Streamline Health Solutions Inc (STRM) 2017 Q3 法說會逐字稿

Good day, and welcome to the Streamline Health to Report Third Quarter 2017 Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Randy Salisbury. 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 2017, which ended October 31, 2017.

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 question-and-answer session. If anyone participating on today's call does not have a full-text copy of our press release announcing these results, 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 want to be sure we are clear for everyone on the record how certain information, which may be provided today, as with all of our earnings calls, should be viewed. We therefore submit for the record the following statement. First, statements made on 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. These are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those we may discuss. Please refer to the company's press release and filings made with the U.S. Securities and Exchange Commission, including our most recent Form 10-K Annual Report, for more information about these risks, uncertainties and assumptions and other factors.

As always, we are presenting management's current analysis of these items as of today. Our participants on this call should take into account these risks when evaluating the topics we will discuss. Please note, Streamline Health is not undertaking any commitment or obligation to publicly revise any such forward-looking statements made today.

Second, we will discuss non-GAAP financial measures, such as adjusted EBITDA. Management uses these measures to help provide better insight into our financial performance. However, certain items of income and expense are not included in these measures, so these calculations may differ from those which another entity may reach using their own non-GAAP measures. To help you compare these amounts on consistent terms, 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.

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

Thank you, Randy, and good morning, everyone. This morning I want to comment on our performance in the third quarter of fiscal year 2017. As usual, we'll also look at our fourth quarter performance to date and what we expect for the remainder of this fiscal year.

As released yesterday afternoon, for the third quarter fiscal 2017, we generated revenues of approximately $6.4 million, an 8% increase over the previous quarter of this fiscal year and a decrease of approximately 3% from the third quarter of 2016.

The increase in our third quarter revenue was driven partially by an increase in professional services revenue related to contracts signed in fiscal 2017. It was also driven by an increase in recurring revenue derived from additional facility activations among our existing client base.

The decrease from last year was a result of the expected declines left over from last year's sale of our patient engagement solution, a continuing attrition we are experiencing with our legacy content management solution and the inherent unpredictability in our channel partnerships with perpetual license sales.

Recurring revenues were 79% of total revenue for the third quarter, down slightly from the second quarter due primarily to the increase in professional services revenue.

While we are seeing new revenue growth, the fact that we have not yet booked a perpetual revenue contract so far this fiscal year is a primary factor in offsetting these revenue declines. It continues to be difficult to predict the execution timing of a perpetual contract primarily through some of our channel partner relationships such as Optum360. But we continue to work closely with these partners and understand from them that the potential for closing a deal, which could generate material revenue contribution before the end of the fiscal year, remains.

Turning our attention now to professional services. Revenues were approximately $800,000 in the third quarter, an increase of approximately 40% over the second quarter of this fiscal year. This was primarily due to a large professional services contract we signed in the quarter and a onetime drag that had approximately $300,000 of catch-up revenue booked in this quarter.

Our bookings for the third quarter of 2017 continue to improve and have grown consecutively throughout the year, up from $1.1 million last quarter to approximately $1.9 million in Q3 of this fiscal year. The bookings in the third quarter consisted primarily of net new SaaS contracts, including 4 new eValuator contracts, 2 of which came from existing clients and 2 from new clients, as well as a new financial management software solutions client, Nobilis Health, which I referenced in my Q2 prepared remarks.

[One thing to note] is our addition of new clients to the Streamline Health family. I mentioned last quarter we were pleased with the addition of new clients as we added 4 new net clients to our roster.

We continued to win new business, and we added another half-dozen new clients in the third quarter to our growing roster of health care providers. That brings the number of new clients through the first 3 quarters of this fiscal year to an even dozen, and we anticipate signing a few more in the fourth quarter as well, which will make 2017 one of the best years in terms of signing new clients in the history of our company.

While the contracts vary in size, by establishing new relationships, we give ourselves the opportunity to win more business from these new clients by expanding our areas of contribution or increasing the size and scope of the inpatient records we offer them. We've already seen growth for some of these clients, even within fiscal 2017, through our cross-selling efforts.

