TruBridge Inc (TBRG) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the CPSI second quarter earnings conference call.

During the presentation all participants are in the listen only mode afterwards we will conduct a question and answer session at that time if you have a question please press the “1” followed by the “4” on your telephone.

As a reminder, this conference is being recorded, Friday, July 25th of 2003.

I would now like to turn the conference over to David Dye, President and Chief Executive Officer.

Please go ahead, sir.

Thank you, Tammy.

Good morning everyone and welcome to the call.

Joining me today is Steve Walker, our Chief Financial Officer.

Before we get started I will read our forward-looking disclosure statement.

During this conference call we may make statements regarding future operating plans, expectations and performance that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

We caution you that any such forward-looking statements are only predictions and are not guarantees of future performance.

Actual results might differ materially from those projected in the forward-looking statements as a result of risks, uncertainties and other factors including those described in our public releases and reports filed with the Securities and Exchange Commission including, but not limited to, our recent annual report on Form 10-K.

We also caution investors that the forward-looking information provided in this call represents our outlook only as of this date, and we undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call.

Okay to begin this morning, Stephen and I have about 15 minutes of prepared comments and then we will take your questions.

I will begin with a review of our second quarter operational highlights followed by some thoughts on the current spending climate in our marketplace.

In the quarter we installed the CPSI financial and patient accounting system in 11 new client facilities.

These hospitals ranged in size from 15 beds to 241 beds.

Seven of the facilities also installed our clinical applications and three installed nursing point of care.

Add-on sales to our existing customer base represented about 10 percent of total revenues compared to 14 percent for the same period last year.

As we have previously released, during the quarter we executed new systems sales contracts with 19 facilities, which is a record.

The average contract size for the system purchases, inclusive of conversion and installation and training fee, was $450,000, which is down sequentially from 750,000.

Our total number of signed contracts in the first six months of 2003 is 27.

These hospitals are located in sixteen states across the country, with 25 of the facilities in the under 100 bed size category, and remaining two both over 200 beds.

The number of prospects hospitals in our sales pipeline remains high, as we had 73 active sales prospects as of the end of the quarter, which is up from 55 at this time last year.

Of the 73 prospects, 16 are greater than 100 beds in size.

Our outsourcing services division, which is comprised of patient statement, electronic billing and business office outsourcing components, continues to grow steadily.

Total outsourcing revenues was up 49 percent over the same period last year, increasing from 7 percent of total revenue in the second quarter of 2002 to 9 percent this quarter.

Our twelve-month backlog increased 2.3 million sequentially.

As of June 30th, backlog totaled 59.9 million, made up of 17.7 million in non-recurring system purchases and 42.2 million in recurring fees.

We have continued to make great strides with new product rollout and development.

Our computerized physician order entry product has been well received.

It is in general release and is now operational at several facilities.

As an example, during the quarter at a new client hospital with greater than 200 beds, we performed a successful full system installation which included the day one CPOE go live, in which 100 percent of all ancillary orders were entered and continued to be entered electronically by the full staff of 250.

Additionally our Web base physician chart product, ChartLink, is now installed at more than 80 client hospitals.

Most importantly, our PACS development remains on schedule.

We have continued on-site clinical evaluations of the product and we now expect to fully install the application at three hospitals by the end of 2003.

Our marketing efforts are in full gear, and we currently estimate that we will install our PACS at 18 hospitals in 2004.

I would now like to spend a few moments discussing the trends we're seeing in our market, how these trends are affecting our Company, and what we're doing as a Company to respond.

As stated in the press release, guidance for the third quarter is for gross revenues of 18.5 to 19.5 million, with net income of 1.4 to 1.6 million, or 13 to 15 cents per share.

Obviously we're disappointed that our guidance for the third quarter is down over the same period last year and that our margins are projected as significantly weaker.

Although we anticipate performing at least 14 system installations in the quarter, none of the implementations are in hospitals over 100 beds in size, and only one includes nursing point of care.

The lack of a large hospital installation, combined with the small average deal size for those installed scheduled places significant pressure on our margins as a result of our fixed costs.

We firmly believe that CPSI is currently properly staffed to effectively support our client base, while allowing for the ability to install maximum amount of new installs in the near future.

Based on this fact and current market conditions, we do not anticipate any new hiring for the next several months.

After multiple recent discussions with community hospital CFOs and CEOs of both prospective customers and current clients, we believe that the financial status of the community hospital marketplace is not as strong today as it was last year, which is negatively affecting the amount of applications being purchased by our new customers upfront, and limiting the cross selling opportunities to our current client base.

