Streamline Health Solutions Inc (STRM) 2017 Q4 法說會逐字稿

Good day, and welcome to the Streamline Health Q4 fiscal year-end earnings 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.

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'll 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 financial websites.

Before we begin with prepared remarks, we want to be sure we're 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 releases 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're 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 our 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. Today, I wanted to comment on our fourth quarter and fiscal year 2017 performance. After which, I will share some of our thoughts and plans for fiscal year of 2018. Yesterday afternoon, we announced fourth quarter 2017 revenue of approximately $6.1 million, slightly down from the fourth quarter of 2016. Recurring revenues were 77% of total revenue for the fourth quarter of 2017. For the fiscal year 2017, we generated $24.3 million in revenue as compared to $27.1 million in revenue in fiscal year 2016. This decline was due to the absence of any material perpetual license revenue in this fiscal year, which we referenced in our third quarter call, and which contributed approximately $800,000 in revenue in fiscal year 2016. In addition, the transition we undertook late last year to refine our company's focus more to the middle of revenue cycle, from charge capture to bill drop, which entails selling our patient scheduling business and acquiring an audit service and technology business resulted in an $800,000 decline in total revenue in 2017. I will comment more about this transition in a few minutes.

While we generated approximately $400,000 in new services revenue during 2017, this gain was offset by revenue attrition of approximately $2 million primarily in our legacy ECM and financial management solutions.

Turning our attention now to professional services revenues. We're approximately $950,000 in the fourth quarter, an increase of approximately 19% over the third quarter of this fiscal year, and an increase of approximately 80% over the fourth quarter of last year. Our bookings for the fourth quarter of 2017 were $1.2 million and $4.7 million for the fiscal year. The majority of our bookings were from our new eValuator product in addition to coding and auditing services. I am pleased to report that our first quarter bookings of this new fiscal year, which ends April 30, currently exceeds $3 million, primarily comprised of our Coding and eValuator solutions. Since introducing our new eValuator technology last spring, we closed 6 deals during the fiscal year, 4 of these were with new clients. I mentioned last quarter that we expected fiscal year 2017 to be one of our best years in attracting new clients with 12 new accounts in the first 3 quarters. And I'm pleased to report that we ended the year with 15 new client additions to our roster. That's 15 new relationships that we will work to leverage and across our incremental technologies, our services going forward.

Looking at our sales funnel. Opportunity for our new eValuator technology continues to build. eValuator is helping us lead an industry movement, enabling health care providers to analyze 100% of their coding before sending a bill for payment. Today, almost all coding analysis is done well after those and released for reimbursement. Our new smarter way of doing business is gaining traction as our funnel includes a number of large recurring revenue opportunities as well as plenty of average-sized contracts. In total, we see more than $30 million in annual contract value potential in our pipeline today. Additionally, we are closing eValuator deals with clients, employing all the primary EMR technologies, be it at Meditech, our largest eValuator client-based today, or Allscripts and McKesson, et cetera. Without going too far into our first quarter performance, we've also sold eValuator, and the health care provider is using Epic and Cerner as their EMRs. The upside of this is that we continue to build credentials that help us overcome obstacles to purchase. We have 5 of our eValuator clients up and running today and plan to have the remainder live in the month of May. Through these accounts, we have provided video testimonials to aid us in our -- in selling new accounts. As we implement the solution, we're learning how to streamline the process and have brought 2 clients to go live in 30 days or less, which is one of our many selling points. eValuator is easy to implement.