Adjusted EBITDA for the third quarter was $1.5 million as compared to $0.5 million in Q2 of this year due to both increased revenues and decreased expenses, including a research and development tax credit related to innovation work on our various solutions.

Nick Meeks, our CFO, will address these items and others more specifically in his prepared remarks coming up in a few minutes.

In GAAP terms, our net gain for the third quarter was effectively breakeven, up from a negative $1.1 million in Q2 of this year.

Looking at the bigger picture, we are approximately 8 months into the process of refocusing our company to better help our clients and prospects with the middle of their revenue cycle processes or, as we like to say, to help them transform their revenue cycles into revenue streams.

We talked a lot about eValuator, and I plan to do so again in a minute because we really do see it as an industry game changer. And I'm also pleased to see our sales pipeline include opportunities for all of our technologies.

Last week, we announced a new client win for a 2-hospital system in the Southeast that included eValuator and our Auditing Services. But importantly, it also included our CDI or clinical documentation integrity technology, along with our automated Physician Query feature. This was a nice win for us as it was a new client generated by a cold call from one of our inside sales reps who reached the CFO over the phone and then opened the door for productive conversations. It was fortuitous as they were bringing their coding and auditing functions back in-house.

Once we had a clearer picture of everything they wanted to accomplish to support this change in the strategy, we presented the uniqueness of eValuator and expanded the conversation to include a combination of automated coding analysis along with an improved prebill querying process.

We now have over 100 active opportunities in our sales funnel. A little more than 20% come from our existing client base. The other opportunities come through our sales team and referral on channel partners.

We've closed 4 eValuator clients in the third quarter and announced the signing of our fifth eValuator client last week. And we are on track to close more eValuator deals in this, our fourth quarter.

We've stated before that in our industry, referenceable clients are a must. And we continue to believe that as we gain a foothold with clients who experience a strong return on revenue investment with eValuator, we will leverage their testimonials to help us accelerate the pace of closing new eValuator agreements.

During the third quarter, 4 clients, 2 existing and 2 new ones, signed contracts for eValuator technology.

We also are working with our new clients to help strengthen eValuator's message in the health care space. During our second quarter call, I quoted Donald McGruder, the Chief Information and Revenue Integrity Officer of South Shore Hospital in Chicago. He has graciously agreed to allow us to seek future speaker opportunities for him next year as one of our first eValuator users.

Last month, we also published a release quoting Diane Settle, the Vice President of Revenue Cycle and our longtime client, Sarasota Memorial. Diane agreed with us that, and I quote, "The idea of checking the accuracy of our coding in every patient record before billing is very sound, and their analysis of recent billing showed how and where we can improve coding accuracy," end quote.

As we gain more clients and bring them online with our eValuator technology, we will be able to leverage their successes to help attract and close future deals. We've been saying now for a few months that we see ourselves as leading an industry movement to improve health care providers' financial performance by moving mid to late revenue cycle interventions upstream to help them optimize coding accuracy for every patient encounter prior to bill submission.

When we say that we're leading an industry movement, we're talking about changing the way it's always been done. Think about companies like Amazon or FedEx or Uber who looked at the way business was being conducted in a certain industry and came up with a much better way of doing things.

We're working to do that for coding review and both automation and review capabilities before the bills go out. We are convinced that in the not-too-distant future, our clients and others in the health care provider industry will look back on the methods they used to measure their ability to code accurately by conducting postbill manual audits and wonder what they were thinking. Our cloud-based automated prebill code auditing technology, eValuator, helps accomplish just that. Our clients improve their coding accuracy before billing and with all records in scope. It enables them to reduce revenue leakage and to mitigate the risk of overbilling.

The fact remains that our target buyers are under increasing financial pressure. Today, almost every hospital in the country determines their level of coding and payment accuracy after the fact by conducting postbilling audits. These retrospective audits are often comprised of cases selected randomly that at best only look at 1% to 2% of all coded and billed patient encounters.

From this limited look back, hospitals try to close accuracy gaps and maintain CMS' inpatient coding accuracy standard of 95%. Few hospitals have reached that goal today, yet this postbill audit practice is the accepted method throughout the industry.

