Streamline Health Solutions Inc (STRM) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Streamline Health Solutions Third Quarter Fiscal Year 2018 Results. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Randy Salisbury, Senior Vice President and Chief Marketing Officer for Streamline Health Solutions. Thank you. You may begin.

Thank you for joining us to review the financial results of Streamline Health Solutions for the third quarter of fiscal year 2018, which ended October 31, 2018. As the conference call operator indicated, my name is Randy Salisbury, Senior Vice President and Chief Marketing Officer here at Streamline Health. I manage all communications, including investor relations.

Joining me on the call today is David Sides, President and Chief Executive Officer; and Tom Gibson, Senior Vice President and Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a 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 www.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 discuss. Please refer to the company's press releases and filings made with the U.S. Securities and Exchange Commission, including our most recent 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?

Thanks, Randy. First, I want to comment on our third quarter 2018 performance. Then I want to comment on what we anticipate seeing for the remainder of our fiscal year. I also want to provide some insight into our planning for our next fiscal year 2019.

With regard to the third quarter, I believe it was a quarter of solid performance with a number of achievements that will contribute to building a solid foundation for sustained growth and improving profitability. Specifically, as released yesterday afternoon, for the third quarter of fiscal 2018, we generated revenues of approximately $5.4 million, a modest increase sequentially from the second quarter of this fiscal year and down approximately 16% as compared to the same period a year ago. The decline is attributable to churn and pricing pressure on some of our legacy solutions that we expect to be offset going forward as our eValuator clients come online. More on that in a few minutes.

Recurring revenues were approximately 82% of total revenue for the third quarter, up from 79% in Q3 a year ago, and about the same as the previous quarter of 83%. Our bookings for the fiscal quarter of 2018 were $1.8 million. Through the first 9 months of this fiscal year, our bookings are $7.1 million, which is double that of the same period a year ago. We are generating quality bookings, and will continue to target between $2 million to $3 million per quarter going forward. When we combine bookings growth with quarterly sequential growth in our backlog of 13%, I believe these leading indicators point to our company turning from lower revenue to a period of revenue growth in 2019 and beyond.

The bookings in Q3 consisted primarily of 2 new eValuator clients, a meaningful expansion of our CDI solution with a current long-term client and the new sale of our business analytics and financial management solution suite. The 2 new eValuator client contracts in the quarter were Peak Health Solutions and Citizens Healthcare in Texas.

Pipeline activities in the fourth quarter has been more pronounced than at any point in our fiscal year. We had numerous and larger-contract opportunities for eValuator in the pipeline, and we continued to have CDI and Abstracting prospects as well. In fact, there are several individual pipeline opportunities that are 4 or 5x what we have previously disclosed as an average deal size for eValuator. We are now in conversations with larger hospital groups and IDNs in addition to the regional and community hospital systems.

During our last earnings call, I mentioned the signing of Peak Health Solutions earlier in our third quarter as our first reseller partner of eValuator. Our sales pipeline today has multiple reseller-partner opportunities that we are exploring. But we want to be very selective in choosing our go-to-market partners. We anticipate having more news on this subject in the coming quarters.

Moving now to adjusted EBITDA. We generated approximately $810,000 in Q3 of this year, down from $1,514,000 in the third quarter of 2017. The lower revenues have not impacted our adjusted EBITDA on a dollar-for-dollar basis, specifically, because of our cost-containment discipline.

I've asked our CFO, Tom Gibson, to cover this and other financial metrics in more detail in his prepared remarks coming up shortly.

In GAAP terms, our net loss for the third quarter was approximately $679,000, which after adjusting for the onetime cost from the previously disclosed Atlanta move of $562,000, resulted in a net loss of $117,000. The net loss for the quarter is a substantial improvement from Q2 of this year, but down slightly from essentially breakeven in Q3 of last year. At the end of the third quarter this year, our cash on hand was approximately $1.1 million as compared to approximately $1.9 million at the end of Q3 last year. As a reminder, there is a seasonality to the use of cash throughout the year, in which we build our largest cash-on-hand amounts at the end of our fourth quarter in January from the bulk of our annual client renewals repay.