Turning our attention now to adjusted EBITDA. For the fourth quarter, it was $1.2 million, up substantially from $535,000 in Q4 of 2016. Adjusted EBITDA for the fiscal year 2017 totaled $2.8 million or approximately 11.5% of revenue compared to $2.9 million or approximately 10.8% of revenue in fiscal 2016. I wanted to emphasize that the leadership team planned for the transition I referenced earlier, and throughout the year, we implemented tight cost and investment controls, so the decline in revenue we experienced did not negatively affect our balance sheet. In fact, looking deeper into some of our financial performance metrics for fiscal year 2017, I'm pleased that we reduced our cost of sales by 12%, our total operations expense by 15% and reduced both our operating loss and net loss for the year by 45%. In GAAP terms, our net income for the fourth quarter was $38,000, up from $1 million net loss in Q4 of last year. For the fiscal year 2017, we reduced our net loss to $3.1 million from a net loss of $5.2 million in fiscal year 2016. I've asked Nick Meeks, our CFO to address these items and others and more specifically in his prepared remarks coming up in a few minutes.

Fiscal year 2018 represents the first full year of our newly focused company with services and solutions designed to help health care providers improve their financial health so they can improve the health of the communities they serve. By narrowing our focus to the middle of the revenue cycle, from the first capture of charges for a patient through the submission of that patient's bill for reimbursement, we believe we have a more distinct and compelling value proposition that can help us win in the marketplace. And not just for hospitals, but with outpatient centers and clinic and physician practices as well. Our Coding solutions alongside our Auditing Services and technologies, are winning in the marketplace because they can help providers turn revenue cycles into revenue streams. There are specific solutions in the coding suite that are succeeding in the marketplace today. Our coding -- our clinical documentation integrity technology, known in the industry as CDI, proves as great benefit and great value to the revenue cycle process.

Last month, at one of our industry's largest trade shows, HIMSS, our Lafayette, Louisiana client, Lafayette General Hospital, won the 2017 Nicholas E. Davies Enterprise Award of Excellence for outstanding achievement in utilizing technology to improve patient outcomes. Let me take a minute to share with you the benefits that Lafayette is realizing, by using our CDI solution throughout their system. Most health care providers have a unique function in their HIM department called clinical documentation integrity. These specialists review medical records for incomplete, ambiguous or conflicting information in an effort to ensure all documentation accurately reflects the patient's condition and the acuity of care delivered. Lafayette General have been struggling with their CDI function. They lacked the ability to connect their team with the needed records and data in various systems across their 7 facilities, and they are mainly assigning routing and managing cases. Our CDI solution offered them the integration, automation and reporting that addressed all these concerns. And they soon realized an impressive return on investment. By identifying the cases with greatest potential for improvement and better handling of all CDI functions, Lafayette realized a net revenue improvement of $1.5 million since its implementation in 2015. In addition to capturing more revenue, our CDI solution helped them address certain quality issues with their care delivery. One metric that pairs track and factor into reimbursement calculations is hospital-acquired conditions or HACs. Using our CDI solutions, Lafayette discovered that 14% of cases with HACs were flagged because they were missing or contained inaccurate documentation. The alerts in our CDI solution enabled Lafayette to catch these issues much earlier. Also while the patient was still admitted and with the subsequent documentation corrections, helped them avoid nearly $700,000 in penalties. This is a clear example of how the integration, automation and reporting from our technology enables our clients to increase staff productivity, enhance their effectiveness and improve their overall financial performance.

Another technology that fits under the coding umbrella, is a big part of our refined focus going forward, is Abstracting. Our Abstracting technology enables health care providers to automate key elements of their coding functions. With custom workflows, robust reporting and integration with existing HIM, coding and CDI systems to drive productivity and compliance to help providers optimize operational and financial results. Earlier this month, we closed the meaningful contract expansion with a long-time client from both -- for both CDI and Abstracting. But we will be adding these solutions to 5 more facilities. And our sales pipeline contains more meaningful opportunities for both of our Abstracting and CDI technologies. I discussed the game-changing benefits of eValuator in previous earnings calls. So this morning, I thought it would be worthwhile to hear about the positive impacts from one of our clients.