This is due in large part to reduced Medicaid reimbursements and delayed Medicaid payments as a result of state budget crises in more than 30 states.

Although the Medicaid payor mix is typically only 10 to 20 percent of total payments for our customer base, margins are being affected enough that hospitals seem to be less anxious to spend money for IT purchases, even though many of them realize that in the near future they must do so in order to remain competitive.

Medicare reimbursement has remained stable.

However, uncertainty over potential reimbursement aid to rural health care providers being debated in Congress is contributing to system purchase delays.

In addition, we believe that many smaller hospitals are waiting to see if Congress will increase the maximum allowable number of acute care beds for a facility to be designated as a critical access hospital.

The current maximum is 15 beds with potential increases up to 50 beds being debated.

The critical access designation allows hospitals to be cost based reimbursed for a large percentage of IT purchases.

Generally speaking, we have seen the critical access hospitals move more quickly when pursuing technology solutions.

Regarding future IT spending by community hospitals, it is difficult to determine when the trend will improve.

States will be receiving $10 billion in Medicaid funding aid via the recently passed tax cut bell.

And Medicare reimbursement assistance for rural hospitals is included in both the House and Senate versions of the Medicare prescription drug bills currently being considered.

Based on our continued high number of community hospitals prospects in our sales pipeline, the understood need for investment in an integrated information technology solution is at or near an all-time high.

In the meantime, we are steadfastly focused on factors that are within our control.

Most importantly, the quality of customer support being provided to our current clients and our win rate versus the competition in generating new business.

We're confident that our support quality remains the best in the business.

And our competitive win rate thus far in 2003 is a remarkable 73 percent.

Those two factors have, and always will, go hand in hand.

Additionally, our balance sheet statistics were extremely strong as of the end of the second quarter, with record free cash flow, declining DSOs, and an asset to liability ratio of 4.1 to 1.

Based on sales to date, we currently have five hospitals slated for installation in the fourth quarter, with an average deal size of $950,000.

This Company, and in particular this management team, has weathered many short-term ups and downs, while consistently delivering long-term profitability and growth.

With the potentially improving reimbursement climate, a widespread need for the adoption of integrated clinical and financial solutions, and the upcoming release of our PACS solution at the end of this year, CPSI's future is very bright.

I would now like to turn the call over to Steve for a brief financial summary.

Thanks, David.

Revenues for the second quarter increased 13.7 percent to 19.9 million, compared with 17.5 million for the second quarter of 2002.

Recurring revenues represented 51.5 percent of total revenues for the second quarter.

Income from operations for the second quarter increased 19.7 percent to 3.3 million, and net income increased to 17.8 percent to 2.1 million compared with the pro forma second quarter of 2002.

Pro forma financial information presented in the income statement reflects a provision for corporate income tax during the (inaudible) period, during which CPSI was taxed as an S Corporation.

Our effective tax rate for the second quarter remained at 37.4 percent.

Turning now to the six months ended June 30, 2003, revenues increased 16.1 percent to 40 million, compared with 34.4 million for the same period in 2002.

Recurring revenues represented 50.6 percent of total revenues for the six months.

Income from operations for the first half of 2003 increased 17.5 percent to 6.5 million, up from 5.6 million in the same period year ago.

Our gross profit margin decreased 40 basis points to 40.9 percent for the six months ending June 30, 2003 compared with 41.3 percent for the six months ended 2002.

Pro forma net income increased 16.8 percent to 4.2 million for the first six months of 2003 compared with 3.6 million for the same period a year earlier.

The pro forma net income margin for the six months ended June 30, 2002 and 2003, remained constant at 10.2 percent.

Our balance sheet remains strong with 8.4 million in cash and 23.1 million in current assets compared with 5.7 million in current liabilities, which translates to a 4.1 to 1 current ratio, and we have no debt.

Our DSOs were 50 days for the second quarter, an improvement of 6 days from the first quarter.

And we finished within our range of 45 to 60 days.

Operating cash flow for the second quarter was 2.6 million.

And free cash flow was 2.1 million, which is an improvement of 1 million and 1.1 million sequentially.

CapEx for the quarter was 453,000, and for the year 1,038,000.

Cash collections set a new record of 21.8 million for the second quarter.

Financing receivables of 1.9 million were up sequentially .1 million for the quarter, but we are down year to date by .3 million.

We recognize revenue from systems sales on a completed contract basis in accordance with SOP 97-2.

Equipment sales are recognized when the equipment is shipped.

Support services, ASP services and outsourcing revenue is recognized on a monthly basis as services are performed.

We have not capitalized R&D expenses, and we do not recognize revenue upon contract execution.