We've taken the necessary steps to improve our fixed cost and balance sheet to provide us with the ability to invest in sales and marketing efforts to grow eValuator. I'm proud of our 100-plus associates that have rallied around our cost-containment initiatives and made sacrifices for our company. These sacrifices will pay off as we now begin to grow our business around eValuator. As our company turns to sales growth, we are pursuing several different swim lanes that are in parallel. These swim lanes include, but are not limited to, investing in our key customer influencers and our early adopters, building a network of healthcare executives to be our evangelist, building out our next sales channel and our distributor partner channels. These are the next logical steps behind completion and introduction of the eValuator to the market. I will now turn our call over to Tom Gibson, who will provide greater detail on our financial results for the third quarter of fiscal year 2018. Tom?

Thank you, David, and good morning, everyone. We continue to execute on certain cost-savings initiatives. In the third quarter, as previously disclosed, the company assigned all its future obligations under its Atlanta office lease to a third party. The Atlanta office move will provide $600,000 in cash and cost savings for our adjusted EBITDA in fiscal year 2019. Combined with our New York City sublease, the company will have $1.4 million in cost savings before adjusted EBITDA and over $800,000 in cash savings in fiscal 2019. The company recognized $562,000 in expenses associated with the Atlanta office move, consisting of $262,000 in transactional cost, $500,000 in noncash write-off of leasehold improvements, furniture and equipment, all net of $200,000 in deferred rent liability that was voided with the assignment. The write-off of the leasehold improvements, furniture and equipment will lower future amortization and depreciation expense for the next 3 to 4 years.

I will now move on to the financial performance for the third quarter and the first 9 months of 2018. In the quarter, we generated $5.4 million of revenue and $810,000 in adjusted EBITDA compared with the same period in 2017, where we generated $6.4 million of revenue and $1,514,000 in adjusted EBITDA.

The higher revenues in 2017 came from recurring content management software and professional services. The content management software has experienced some pricing pressure, which we have reviewed in previous earning call, and we repositioned some of the auditing professional services staff to expand and support the eValuator product. eValuator has a much better margin being a pure SaaS-based technology, longer contracts, lighter implementation and consist almost entirely of recurring revenue.

Operating expenses, net of the onetime Atlanta office move cost were approximately $5.4 million in the third quarter of 2018, down $700,000 from the same quarter of 2017. There was no benefit recorded in operating cost for the third quarter of 2018 for the Atlanta office move as it was effective November 1, 2018, the first day of our fiscal fourth quarter.

The primary factors in the lower operating cost from 2017 were cost of sales and G&A that were each lower by $400,000 and was offset slightly by $100,000 in additional R&D investment. The reduction of cost of sales is primarily attributable to the improved apportionment of development personnel to enhancements for eValuator. And G&A was primarily depreciation and amortization.

For the 9 months ended October 31, 2018, the company reported $17.8 million in operating cost, adjusted for the real estate exit cost compared with $20.8 million in the same period last year, a reduction of $3 million in operating cost in a 9-month period. Of that $3 million reduction, the noncash portion of the savings were approximately $1.2 million, leaving $1.8 million of true cash-related cost savings.

I want to reiterate and emphasize this point: In the first 9 months of 2018 as compared to 2017, the company saved some $1.8 million of cash-related operating cost. The savings that have been executed, including real estate, are not fully realized in the 2018 numbers, meaning the cost savings will continue to show up in quarters ahead and throughout 2019. We want to redeploy certain amounts of these savings to grow our business, primarily around eValuator.

In addition to the adjustment for the onetime cost of the Atlanta office move in Q3 2018, the nearly $700,000 net loss includes $700,000 of noncash depreciation and amortization and $125,000 of share-based compensation.

Moving to the balance sheet. We finished the quarter with approximately $1.1 million of cash on hand. That includes the use of cash during the quarter from normal operations. As David mentioned a few minutes ago, we have an established seasonality to the levels of cash we have on hand at the end of each quarter. The company generates a material amount of its cash from annual invoices, a substantial number of these invoices are issued in November and collected the following January. The company anticipates it will generate cash in Q4 2018 in a similar manner to prior years and will end the year with a healthy cash balance.

Beyond operations, for the second straight quarter, we invested $800,000 in new functionality for our key client solutions, primarily eValuator.

We foresee continuing to invest in the solutions that have the most potential for revenue growth. The company is expected to spend a total of $2.8 million to $3 million on capitalized software development for the full fiscal year 2018 as compared to a $1.8 million spend on capitalized software development for fiscal 2017. The company anticipates a lower spend in fiscal 2019 as the heavy lifting required to introduce eValuator into the market is behind us.