Last month, we received a written testimonial from the Assistant Director of Revenue Cycle services and one of our new eValuator clients. In the letter, this person states, "eValuator identified a few cases already where the coding sequence was tagged for a review, which resulted in additional reimbursement. The implementation process was very smooth, organized and professional. We look forward to expanding the use of eValuator at all of our hospitals soon." But as you can see in this chart, we implemented our eValuator coding audit platform by one of their 4 sites earlier this year. In the first 90 days, the eValuator solution helped this client realize a gross impact of $90,731, a vast majority of which represented underbilled revenue that they did not collect due to inaccurate billing. Approximately 10% of the gross amount represented an overbilling risk that our client can now avoid in the future.

And more importantly, some of the cases eValuator found were like needles in a haystack. Cases that easily could have been billed as quoted and not been caught because the overall percentage of coding accuracy was quite high, in the 90% range. The results are why this client stated in his testimonial, that their organization is now implementing eValuator at 3 of their other facilities.

As we approach the second quarter of our fiscal year, we now have nearly 200 opportunities in our sales funnel. Further, of the 200 total potential opportunities in the sales funnel, 125 have been qualified, representing approximately $20 million in near-term revenue opportunity. We still see great opportunity for sales success with our current clients, which continues to represent about 20% of the opportunities we are currently pursuing. The other opportunities come through our marketing efforts, our sales team and referral and channel partners. We closed 2 eValuator clients in the fourth quarter and have closed 2 more in the first quarter of this new year. We believe the pace of our sales activity will accelerate and so (inaudible) forecast an average of 4 new eValuator deals each quarter throughout this fiscal 2018.

As I stated last quarter, as we gain more clients and bring them online, we will be able to leverage their successes, help attract and close future deals.

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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 by cutting their dates of AR, improving their cash on hand and reducing the number and dollar amount of patient bills being denied by payers. I will now turn the call over to Nick Meeks, who will provide greater detail on our financial results for the fourth quarter and full year of 2017. Nick?

Thanks, David. Good morning, everyone. Allow me to begin by thanking all within Streamline who contributed to a successful audit and reporting cycle over the last many weeks. 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 gain of approximately $134,000 related to the warrants that were issued in our 2012 pipe transactions. Those warrants expired in early February and the Q4 adjustment will be the final one impacting our financials.

Operating expenses continued the trend of being lower across the board both year-over-year and quarter-over-quarter. Adjusting for the gain recognized with the divestiture of scheduling last year, Streamline reduced operating expenses by more than $5 million over the last 4 quarters.

Moving on to the balance sheet. We finished the quarter with approximately $4.6 million of cash on hand, a subsequent increase from the $1.9 million of cash at the end of the third quarter. Through the full fiscal year, Streamline generated just over $2 million of cash from operations that was a net impact of $2.7 million in cash profitability, offset by $600,000 reduction in net working capital, predominantly the reduction of accounts payable balances at the year-end. The fourth quarter is traditionally the strongest cash generation quarter for Streamline and that was true for fiscal year 2017. Conversely, the fourth quarter is comparatively low cash generation quarter.

That being said, I'm pleased with our progress to date for Q1 of this year. Our bank debt decreased slightly in the fourth quarter as well, down from $4.8 million to $4.6 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 decreased over the end of the third fiscal quarter by approximately $14.9 million to $32.8 million. A portion of this drawdown was the normal trajectory we have experienced in recent quarters, but the substantial majority of the reduction resulted from the termination of a long-dated clinical analytic sales agreement, originally with NantHealth, but subsequently acquired by Allscripts. The revenue from the contract accelerated in its later years and also contained a termination penalty. Given that, the impact on fiscal year '18 will be immaterial.

As I did 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. Generally speaking, as we continue to add multiyear contracts with new eValuator clients and secure a number of multiyear renewals, I expect contracted backlog to increase in future periods.