Operator, we would now look like to open the call to questions.

Thank you.

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You first question comes from the lines of James Temple(ph) with Raymond James.

Hi, Good Morning.

Just first of all wanted to just make sure the math is right here.

You guys have five installations slated for the fourth quarter, and does that mean you've got 14 slated for the third?

Yes, at this time that is correct.

Can you give us the average size of the installations projected for the third quarter?

I do not have that figure.

I'm going to guesstimate, Jim, that it is somewhere in the $275,000 range.

Can you offer some commentary about the add-on sale environment?

And what kind of -- what kind of color you're getting from CIOs when you're talking to them, or the CFOs for that matter?

And do you expect kind of a return to a 15 percent thereabouts contribution to overall revenues, maybe by the fourth quarter and going forward?

Or is there a new level that you think ought to be set?

Sure, I will comment on that.

First, going back to you previous question, Jim, one thing I should have mentioned in addition with the deals in the third quarter is that two of them are ASP installations.

And regarding your recent question with add-on sales, the comments that we're simply hearing is that their financial climate is not as strong as it has been recently.

That is just an overall perspective, and that would be commentary from the CFO.

In terms of the calls that are coming into our sales queue to see demonstrations of the add-on products, most notably the order entry, lab, radiology type products, and also in particular, point of care products are at a nice level, at a high level.

It is the actual following through with the putting in the budget and getting Board approval for the product that is somewhat the difficult part right now.

We have had a number of business instances, even in the last couple of weeks, where we have had the facility decide at the management level that they wanted to pursue some add-on applications, take that recommendation to the Board of Directors and be turned down, at least temporarily for the ability to install those applications.

I don't foresee a return to the 15 percent level for cross selling in the fourth quarter.

I mean, there's no way to magically look ahead and know for sure, but I would doubt that we would see that.

My hope would be, and I think it is entirely possible, that we could get it somewhere in between there, maybe back to say the 12 percent level by the fourth quarter.

But that is pure speculation at this point.

Our next question comes from Sean Jackson with Avondale Partners.

Please proceed with your question.

Yeah, Good Morning.I think you gave the number for the year to date on the number of hospitals that you signed over 100 beds, but of the 19 new contracts, how many of those were over a 100?

One.

And I assume that that one, the installation of which is going to be in the fourth quarter?

That's correct.

Thanks.

Can you comment on the difference that you are seeing between, if any, between the less than 100 bed market and the 100 to 300 beds market?

Is it fact that it is still tough to get those 100 to 300 bed deals, is that more competitive reasons, is more competitive up there, or is just particular to that size hospital?

I think it is slightly more competitive, Sean.

But our win rate there in terms of the deals over 100 beds so far this year is 50 percent.

And of course our overall win rate is 73 percent, so obviously that is a little lower.

But the number of deals is almost insignificant in terms of determining that percentage in that we have won two and lost two.

I think in terms of the difference between what we're seeing is that a lot of the under 100 bed hospitals that are (inaudible) in particular to smaller hospitals even under the 50 to 60 bed range are buying systems.

Buying systems because they absolutely have to, either because of the lack of support for their current system or the lack of it being updated for HIPAA compliance, and most notably with the transaction standard code sets.

We've seen a couple of the smaller hospitals where their electronic billing wasn't going to be compliance.

So we think that probably helped them pull the trigger to purchase at least the financial and patient account applications.

In the under 100 bed hospital, obviously, we are extremely pleased with the number of hospitals that signed a contract in the second quarter, but we've had -- obviously we had quite a bit of difficulty convincing those hospitals that it was in their best interest at this time to also sign up for the clinical and point of care applications.

So that is my characterization of the under 100 bed.

In the over 100 bed, we continue to see hospitals put off their decision -- I mean the process, the demonstrations, the site visits, continued due diligence, contract negotiations, etc.

Quite frankly, and I can't necessarily give any good reasons for this, but it just continues to be delayed.

Potentially why is that?

Is it because they're having down years and maybe they're being encouraged to slow the process?

That could potentially be it.

I have also mentioned before and I will mention again that I think in particular this year and in comparison to previous years there's no system sunsets -- significant system sunsets like last year's HBFC Saint (ph) system sunset, for example, that are forcing people to move to sign a contract and implement a system by a specific period of time.

And then just lastly, can you comment on maybe the time lag that you have seen historically in your Company between backlog numbers and actually reported revenue?

It looks like it is closer to two quarters?

Is that accurate?

I would say to four to five -- four to six months, yes.

Our next question comes from the lines of James Tuwilliger (ph) with Morgan Keegan.

I missed some of this.

I apologize if I'm asking some questions that have already been asked.

And I do apologize for not.

Could you go back and review PACS and the ASP for that particular product?

There seems to be a lot of excitement about that.

The number of hospitals, I believe the number that have already indicated they like PACS?

And maybe some margins, if you could give some margins associated with PACS?

Sure.

In terms of PACS what I stated on the call is that we anticipate at this point installing three PACS installations in late 2003, and guesstimate that we will do approximately 18 in 2004.

Are these already orders or just your estimates?

These are just our estimates based on our pipeline and our current activity demonstration wise, etc.

Okay.

In terms of system sales that are generated from PACS, anywhere from a low end of $200,000 to a high end of probably about $600,000, depending on what modalities and how much equipment they're going to purchase, etc.

At least initially that will trend towards the low-end of that range based off initial -- being the first to install discounts, etc.

In terms of the margins we see them being very consistent with our system sales margins, which are typically in the 50 to 60 percent range.

Okay. 50 to 60.

In terms of new products, just finishing out that, is there a OR scheduling product?

Yes, there is.

Would you talk about that briefly, please?

Yes, that has rolled out quite nicely and is completely in full release.

I think we're installing one to two per month.

I believe we did two in the month of June.

And in terms of -- it is somewhere in the 30 to $40,000 range in terms of its system sales generation.

But it is something I think that is becoming more and more sought after in the community hospital marketplace, as it is an area of the facility where the hospitals can be profitable.

So it is currently an area of interest, so we have a high amount of interest in that product right now.

I appreciate that on the new products.

Could you move to -- did you say for the fourth quarter you had five deals slated with a $950,000 kind of ASP?

Is that correct?

With a $950,000 average initial purchase price, yes.

Why is that such a huge jump up from the third quarter?

Could you just provide a little color on why we have gone from an average deal size of maybe 275 up to 950?

Timing.

There's no explanation for it whatsoever.

It is timing.

It is a matter what of when the deal get signed, and the amount of time that it takes from the deal execution to install the system, which can vary anywhere from a low-end of 45 days to a high-end 180.

And it also has to do with when the site wishes to install the system.

I mean that is a decision really that is much more on the site's shoulders than it is our.

It has typically been easier to install systems in the fourth quarter because most of the not-for-profits have a fiscal begin month of October.

Now having said that, we certainly haven't traditionally had the kind of downward trend in the third quarter that we expect to see this year as well.

But the fourth quarter is typically an n easier quarter.

Are the hospitals in the fourth quarter, are the deals, are they a larger bed size in the third quarter?

Absolutely.

And in terms of you already dressed the hospital budget cycle.

A lot of these ended September, start October, do you historically see maybe a pickup when you get into the next fiscal year for these hospitals in terms of their IT budget?

I can't necessarily say I agree with that, maybe a small degree, yes.

And last question, in terms of your pipeline, not the backlog but the pipeline, can you tell me how many hospitals that your currently speaking to right now and give me a percentage of the guys that are above 200 beds?

Yes, 73 hospitals with 16 over 100 beds.

Our next question comes from the lines of Corey Tobin with William Blair & Co.

With respect to the Q4 numbers that you stated, the five deals right now, average (inaudible) size 950,000.

I'm assuming all five of those are spillover, if you will, from the June quarter?

In the bookings in the June quarter?

No, one of them is a new deal that we signed in July.

Okay.

Can you give us some color on what you're seeing this quarter in terms of contract size and willingness to make a decision?

Has it accelerated at all or is it consistent with what we saw in June?

It is a little early to say.

We find the three-month period of time to be relatively short, but certainly less than a month.

I don't want to characterize it as having improved over the previous quarter, no.

It has the potential to for the third quarter based on who we feel in the pipeline is in a late stage of their process, both in terms of the deal size that is out there and the bed size that is out there.

But that is yet to come to realization, so I want to characterize it too positively.

Okay.

With respect to some of the vendors going after the larger hospitals, we're hearing, I guess I would say, slightly more positive commentary with respect to spending and whatnot.

And I understand that you're going after a different hospital size and a different market.

But do you feel that the sales force is large enough that you are gaining in front?

Are you getting a shot rather at all the deals that are occurring in the marketplace, particularly in the 100 to 300 bed area?

I'm absolutely confident that the sales staff is large enough.

We constantly monitor how many active prospects each sales manager has in their queue, if you will.

And are very cognizant of at what amount they can follow our very defined sales process in terms of the amount of face time on-site, site visits follow through, etc.

And that is all well within our range right now.

And having said that, we currently anticipate probably adding one FTE to the over 100 category probably by the end of year.

Okay.

So you do feel that for all of the deals that are occurring in the 100 to 300 bed space you're getting your fair shot at a relatively high percentage of them?

That's correct.

And then finally, can you give us a headcount update in terms of total and that in terms of sales?

I will let Steve give you a headcount update.

I think he has that.

Yes, headcount at the end of year -- I mean end of the quarter was 691 employees.

And in terms of the sales force?

In terms of the sales force that has remained constant, I believe it is at -- we have 31 people totally in department and 15 that are 100 percent devoted to commission based new sales.

Would it be possible to add one more by the end of year, right?

That's correct.

And actually -- sorry, just one other question.

Regarding margins for next quarter, I'm assuming that most of the margin pressure we should see in the system sales line as opposed to the support and maintenance and outsourcing line, is that a correct way of an accurate understanding of the cost structure there?

Yes.

Our next question comes from the lines of Hamlin Thompson (ph) with HLM Management (ph.

Please proceed with your question.

Can you just help me understand historically an ASP deal?

How many ASP deals you typically do in a quarter?

And when you do two, can you help me understand apples to apples if they have not been an ASP deal what would the revenues look like or the margin look like?

We typically do about one per quarter, occasionally two.

And with an ASP installation we install the system exactly as we do with a license agreement type installation, the more traditional installation.

The differences is that they, beginning with the month of installation, simply pay us a monthly fee for access to the system.

It is typically a five-year contract.

The only other major difference from a logistical standpoint is that their server is located at our corporate headquarters in Mobile.

So we book all the costs upfront.

So can you just throw some sort of -- not random numbers out there, but if typically a deal is going to be $500,000 deal, and you recognize that in the quarter, it was a licensing fee, on an ASP basis what would you recognize during the quarter?

Just three months of...

I was say on that approximately $36,000.

And you typically do about one a quarter?

If that what you said?

We had two for the third quarter.

And we did one in the second quarter.

Our next question comes from James Temple with Raymond James.

I promise to keep this under 12 parts.

Basically, I was curious if you would have an interest in bringing up to the Board considering authorization for buyback of some sort?

I will consider everything.

I don't necessarily think that is -- I know it is not an active consideration at this point.

As we are already done and will continue to do, we are using some portion of our cash for dividends to our shareholders.

In addition to that, we feel as though, and have consistently heard, that we have a relatively thin float, and certainly that wouldn't help that situation.

I don't want to negate the idea, but it is not actively under consideration.

Potentially it will be in the future.

And I guess if you could maybe provide a little perspective about the five years -- I guess it has been about five years you have been running the Company -- and the types of ups and downs that you experienced within the community marketplace?

Sure.

I think that maybe the best way to do that is with an example which would have been year 2000, which was I think a pretty massive down trend for the entire industry, and it was for us as well.

In terms of what we have done about it and what we will continue to do about it when there are down trends is just focus on what it is that we can control.

We cannot control the spending environment.

We cannot control the timing of hospitals' decisions.

What we can control, and what we have determined that is the most important thing in our business is the quality of support for our current customers.

Sometimes that becomes advantageous to us because when we have a period time where they're doing less installations than we expected we can concentrate even more than we normally do on that support aspect and making sure that our current customers are very satisfied with their product and their support, which when the up trend does occur, helps us significantly.

So that is certainly one thing that we have focused on and will continue to focus on.

Second to that is just to maintain or increase our competitive win rate.

I think it is going to be hard to increase our win rate ever what it has been thus far this year.

But we will continue to focus on what it takes to win new business in terms of product development, in terms of what we can do from a sales force standpoint, etc.

That is really our key.

We are focused on this and I don't think to anyone's surprise, for the long-term.

We feel like we have successfully demonstrated that we can run the Company and generate profit and growth over long-term, and that's what we will continue to do.

I guess the final question.

I guess this is for you or Steve.

The operating cash flows were, I think this is at a record level since you have been public.

And I wanted to see if you can offer sort of some perspective over the rest of the year what you think operating cash flows ought to be given your -- at least your current views?

DYE: Well, Jim, I think I have stated in several conference calls ago that my goal was to make my operating cash flow equal to my net income, and I succeeded in doing that this quarter.

And so that continues to be my goal.

We have come up with a little short in prior quarters due to increased sales volume, and therefore increases in the receivables.

But we're going to try our best to continue matching cash flow with income.

Gentlemen, there are no further questions at this time.

I will now turn the call back to you.

Please continue with your presentation or closing remarks.

Thanks, Tammy.

I would like to thank everyone for your participation today.

We appreciate your interest in CPSI and hope everybody has a great weekend.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your line.