On the financing side, we continue to make our regular $150,000 quarterly payments on our term loan, the balance of which was $4.1 million, net of financing cost at the end of the quarter. We issued a press release in November 2018 that the company amended and extended its credit facility that includes both the term loan and the line of credit. The company extended the termination date of the loan agreement until 2020 and amended certain covenants to account for the investment made in eValuator in 2018. The company viewed the amendment and extension at our banking partner having confidence in the company's vision on the investment in eValuator.

Turning our attention to future trends in non-GAAP measures. Backlog increased for the first time in many quarters by 13%, sequentially to $26 million.

A reminder here that due to the variable nature of some of the audit service engagements, we only record in backlog those agreements which have clear, fixed revenue commitments. The backlog measure, as reported, includes only contracts through their natural, original term or through the end of the next succeeding auto renewal term and are not extended for future auto renewal periods. The timing of the contract to their natural terminations compared with the end of the quarter could materially impact the reported value of the backlog measure. The company is evaluating this measure, both its definition and reporting.

That concludes my remarks. But before I turn the call back to David, I wanted to add that my first full quarter with the company has been both rewarding and pleasant. I feel that I fit very well with the other members of the executive team and our board. I have seen this executive team execute, and that execution has been realized in our financial statements. I look forward to playing my part to help bring our vision of growth to life and to continue to build upon this positive momentum in the quarters ahead. David?

Thank you, Tom. Last quarter, I shared some recent headlines from various industry publications to communicate the difficulties that American healthcare providers face in today's economic environment. Just last week, Fitch, the credit-rating agency, stated that credit downgrades outweighed upgrades in 2018, and the trend is expected to continue as "threats to healthcare business models roll down to an attack on pricing power." And not surprisingly, Moody's published a negative outlook for the nonprofit hospital sector, more reasons than ever for healthcare providers to focus on getting full and fair compensation for the care they provide to their patients. Our eValuator solution, a 100% cloud-based, automated pre-bill coding analysis platform, is designed to help every healthcare provider do just that.

In fact, one of our long-term clients and user of eValuator, Teresa Michael, Director of HIM at Sarasota Memorial in Florida, stated in a testimonial we filmed last month, how eValuator has fit right into their workflow in helping them improve their revenue integrity. "We were looking at a number of different tools to do more pre-bill auditing, and we spoke with Streamline. They offered to do a data analysis of our current coding, which we found very valuable. That helped us make our decision." In that analysis, we showed Sarasota where improvements could be made to help them catch and correct most of the under-billing they were experiencing and rectify some of the overbilling as well, helping them to reduce the risk of an audit. Months after implementation and using eValuator every day, Teresa said, "It has been working very well for us. We've been reviewing all the cases that have gone through eValuator, and we've consistently been making improvements. We've been working with Streamline to help us make it even better, and they have been very cooperative in expanding the product even more."

When we look at just the bottom of our current sales funnel for this quarter, we believe we have the potential to close between 4 and 8 new eValuator contracts by January 31, 2019. Our goal of 16 new deals this fiscal year is still in reach. And we envision accelerating the pace of closings ahead of fiscal 2019 as we have more referenceable accounts and as we continue to formalize our prospecting and selling process.

We don't normally comment on guidance during our third quarter call. We usually do this when we report our fiscal year-end results. But given the impact of the many operational improvements we've made over the past couple of years, including the many cost-containment measures we have implemented, we are confident in projecting substantial adjusted EBITDA growth next year to nearly $5 million. That is predicated on the same revenue base as this year although we expect that to grow in 2019 as well. At this point in our fiscal year, we have very good visibility in the client renewals on our legacy solution, and most of our larger clients have renewed their contracts for next year. With existing revenue attrition more manageable today than in years passed, we foresee our new revenue generation exceeding this attrition, leading to the modest revenue growth I just mentioned.

We will provide more specific guidance, as usual, during our Q4 and fiscal year-end call.

My enthusiasm for next year is based on key strengths we can leverage going forward: first, as I mentioned, both our near term and mid-range sales pipeline remains full of qualified prospects, primarily for eValuator, but also for our Abstracting and CDI solutions through our direct sales efforts and through key resellers; second, by rolling out our outpatient and Profee eValuator solutions, we are increasing the breadth of our pipeline of prospects; third, the impact of adding eValuator resellers for our marketing mix. As mentioned earlier, we are, just now, entering into conversations with resellers about enabling them to sell eValuator to their clients and prospects. And lastly, our improving EBITDA gives us additional leverage to invest, as I have described, to accelerate sales.