Lastly, you might have noted that we are roughly 1 week of our normal 10-K reporting pace this year. We have used the incremental time to test with RSM, our application of the new revenue recognition standard, ASC 606. This was required to include a SAB 74 Disclosure on our 10-K on the impact of the standard in future periods. The largest impact for Streamline revolved around the recognition of term license revenues. Moving forward, term license recognition will more closely resemble perpetual license recognition. To expand a bit further on this, that means we recognized lower revenues from existing multiyear term license agreements than we otherwise would have. Our guidance for the year factors the impact of this revenue recognition change. I will close by noting that as we continue to simplify and focus operations, actions such as the elimination of most capital leases and the expiration of warrants have the knock-on benefit of simplifying our overall accounting and reporting. And in a virtual cycle, making the booking itself somewhat less expensive. That concludes my remarks. And I will now turn the call back to David Sides. David?

Thank you, Nick. As I mentioned at the outset of my prepared remarks, I want to spend a few minutes looking ahead to our fiscal year 2018. For the last 2 years, we focused our efforts on improving or accomplishing 3 strategic objectives: first, be more client centric; second, gross sales; third, innovate new solutions. Striving to achieve these strategic objectives over the previous couple of years led us to refine our focus of providing solutions and services in the middle of the revenue cycle for health care providers. That's why we acquired Opportune IT and told our patients scheduling business in late fiscal 2016.

With this as our primary focus, we've been able to innovate new solutions primarily in the form of our eValuator coding analysis platform. By focusing on solutions that can win in the market, we can grow sales by being more client centric, we can cross-sell additional solutions such as eValuator, CDI and Abstracting. Our challenge today is to generate enough growth to outpace the revenue attrition we experience each year. This past year, we experienced revenue attrition of approximately $2 million, roughly 9% of total revenue, including to a beginning revenue run rate of approximately $22.5 million in fiscal 2018. Looking at the year ahead, we are projecting a slightly slower pace of attrition, around 5% or 6%, getting to a revenue base without any growth of approximately $21.5 million as our starting point. From this pace, we expect to generate organic revenue growth of approximately 9% to 14% totaling $23.5 million to $24.5 million in fiscal year 2018. Primary growth drivers will be revenue contributions from eValuator sales, primarily in the second half of the year, CDI and Abstracting solution sales throughout the year, some of which have already closed in Q1, and from our recent partners, primarily through our Abstracting solutions, with a modest amount of eValuator revenue by the end of the year.

As mentioned earlier, with the tighter cost controls we've implemented, the normal running of our business should continue to deliver improved bottom line performance. Positive net income in Q4 of 2017 makes 2 quarters in a row. And we believe, we will see more of the same in Q1 of this new fiscal year.

We've been effective stewards of our balance sheet as we transition this company from a variety of technologies throughout the breadth of the entire patient experience, from check-in to final bill and reimbursement. To the new Streamline Health today, Revenue Cycle management primarily focused on improving coding accuracy and revenue integrity. Our forecast for adjusted EBITDA for fiscal year 2018 is between $1.5 million and $2.5 million. Our projections for cash generation during the year and the $1 million-plus range.

In conclusion, a year ago I said that I believe the move toward value-based health care will not change under the new administration and during the course of the year, Congress did not change its Affordable Care Act. We continue to believe that our focus on Revenue Cycle optimization will remain compelling for the long-term as health care providers big and small, need to improve their efficiency from charge capture to bill drop. And that the strategic moves we have made, and will make going forward, will continue to support the tagline we use when corresponding with our clients and prospects, which remains quality as the new revenue. 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 and 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) And we'll hear first from Matt Hewitt with Craig-Hallum Capital Group.

First up, so given all of the momentum that you mentioned, David. I'm curious if you're looking to potentially add to your sales force, that help you may be capitalize some of on -- some of that pipeline a little bit quicker, either with specific customer base or just more broadly speaking, is there anything that there that you could add from headcount perspective?

Yes. I think so that headcount's been fairly set for the last year or so. And we have now, I think, a better view of what makes a repeatable sales process. So we have really good client testimonials, videos, (inaudible) marketing campaigns and so I think this year will add people to the sales force now that we think they have a good repeatable process to try to get that to accelerate, and we have the cash and the earnings power to do so. And so I think you'll see that happen this year and it's in our current budget and guidance. So there's nothing there.