As proof that the 95% accuracy target is hard to reach, we recently conducted analysis for a potential client in which we ran nearly 47,000 cases from 5 different facilities through our eValuator technology.

As you can see from this chart, we identified nearly 9% or a total of nearly 4,100 cases with potential coding issues. We found the issues and opportunities at every one of the 5 different facilities we analyzed. In every case, the hospital system was underbilling and overbilling. But the net between the 2 would have generated an incremental $16 million in revenue to the health care provider for the care that they have already delivered to their patients. This is the power and benefit of deploying our eValuator automated prebill auditing technology on every patient record before a bill is submitted instead of auditing a limited number of cases well after the fact.

We have yet to conduct an analysis of the clients' or prospects' previous billing and not find varying amounts of underbilling and overbilling. We've also found, thus far, the results always netted out to be more underbilling than overbilling. This means the provider was very likely leaving money on the table. And currently there are very few health care providers that can afford to do that.

There are also financial recovery benefits our clients can see with this tool. By looking at every coded patient record before it's been submitted to billing, clients can reduce potential errors and denials. Those errors and denials usually take weeks or months to realize. And many times, when a bill is denied by a payer, it's a total startover for the health care provider to find more resource and time to work through the issue and extending the number of days in accounts receivable.

To reiterate, the benefits of our cloud-based automated prebilling technology are many and easily measured. Our eValuator solution can enable hospitals, outpatient facilities and physician offices to greatly improve their coding practices, gain potential benefits like cutting their days of AR, improving their cash on hand, reducing the number and dollar amount of patient bills being denied by payers and reducing the need for postbill audits.

I will now turn the call over to Nick Meeks, who'll provide greater detail on our financial results for the third quarter. Nick?

Thanks, David. Good morning, everyone. As always, allow me to begin by thanking my team, the whole of Streamline Health and our auditors for a smooth reporting effort.

Beginning with the income statement, David has covered revenue and EBITDA. I would first note that in addition to equity-based compensation, we also adjusted from EBITDA a noncash mark-to-market charge of approximately $190,000 related to the warrants that were issued in our 2012 PIPE transaction. I would add here that these warrants will expire in mid-February 2018, so this is one of the final quarters subject to this valuation volatility.

Operating expenses continued the trend of being lower both year-over-year and quarter-over-quarter. We have been working for many of the past months with our tax advisers to secure a refundable via payroll taxes research and development tax credit from the state of Georgia covering the last 3 fiscal years. During the fiscal third quarter, we booked that credit totaling approximately $365,000. That amount is reflecting on the income statement as a reduction of R&D expense. We will continue to pursue that credit in the future years and record it in a similar manner in the quarter in which it is granted by the state of Georgia.

Moving on to the balance sheet. We finished the quarter with approximately $1.9 million of cash on hand. From an operating cash flow perspective, we used approximately $364,000 of cash in the quarter. That was the net impact of $1.4 million in cash profitability, offset by a $1.8 million reduction in net working capital.

While collection activity was good in the quarter, there was a low level of annual renewal invoicing which drove the reduction in overall working capital. The fourth quarter is by a wide margin our largest quarter for annual renewal invoicing, and I expect cash to rise materially through the quarter.

Our bank debt decreased slightly in the quarter as well, down from $4.9 million to $4.8 million. We stated last quarter that we do not anticipate any accelerated debt prepayments moving forward. Our normal amortization on the term loan is approximately $150,000 per quarter.

With respect to future visibility, backlog increased over the end of the second fiscal quarter by approximately $1.3 million to $47.7 million. As I've done on previous calls, I would also note here that due to the variable nature of some of our audit services engagements, we only record in backlog those agreements with clearly definable backlog terms.

Lastly, I wanted to speak briefly to a change coming in our fiscal year 2018. We will adopt the new revenue recognition standard, ASC 606, beginning in the fiscal first quarter of 2018. We have spent the past several months analyzing all of our various revenue streams for potential differences in our current recognition methodology versus that prescribed by the new standard.

We will now use the time between the end of the third quarter filing work and the beginning of the full year audit to review, in depth, our findings with RSM. Because of the short time window between our 10-K filing and the end of our fiscal first quarter, you should anticipate a thorough reporting of the financial impact of the new standard to be included in the note on future accounting pronouncements within our 10-K.

That concludes my remarks. I will now return the call back to David Sides. David?

Thank you, Nick. Before I open the call to questions, I want to comment on our expectations for the remainder of our fourth quarter and to touch on what we believe will be the main growth drivers in fiscal 2018 and beyond.

Based on the activity in our pipeline, which I referenced earlier, we anticipate closing more eValuator deals between now and the end of our fiscal year 2017 on January 31. These new deals will most likely include some incremental auditing services revenue as well as we are focused on [deploying] them together.

Additionally, we see our cash on hand improving in the fourth quarter, as we have in years past, since it's our biggest contract renewal quarter. We anticipate reporting cash on hand at the end of the quarter to be near par with our bank debt, similar to the end of last year.

With the tighter cost controls we've implemented throughout this fiscal year, the normal running of our business should deliver improved bottom line performance in Q4 as well, as with the signing of a perpetual license deal in the quarter, as I mentioned earlier.

We see 3 primary growth drivers to our business in 2018, and we anticipate we'll begin to surpass the attrition we continue to experience in our legacy business. In no particular order, those growth drivers are Auditing Service as one driver. Many of the new clients we have signed this year have needed our professional auditing services. Just as we have done with one of our West Coast-based clients this year, we will continue to promote the power and benefits of our eValuator technology as a logical extension, not dramatic improvement, of our post or prebill manual or human auditing. I mentioned last quarter that new client growth is important to any solutions and services provider company. We are very pleased with the number and quality of the new logos we have attained thus far.

Another revenue growth driver we believe is our eValuator technology. Clearly, we are excited about the eValuator solution, and we are investing accordingly. I'm sure I've said enough about this already, but the case study I shared with you earlier is just for inpatient billing. Our eValuator technology can be applied to outpatient billing and professional fee billing markets as well, and we've already begun marketing this solution in those spaces. There is some great opportunity for growth here from our company-owned sales force, not to mention via our network of reseller partners.

Speaking of which, the third growth driver we envision in 2018 and onward is our reseller channels. Today, our resellers are primarily focused on reselling our Abstracting and Physician Query technologies. Optum360 has been offering these solutions to their largest outsourced clients for the past few years. And just a few months ago, we expanded our relationships with them to include Abstracting as far as their go-forward computer-assisted coding solution. Additionally, we see opportunity potential with Allscripts within their existing clients and within the new clients they acquired via the McKesson acquisition.

We are pursuing opportunities to enable our reseller partners to sell eValuator once we have established the market and the pricing for it. We believe there is real opportunity to get to market faster and more broadly via partners that have much larger client bases than we do. As stated in previous earnings calls, it is incumbent upon us to build the initial set of reference accounts so that our reseller sales teams can point to them as proof positive when selling into their current clients and prospects.

Moving to the guidance. Last quarter, we felt it prudent to revise our fiscal 2017 revenue guidance down to $26 million to $27 million as it was apparent that we were not on a run rate to reach our previous revenue guidance. As a reminder, the reasons for the adjustment were centered around 3 elements of our growth projections.

First, the average size of the new engagements we are winning in the Audit Services arena have been smaller than we anticipated. And much of this has to do with the fact that the government has not turned up the pace of recovery audit contractors, known as RAC audits, we experienced in years past. Almost every one in the industry projects that this important [audit] activity will pick up again in 2018 and beyond, and we should see some acceleration in our Audit Services revenue when this happens.

Second, our early adopter eValuator clients, the majority of which we named as Charter Members, received incentives to sign contracts with us, one of which was a trial period during which we would not bill them the contracted monthly amount. This will obviously delay the revenue contributions for a quarter or so depending on how quickly we can get them up and running. As mentioned before, eValuator is a very light implementation since it's cloud-based, but we still require some participation from our clients' IT staff, and sometimes that delays project implementations.

And finally, while we continue to anticipate that we will realize a meaningful perpetual license revenue deal with one of our larger reseller partners, that revenue contribution is not in our control, which has always been the case.

Looking ahead at our bottom line performance. We continue to watch our expenses, focusing our development efforts in areas that protect our current revenue while enabling us to grow revenue in the areas I've already mentioned. As our revenue begins to outpace attrition in legacy solutions, we anticipate that our EBITDA margins will improve over the course of 2018.

One final note, we've been busier than usual in the fourth quarter with Investor Relations opportunities, attending and presenting at conferences and conducting some nondeal roadshows, all in an effort to get out and tell our story to as broad a base of current and potential investors as possible. Looking ahead, we plan to continue on this path as we firmly believe our prospects for improved performance going forward are very real.

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

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

(Operator Instructions) And we'll take our first question from Matt Hewitt with Craig-Hallum Capital Group.

I've got a handful here. First and foremost, how many of the eValuator wins have you implemented at this point?

We've -- well, we've sold 5, and so we're implementing all 5. And we should have 1 or 2 live here in the next week or 2.

Okay. And I guess as you look out maybe over the next quarter, is it your intention or would it be possible to generate some type of an ROI or provide some type of metrics that show the benefit of implementing the eValuator, not only for your shareholders and us sell-side analysts but also for future customers to kind of see, "Here, here's what we've been able to capture for one or more of our customers."

Yes. So like the one we showed today in the slide, that's kind of blinded, that's a different one than the one we showed last quarter. So maybe every quarter we'll just show a new example from one of the existing clients of the return on revenue investment we've been able to achieve with them.

Okay. And then shifting gears a little bit to your distribution partners, they have been -- in my opinion, they've been behind. I think the expectation has been that they would have delivered more contracts, more revenues to you at this point, particularly Allscripts. And maybe an update on where that relationship stands today, any changes that have occurred here in the past quarter or 2 that can give us confidence that, that relationship can start to bear fruit.

Yes. Matt, it's Randy. Without getting too far into the weeds, they had change in ownership inside Allscripts with regard to who will manage our relationships and the Abstracting and Physician Query technologies, I think to the good. It's a guy we know pretty well that was on the brand early and then moved off and now he's back on. So that little transition, post the McKesson acquisition, I think augers well. We're now getting ready to attend their global sales kickoff meeting in January in Dallas, and I think we're on track to start working in Q1 and getting a real opportunity to sell into their base. But some of that delay, as we talked last quarter, was the McKesson deal and then some of the delay was one team that was on it from one division in their house moved over to something else, and a different team picked it back up. And we like them and know them well.

Okay. And so then -- so hopefully, things improve there. Now you're indicating that you would likely hand off eValuator to both Optum360 as well as Allscripts, what confidence do you have that they can actually start to sell that product, let alone the ones that they already have access to?

I think the eValuator sale is a pretty -- is an easier sale than maybe some of the Abstracting sales where you need a compliance need. This is more of a, "You need revenue, we'll help you get additional revenue while being more accurate." So that -- we think they have good-sized sales forces, they have very good, well-trained sales forces, and we can make good progress with them on that solution, which is a good solution. We're going to start talking to them about those much more now that we have established pricing in the market and have references. So we're ready to move to that next step now that we have good proof points in the market for both of us to move forward with and references -- clients they can call that we can move forward with jointly.

Got it, okay. And maybe one final one for Nick. A substantial decrease in DSOs in the fourth quarter or in the third quarter here. Was there maybe a heightened focus on collections? Or what drove that decline?

We keep a fairly steady effort around the license, Matt. Unfortunately, just with the annual renewal cycle being what it is and so many of our clients being on the calendar year cycle, that [number] was focused on a smaller number of invoices this quarter. And so [we've beaten] smaller number of invoices to the ground and [tracking] DSO, I would like to [track] it even further. I think it will move back up towards 60 days, which we feel like is actually a pretty healthy number for us in this -- this [particular] industry. But yes, there's nothing spectacular other than slightly lower annual renewal invoices.

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

Well, thank you again for your interest and support of Streamline Health. If you have any additional questions or need more information, please contact me directly at randy.salisbury@streamlinehealth.net. We look forward to speaking with you all again next April when we'll discuss our fourth quarter and fiscal year 2017 financial performance. Good day.

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