There are many benefits of our cloud-based, automated pre-billing technology that are usually measured in all 3 phases of use. Our eValuator solution will enable hospitals, outpatient facilities and physician practices to greatly improve their coding practices, seeing potential benefits like cutting their days of accounts receivable, improving their cash on hand, reducing the number and dollar amounts of patient bills being denied by payers and reducing the need for post-bill audits.

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) Our first question comes from the line of Matt Hewitt with Craig-Hallum.

Yes. This is Lucas Baranowski on for Matt Hewitt here at Craig-Hallum. Regarding eValuator, you've previously commented on how you're building up a referenceable client base for Epic, Cerner and MEDITECH, EMR customers. So maybe you could give us an update on how that initiative is progressing.

Thanks, Lucas. This is David Sides. So the -- we've got really good referenceable clients on MEDITECH in Allscripts, multiples there. We have a couple Epic clients, and we're close to signing a third Epic client. So we have a couple Epic clients live. The third will be a big metric for us because that's when people have a kind of knockout question of how many do you have, and they want to hear the word 3. Those clients are going really well, they're larger clients and 1 or 2 Cerner clients. So we are moving through to major ones. This quarter, we think we'll get our third, maybe even a fourth Epic. But the important thing of it, we will have 3 Epics live, we think, by the end of Q4.

Yes, that sounds great. And then kind of turning to the pipeline, it sounds like you've got a pretty nice pipeline of deals there, and potentially some larger ones. So maybe you could just give a little color on how some of those larger deals kind of -- that are in the pipeline, kind of came about, and whether they are more inpatient versus outpatient?

So some of the -- good question. The larger deals are ones that have been going on for some time. So when you get to larger clients, greater than 5 or 10 hospitals, they tend to move more slowly and build consensus with a lot of people. So these are deals we've been working on for some time, for 2 or 3 quarters, that are starting to come to fruition. They are anywhere greater than $300,000, where our average size is in the $100,000 range. And we're in the final negotiations with those though they'd take a while because they have more committee approvals and things like that. But it's primarily inpatient, some outpatient. And our Profee is also differentiating us in that we can give them a view across their health system. So we can show clients everything that's happening in their health system, where they have risk, reward and how to manage that across a broader, kind of, just a view than maybe some of our competitors that can't really get through a health system-wide view. So the -- our expansion in the Profee and outpatient is also helping us with these larger clients because there aren't other alternatives that we've seen in the market.

Okay. And then kind of given the early success you seem to be having there with the eValuator, have you noticed anything from a competitive standpoint that indicates others might be trying to provide something similar?

It's pretty much the same set that we've seen so far. We have seen some of the competitors discount their offering just recently, which we take as a good sign in that they, at least, recognize that we're out here. But we are winning on functionality. So one of the things that we win on that I talked about before is having that system-wide view in our reporting capabilities. So some of our competitors that have less-modern solutions, let's say, they have a hard time reporting across outpatient, inpatient and Profee, and some competitors may not have answers for all of those, or they may have bought different companies or different solutions. So you have one solution that did inpatient, one that did outpatient, maybe don't even have Profee. Well to show a report across the 2 is really difficult because you have different databases. They weren't made to be put together. They are not built together. And so that reporting becomes really a strong selling point for us in that you have a unified view of: Where should I put my resources to improve my coding accuracy? What are my revenue integrity problems in this hospital or this clinic or this physician? And we can show them that more quickly in kind of an aggregate view. And I think we are ahead there for some time because those are more difficult architecture problems for people to correct from a software perspective.

Okay. Great. And then you talked a bit about cost-saving measures. And looking at the $5 million in adjusted EBITDA, I mean, that would suggest that a lot of that cost savings is going to be flowing to the bottom line but are there also, maybe, some areas that you're looking to invest for growth in fiscal '19? And if so, what would those be?

Yes. A good question. So we're going to work on our sales side, investing in sales from our beta clients, continuing to expand, so we may expand past outpatient and Profee into pediatrics, oncology, some more niche areas to further our lead, setting up resellers for the solution. So that $5 million is kind of including the investments that we're thinking of making. We've got such cost savings coming through just from the offices that are real that I think it's hard for people to see in the run rate. And as we put together the budget for next year that shows some revenue growth and EBITDA growth, the EBITDA growth just comes through so much from the last 2 quarters of changes from a real estate perspective that we just wanted to be sure and highlight that's what we see happening for next year. If sales accelerate in this quarter, Q1 and Q2, we could certainly even go above that. But we'll have a better view and real guidance once we finish this quarter from a sales perspective and can project forward with a more complete view in our next earnings call.