Great. And then, shifting to your channel a little bit. So we got a number of partnerships that you've announced over the past year or so, Allscripts and others. I'm just curious if you can give an update on how those relationships are proceeding and maybe what your expectations are coming out of those various channels this year?

Some of those channels have started to go -- made good progress. So we got into GA with Allscripts and we think next quarter, we could see some deals come through for that. So that can be exciting. We'll see how that goes. With Optum, we're still working through the process to get into their GA in the larger group. We still work with them on their large end-to-end deals. So it would be nice to have one of those to share but none of that's in our guidance. So we've taken that totally out due to its binary nature. So it's not in there at all. That would be upside this year if something comes through from them.

Okay. Great. And then, maybe one more for me and then I'll hop back into queue. Have you seen anything given the unique nature of eValuator? You guys seemed to have struck a chord with the hospitals. You're gaining momentum. Have you seen anything or heard anything on the competitive landscape implying that maybe somebody else is caught wind of what you've built and they're trying to mimic or replicate it and what could that mean for this year?

Well, there's already a competitor out there that -- kind of a single competitor. But they sell it more from a services perspective than a software perspective. So in other words, it's kind of a consulting company that's really -- their main focus is selling hours than selling software. We're trying to enable the client to use the software with their own people to be more accurate. And so, we have always had a competitor there. We, actually -- probably, will start taking some share from them this year. At least, it looks like in our funnel. And we're moving on -- we've talked about doing inpatient, outpatient and pro-fee and we're starting to do a lot more demos on the pro-fee side. Over time, we may move to an adjacency like charge capture validation. We've seen that in the marketplace. There's clients that have said, "Wow, we love this tool, could you do other things with it?" We may do that as we go forward, which will kind of further differentiate us and try to get ahead of people trying to copy the idea.

(Operator Instructions) We'll hear next from Frank Sparacino with First Analysis.

David, just on eValuator. I'm curious, in your discussions with hospitals to-date, in terms of not moving forward, what is the primary pushback or reason for delays in those sales cycles that you've seen?

I think part of the -- good question, Frank. I think part of the pushback from clients is really how do they operationalize it. So if today, they do a sampling who still audit and now we are saying, look, you want to have a computer review everything. And then have your auditors check a smaller list that we think are really high-value. Sometimes clients -- that's a shift and so they're thinking about, okay, I don't have a structure to support that. We kind of talk through with them. Here's the way you could take people working on denials or use our people, use our auditors to help with the transition. So you're not getting as many denials and then have your -- people working on denials that came back from codes, start working on things real time. So that kind of industry shift, to say let's check 100% at times can be daunting for people who don't have a structure that adjusted that yet. So we, in our sales process, talk to, okay, here's the change management program or a way to get some post to pre-bills. And once you get to pre-bill, here's all these clients you can talk to, who made the transition and how much better they're doing financially once they've made that shift. So often, it's -- if things stall out, it's from that perspective of, okay, I get it. I see that this is an important thing to do. But how do I actually get there. What do I have to do, organizationally to affect that change, and that can sometimes slow down as they think part through. But again, we're trying to fine-tune our sales message to help people make it -- kind of, cross that chasm and get to the other side where it's actually real-time checks and they're in a better place continuously rather than during this a couple of times a year.

Great. And maybe one follow-up. Just in terms of the churn last year, and the forecast for this year, between the 2 product lines, is it evenly split between ECM and the financial side in terms of last year, and what you're forecasting this year? Just any thoughts from a strategic standpoint in terms of those particular business lines?

It was more on the ECM side. We have one large client stop using our ECM products and that had a disproportionate kind of impact last year. And obviously, feeds into this year a little bit too. So it's mainly ECM.

(Operator Instructions) And at this time, I'll turn the conference over to Mr. Salisbury for any additional or closing remarks.

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 in June when we'll discuss our first quarter 2018 financial performance. Thank you, and good day.

Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation.