to their clients and prospects. Longer than we would like, and there's very little we can do about it. We are better off not talking about any potential new partners until a deal such as this one we're announcing today with NTT is officially completed.

Both the second quarter's primary sales and marketing efforts focused on growing the top end of the sales funnel, referenced in Q3, will be focused on the middle of the funnel, with more on-site visits and solution demonstrations.

The middle of our pipeline today leans heavily on coding, CDI and clinical analytics, which is in line with our focus on revenue cycle as an area in which we believe we are especially well-suited to win. So far, the level of demos we are getting at the end of last quarter is continuing at a similar pace, which should auger well for closing more deals in the second half of this fiscal year.

It's worth noting here that certain macro trends in the market should have a positive impact on the demand for our Looking Glass solution. For instance, when Congress passed the Medicare access and CHIP Reauthorization Act, known as MACRA, last year, a major step was made towards a more consolidated, value-based Medicare reimbursement structure.

In effect, MACRA makes significant changes to the way Medicare pays physicians, accelerating Medicare's shift toward value-based payment. The measures are focused on quality, 50%; advancing care information and technology at 25%; practice improvement at 15%; and resource use at 10% -- and locks in provider payment rates at a near-zero growth rate until 2025. MACRA supersedes existing quality and value programs for Medicare Part B and consolidates them under the merit-based incentive payment system known as MIPS.

What MACRA means for health care IT provider such as Streamline Health is that our health care provider clients will no longer be compensated for the use of technology like previous meaningful-use regulations, but on the outcomes they achieve for their patients.

After implementation of EHRs, data seemed to be everywhere, but the ability to quickly understand and analyze it and turn it into actionable information is difficult. It is critical for providers to understand and analyze the changes in quality in order to manage risk and remain financially successful in value-based care. Not only must providers report quality measures, but they must demonstrate improvement in outcomes for quality measures.

Add to this the shift to higher-deductible plans, where patients bear more of the financial burden for their own wellness, and we will start to see an increase in patients that shop around and educate themselves on the cost and value of the care being provided. Both patients and insurers will be judging and paying by outcomes after delivery of care, which makes it really important to actually document the severity of cases providers handle.

With revenue pressure on both sides, documentation becomes much more important than it was before to make sure providers are getting the credit they deserve for the work they do on severely ill patients. Acute-care facilities have been concerned with this for a while. But outpatient settings are also going to have to pay more attention.

In fact, a recent industry white paper publicized a case study and found only one-third coding accuracy in physician practices. Two-thirds being inaccurate is a huge number and a great opportunity for our Looking Glass coding and CDI solutions to make meaningful contribution.

In addition, clinicians need to think about how they are acquiring and aggregating the data they need to get the full view of the patient to better manage their care. And the CMS estimates that approximately 836,000 clinicians will be impacted by MACRA starting in 2017. In order to be successful in a value-based environment, the focus must shift to lower costs and increased quality rather than revenue increases alone.

Our Looking Glass clinical analytics solutions enable providers to establish and align clinical best practices to actively identify financial and readmission risk across populations and conduct comparative effectiveness analysis. Clinical analytics allow providers to measure clinical quality outcomes and proactively identify patients who are at risk for not meeting their measures, giving them a solution to be successful in value-based care. The changes in the regulatory environment, along with our investment in sales, are some of the reasons why we believe we will generate improving performance on our quarterly bookings going forward.

I will now turn the call over to Nick Meeks, our CFO, for additional insight into our second-quarter performance. Nick?

Thanks, David, and good afternoon, everyone. Allow me to begin by thanking my own team, the whole of Streamline and our auditors for a smooth reporting effort this period.

Turning now to the results for the fiscal second quarter of 2016, David has already covered revenue and adjusted EBITDA. I would add to his comments that in addition to stock-based compensation expense, we adjusted EBITDA by a further $346,000 related to severances and nonrecurring professional services.

More broadly on the income statement, I would note that expense controls continue to be effective, with overall operating expenses down by more than $2.5 million in the fiscal year to date across almost all areas of the organization. This, while continuing to make targeted investments in sales and products. I would also highlight that for the second consecutive quarter the professional services team generated positive contributions.

Moving on to the balance sheet, we ended with no change in our cash position from the end of our fiscal first quarter, with $6.5 million of cash on hand. That said, we generated approximately $2.6 million in cash from operations in the quarter, returning the Company to cash generation for the year-to-date period.

During the quarter, Streamline had $487,000 of capital expenditures, primarily in software development. And as I mentioned during our last earnings call, we also made a mandatory prepayment on our term loan with Wells Fargo such that we had a total use of cash in the financing activities of $2.1 million during the quarter. The excess cash flow sweep is an annual event that shortly follows our 10-K filing.

Given this prepayment, along with normal amortization, our term loan with Wells Fargo now stands at $6.2 million.

Lastly, I wanted to note the change in backlog in the period. During the quarter, we were able to liberate a long-delayed implementation and subsequently recognize the associated perpetual license revenue in the quarter. In addition to recognizing a large block of revenue from the backlog, we also rationalized the backlog value for the shorter remaining period on the new agreement and a smaller overall scope. All in all, beginning to recognize the revenue on this agreement is a positive for Streamline.

There were no material renewals executed in the quarter, as there were no material contracts up for renewal.

The net impact of all of these factors was an approximately $9 million reduction in overall backlog reported compared with last quarter, leaving the backlog at the end of the fiscal second quarter at $53.6 million. Having said that, I would also note that this has no negative impact on our revenue expectations for the remainder of this fiscal year nor next fiscal year.

That concludes my remarks, and I will now turn the call back to David Sides.

Thank you, Nick. Looking ahead, we have a very busy autumn, with many activities to support the three strategic objectives we established for our Company this year.

First, in the area of being more client-centric, we'll be holding our annual client user conference next week in New York City. We chose Manhattan this year because we have such a heavy concentration of clients in the greater metropolitan area. In addition, we are hosting the first day of the meeting at the NASDAQ exchange in Times Square, and on day two in our offices at Madison and 30th.

We are excited to have many of our long-term clients participate in this conference. They don't know it yet, but they will all be invited to be part of the closing bell ceremonies at the exchange next Monday afternoon, September 12. Look for us on your favorite cable financial news channel.

Next month is the last big national trade show of the year for our industry. AHIMA is being held in October in Baltimore. We will have a booth there, and we will invite our clients to spend time with us and to see firsthand a demonstration of some of our solutions that can help them improve their revenue cycle management.

Our second strategic objective is sales growth. I think I've covered how we plan to generate more bookings in organic revenue growth when I reviewed some of the specifics of our investment in sales and marketing. In addition, I covered how our strengthening balance sheet can be leveraged to enable us to also grow revenue via smart acquisitions that augment our solutions and current client mix without diluting our shareholders.

Our third strategic objective is to be more innovative. We are very excited about a new user interface that's been designed for our Looking Glass clinical analytics solution. And this new design can serve as a go-forward template for many but not all of our other Looking Glass solutions. We will unveil the new designs at our user conference next week and again in our booth at AHIMA in October.

In addition, we are looking at ways to leverage new technologies such as Alexa, Amazon's voice interaction system, to empower users of our Looking Glass solutions to simply ask questions relative to their key daily metrics and have Alexa answer them on the spot.

Finally, today I want to comment on our guidance for fiscal year 2016. We announced at the beginning of the year that our revenue model is built on three primary pillars: recurring revenue stream of approximately $25 million, professional services revenue of approximately $2 million, and perpetual license revenue of approximately $2 million.

The first two elements of our revenue model are tracking well. But as is the case every year with perpetual license revenue, our bigger clients who prefer perpetual license contracts in more of a CapEx model are much harder to predict quarter by quarter as to when they will be realized. At this point, our financial forecast continues to include an additional $1 million in perpetual license revenue, which we remain hopeful will be realized in the next two quarters. With this in mind, we are maintaining our financial guidance for the year of $29 million in revenue and approximately $3.6 million in adjusted EBITDA.

That concludes my prepared remarks. But before turning the call over to the operator, I want to thank our Streamline Health associates for their continued hard work, dedication to our clients, to our shareholders and to each other.

I will now turn the call over to the operator for our Q&A session. Operator?

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

Good afternoon, gentlemen, and congratulations on the progress.

Thanks, Matt.

Thanks, Matt.

A handful of questions here. First, thank you for the details on the pipeline and how you're kind of attacking the different areas of the funnel. But as you look at the back half of the year, given where you are with Shaun, with some of the changes that you've made, do you think that that could really maybe blossom as you get into -- more into Q4? And then how should we be thinking about 2017 from a growth perspective? And I realize that's still a little ways out, but I would assume that you're envisioning that we'll see some nice growth next year.

Yes, I think we'll see good growth next year, Matt. I think in Q3 and Q4 combined, we'll exceed -- in one of those quarters, we could even exceed all of the bookings we've done so far this year to date in the previous two quarters. So, we are setting up pretty well in the back half of the year, the top of the funnel. We have filled things up and now they are starting to come through. May come through in Q3, Q4, maybe some in Q1, but there's such a larger funnel coming through that we are confident we'll in the second half of the year probably more than double the first half of the year.

Okay. Then in regards to some of your partnerships, you mentioned Nant. Was that deal booked in the quarter or is that here in Q3? The one that you mentioned.

That was for the original contract. Nick, do you want to handle that?

Yes, Matt, that's actually -- the nature of the Nant agreement, they buy blocks of licenses. And this will use up materially all of the current blocks that they are in. So, there is no incremental booking. But with that said, there's probably some professional services dollars that will come.

And do you anticipate at least with Nant that you will, I guess, sell some additional licenses or some additional seats now that they've kind of used up the initial allotment?

We hope so over time. That's the goal.

Okay. All right, I guess shifting to partner number two, Optum. You know, over the last couple of years, you've had one large deal. I think in the first year there might have been two. But you've had this pattern of one large deal a year. Those are obviously significant in size. Maybe an update on how that relationship is growing.

The relationship is good, so Optum is a great partner of ours. We've -- they've probably three or four deals in their pipeline. Obviously we're not in control of that pipeline. But we would expect or hopefully they would expect that sometime in the next two or three quarters, they'd see another pick-up there. Their goal is to sign at least one or two of these a year. And we are important because we help to displace other major competitors. So that's still to come in the next couple of quarters.

Okay. And then the last one on this topic, the partnership that's taking a little bit longer to close -- maybe what is the hang-up or hold-up on signing that? And is it -- are you able to maybe target -- I think last call you had talked about they have (inaudible) -- that partner has several customers that need to do something sooner rather than later. Are you able to participate in RFPs for those end-customers even without the signed contract with your partner?

Yes, we can participate without the signed contract and we can also go direct. Until there's a signed contract, we are free to compete for that business directly.

And we are encouraged this quarter to sign an expansion on -- to sell CDI with NTT Data. They have a couple of clients in their pipeline that we thought were reasonable, and we're jointly going to market with them and excited about the possibilities there as well.

Okay. Thank you for that color. You spend a fair amount of time on MACRA. And it's something that we've done a fair amount of work on here recently, this new law. What are you hearing from customers? Has this -- is this something -- what we're finding is that it's hit or miss. Some customers are well aware of it and they are trying to get ready for this law that takes effect January 1. Others, it's -- I don't know, they've been on vacation or have missed the news but now are scrambling. What are you hearing from customers, and where do you see the greatest potential within your portfolio?

We see the same hit or miss you do. So if you talk to a county safety-net hospital, they are not too worried. You talk to rural critical-access hospitals, not as worried. You talk to a large academic in a competitive down, they are on top of it.

And so we think it varies somewhat by hospital type -- perhaps is their reaction and their capability to do more in-depth analysis to really understand the law and to try to be prepared for it. I think if you go forward six or 12 months, there will be more that are prepared, or there will be more consolidation for the unprepared being acquired by the prepared. Because the amounts of money are enough that it could swing a 3% operating margin hospital into a loss that then has to be acquired.

So we think it's important for us -- it helps on the coding suite side, so that you are sure you have the quality metrics codified. You have got things exactly as they should be. And also on the analytics side -- so the clinical analytics piece, we think, becomes more important so you can model things out and understand what your risk looks like for the different pieces.

It's kind of -- that piece, we've heard more about it from clients lately as we get closer to that date. It's only a quarter away for us, and we thought it was worth mentioning this time some of those conversations and how we're prepared and what we think the portfolio lines up well with the client and with the clients and the law.

Great. Thank you very much for your help, guys.

Frank Sparacino, First Analysis

Nick, just wanted to go back and talk through the backlog again in a little bit more detail. I'm not sure I followed entirely all of the elements and the actual kind of impact from each of those.

Sure. The perpetual license that was signed was a reshaping of an agreement that dates back to 2014, late 2014, that had kind of stalled in implementation, I think. It was signed with the best of intentions, and unfortunately it just took a while to get all of the necessary forces marshaled and organized and marching forward.

And in so doing, we were able to recognize a large chunk of revenue that we otherwise wouldn't have been able to recognize when that started marching forward. But it also shortened the overall length of the contract, and it decreased the scope little bit from the broadest possible to what we can action right now. And so all of those things marked it down a little bit.