Yes. And then I guess, going off of that, the growth that you are expecting for next year, I mean, you touched on a lot of things there, some sales investments, resellers, expanding into kind of new customer segments, I guess, so which of those factors do you currently see as being kind of the most important to achieving that growth?

Well, actually, I still -- and at this stage, I still see that client testimonials and the number and breadth of clients we have and their experience is the most important. So we're putting a lot of time to be sure our client success program works really well because those reference clients are just the key to evangelizing the next set. So one way we are even approaching sales is, those clients are helping us in a region to fill out other clients in that region by hosting lunches or just get-togethers and talking to the people that they know who can benefit from this solution. So as you get really great results with clients, they become passionate around how they can help you expand and why other people that they know need to have the same benefit and can use the solution in a similar way. That's some of your absolute best ways to reach your next clients.

Our next question comes from the line of Frank Sparacino with First Analysis.

Maybe just first on attrition for the current fiscal year. What is the estimated attrition?

For 2018? Or for -- what do we think for 2019? For 2018...

It's about $1 million, $1.5 million.

$1.5 million.

And is that a good number for next year, David?

Smaller.

I think it's going to be a little bit smaller. So Frank, we've gotten through a lot of the renewals, and we're -- on an another good positive note, we're starting to see multiyear renewals for the first time in some of the legacies, which is helpful because it gives us visibility not just for '19 but for '20.

And if you looked at '18, the $1.5 million, how does that roughly break down by product category?

Mainly ECM, but also some, probably, business analytics.

A small dollar amount of business analytics.

Okay. Well we sold some business analytics this year too. So somewhat offset.

Okay. And then Tom, as I look at the balance sheet, I just was hoping you could clarify. The contract AR number keeps going up, and it's a sizable number. So just curious what's driving that.

Yes, I think that's mainly from our change to ASC 606. And I think you're probably seeing the peak of that number based on where our volume is today. It is because, of course, under ASC 606, you have to take some of those future revenues and recognize them earlier than we did under our old revenue rec policy.

Okay. Good. And just on '19 in terms of the investments. I know you talked a little bit about sales and R&D side as well, I guess, but maybe that's a little bit more modest given this had been a bigger year with eValuator. But in terms of maybe sales capacity, David, can you just give me a sense where we're at today? And where you think you'd like to be 12 months from now?

Yes, so just to clarify on the R&D. So we'd see kind of moderating next year somewhat. So sales up, R&D somewhat less as we move from new feature to more support as we get more clients live. On the sales side, we started working with people on how do we get into new relationships to us, larger relationships. That's a new initiative we've started just really recently. Just when you get to really large places, it's complicated to navigate the politics. I'm talking about greater than $5 billion organizations. Our functionality works in that level of organization now. We feel comfortable with its performance, scalability, its ability to deliver value, where we just started to recently look at how do you sell into that kind of client. And that's why you see -- even though we've been selling to some for a few quarters, we're working on more of those larger ones going forward. So on the sales capacity side, I think you could see us add maybe someone who works on large national accounts, like the megas, greater than $10 billion or $20 billion of revenue kind of accounts. And we know that those are large, long-term sales, but you get a client like that, there's enormous potential within that base. So I think we may add someone of that caliber to the team at some point, just a national sales person, and we've talked about that internally what they'd need to do. But otherwise, the rest of the team feels pretty good. I think if we see some reseller activity from -- we have one reseller now. We've talked to 1 or 2 others. That could be a nice addition to our -- to what our own team is doing that would kind of accelerate our plans for our budget purposes next year. We're always conservative. And then if things speed up on the sales front, we'll kind of add as we go. And then, obviously, we'd adjust all the metrics up from there. But we wanted to be sure and give an early view that with the changes we've already made, there is a lot of earnings power in the business, even net after the investments.

Mr. Salisbury, there are no further questions at this time. I'll turn the floor back to you for any final comments.

Thank you, Melissa, and thank you all, again, for your interest in and support of Streamline Health. If you have any additional questions or need more information, please don't hesitate to contact me at randy.salisbury@streamlinehealth.net.

We look forward to speaking with you again in the spring, when we will discuss our fourth quarter and fiscal year-end 2018 financial performance. Good day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.