That said -- so that's one piece of the overall decrease. The other piece being, we recognized the revenue that we recognize normally in the quarter, and there really weren't any renewals to put into the backlog. So it was a reduction of backlog with very little going in. But it's not that -- it doesn't change anything in the near term because there were no contracts that were up for renewal. We have no expectation that those that will come up for renewal won't in any meaningful fashion.

And so the scope change was well into the future. The shortening of the contract also affects out years. So this year and next year, I expect the drawdown from the backlog to be roughly exactly what it was.

Okay. And just following up on that, Nick, on the maintenance support side of things, you know, sequentially it was down fairly materially. How would you explain that?

Maintenance and support or --?

Yes.

Or staff?

Well, both were down, but I mean the maintenance support was down a larger percentage amount.

I'm sorry, you're quarter over quarter, not year over year.

Correct.

I'm sorry. Maintenance and support had a catch-up contribution last quarter. There was a client who we had deferred recognition on for a number of reasons, but we managed to clear all of those concerns when it passed our auditors. So, [they used] the number -- the maintenance line item is actually building right now. In fact, the contract that we just signed will add $250,000 or so of annual maintenance.

So that one is building. I think that was just a blip in the numbers. It was higher last quarter than I guess it would be on a run rate basis.

Okay. And maybe just lastly for me on sort of the coding and CDI side of things. Can you just talk about activity and what is sort of driving things or what the conversations are like with the providers?

We are having a lot of conversations. The conversations are good. So we have some unique integration into the EMRs with some of the providers so that when you -- as a clinical documentation improvement specialist say, did you really mean to document this or something else? Then the answer either today is printed out on paper and put on a paper chart. Or, in our system, you get an electronic query and it shows up in the physician's inbox in the EMR or whatever that metaphor is.

So that workflow is substantially better in that people can be on their phone or something else. And we see that as a differentiator that people are saying, look, this paper process isn't working for me anymore. I'm doing substantially everything electronically now other than this interaction to be sure that my documentation is appropriate and correct to support the codes that I'm going to submit. And we have a unique way to improve that workflow.

So that's helping us in the market because a lot of our competitors are still printing out pieces of paper and trying to hunt down the physician to sign the piece of paper. And now that they are not to medical records anymore because they don't physically sign charts, therefore they also want to see that information in the electronic record, sign it, make any changes and have it part of the medical record rather than sign a piece of paper to then scan in.

Okay, great. Thank you, guys.

(Operator Instructions) Matt Hewitt, Craig Hallum. Just two follow-ups for me. First on the OpEx, Nick, you had mentioned that you guys have continued to make some progress there. I think during the quarter, there was one departure. Should we use the Q2 SG&A line? Is that kind of a good run rate, or are you expecting some growth off of that as we look to the next couple of quarters?

No, Matt, I think it's a solid run rate number. The only thing that I would tell you is it's cyclically higher in Q1 to pick up the cost of the audit. But the cost of the audit is now substantially lower with RSM than it was with ABMG. So, think $300,000, not $1 million.

So I think it's a pretty good -- I don't see a lot of G&A expenditure. And I think -- for now, I think Shaun is happy with the level of investment that we have in the sales organization. That said, we find positive ROI opportunities to invest in that team, we'll continue to do so.

Okay. Then the last follow-up for me on the M&A -- you had mentioned that you are continuing to kind of scour the universe for opportunities from a valuation perspective. What are you seeing? Do you think that if you had to place a percentage on the opportunity before the end of the year, do you think that you'll be able to get something done? And what kind of valuations do you anticipate that going off at? Thank you.

I think we'll be able to get something done and maybe a smaller deal at first just to be sure that we prove out. We have thought of some ways that we think are strategic to add to our portfolio that would be interesting. I think we'll be kind of under -- in between 1 and 1.5 times revenue. Certainly not more than that, so that it's not that it dilutive. We'll either do it with all cash or a combination of cash and debt. But I think it's fairly likely that we'll get something done before the end of the year.

Great. All right. Thank you.

(Operator Instructions) And with no further questions in the queue at this time, I'd like to turn the call over to Randy Salisbury for any additional or closing remarks.

Thank you, Noah, and thank you all for your interest in and support of Streamline Health. If you have any additional questions or need more information, please contact me at Randy.Salisbury@StreamlineHealth.net. We look forward to speaking with you all again in December, when we'll discuss our third-quarter 2016 financial performance. Good day.

And that does conclude today's conference. Thank you for your participation, and you may now disconnect.