TruBridge Inc (TBRG) 2005 Q2 法說會逐字稿

Welcome to the Computer Programs and Systems Incorporated second-quarter earnings conference call.

During the presentation all participants will be in a listen-only mode.

Afterward we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded Friday, July 22, 2005.

I would now like to turn the call over to David Dye, President and Chief Executive Officer for Computer Programs and Systems Incorporated.

Please go ahead, sir.

Thank you, Anna, and good morning, everyone.

I like to begin by reading our forward-looking 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.

Joining me on the call this morning is our Chief Financial Officer, Steve Walker.

Steve and I have about five minutes of prepared comments and then we will take questions.

In the second quarter, we installed our financial and patient accounting system at 10 new hospital clients.

Our core clinical departmental applications were installed at 11 hospitals; seven facilities implemented nursing Point-of-Care; and six hospitals went live with ImageLink PACS.

In outsourcing services we executed three new business outsourcing contracts, one of which was for the full business office, with the other two for private pay collections only.

At this time we expect to install our financial and patient accounting system at 11 facilities in the third quarter.

We anticipate nine new installations of our core clinical departmental modules; 9 nursing Point-of-Care implementations; and six ImageLink installs.

During the second quarter we executed agreements to install the CPSI system in 11 new client hospitals.

Included among the 11 facilities, and as we released in conjunction with the earnings report yesterday afternoon, we are very pleased that in June we signed an agreement with Carilion Health System based in Roanoke, Virginia.

Carilion will implement the CPSI system in their six community hospitals over the next three years, with the first Carilion facility scheduled to install the system in October of this year.

As a general comment, based on our continued competitive success winning new client hospital contracts and selling add-on applications to our existing customer base, we remain confident in our competitive position.

In addition, the demand among community hospitals for information technology products and services remains strong, predominantly because of the continued momentum behind the move from the paper chart to an integrated electronic medical record.

To that end, we are keeping a constant eye on the initiatives in Washington concerning the development of regional and national interoperability standards.

CPSI recently joined the HMS electronic health record vendors association, a trade group comprised of EHR vendors that address national efforts to create interoperable EHRs in hospitals and clinics.

We stand ready to support and quickly adapt to any standards that become reality in the future.

Steve will now share with you some financial benchmarks, and then we will take questions.

Thanks, David.

I would like to highlight a few points before we open the call for questions.

Our DSOs were 43 days for the second quarter, up three days from the first quarter, and finished below our range of 45 to 60 days.

Cash used in operations for the second quarter was $40,000.

The first and second income tax estimates due April 15 and June 15 fall within the second quarter; this extra tax payment was the primary reason cash flow from operations for the second quarter was flat.

In fact, cash provided by operations for the entire first half of the year was 6.4 million.

Free cash flow was a -$500,000 for the quarter.

We define free cash flow as net cash provided by operating activities less CapEx.

CapEx for the quarter was $500,000.

Cash collections were 25.1 million for the second quarter, compared with 18.5 million for 2004.

Our employee headcount at quarter end was 127, an increase of 48 for the quarter.

The increases by division are software 10; clinical five; programming four; and outsourcing 29.

We anticipate an effective tax rate range of 39.5% to 40% on a go-forward basis.

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

(OPERATOR INSTRUCTIONS) Sean Jackson from Avondale Partners.

Terrific quarter.

Can you talk about the backlog?

Backlog jumped tremendously sequentially.

Is it because of this new deal?

Certainly that helps.

That is a factor.

We also had a very nice quarter in terms of orders for future add-on applications to our existing customer base.

As I mentioned in the call we have nine Point-of-Care implementations, I think, scheduled for the third quarter.

That is, I'd say, somewhat well above average.

The number of existing customers that have ordered or continued to be interested in, at least those that don't already have it, like the applications like nursing Point-of-Care, applications like ChartLink CPOE, etc., are at an all-time time high.

So that is probably as much of a factor as anything.

Okay, great.

I assume, I mean you have the 12-month backlog, is it -- the revenue you think is going to be recognized from that, is it beyond the September quarter?

Is it more so beyond the September quarter?

Or is it pretty much evenly spread out through these 12 months?

No, I would not call it evenly spread out.

That is part of the reason why we break it into two numbers, Sean.

The recurring is evenly spread out among -- somewhat evenly spread out among the 12 quarters.

It is slightly more heavily weighted through the earlier quarters, because we can only put in the backlog recurring.

Which the recurring, of course, is support and maintenance and outsourcing.

We can only put in numbers for contracts that are already in force.

Certainly we expect that we will get more contracts where the applications will be turned on over the course of the next 12 months.

Therefore we will receive a boost from recurring revenue as a result of the support and maintenance that comes from that new software being installed at the hospitals.

But the recurring is a 12-month number.

The non-recurring, it varies.

It is basically software and to some degree hardware that we have on order as of the end of the second quarter.

A good bit of that certainly will be recognized in the third quarter, a good bit of it in the fourth quarter, and we have quite a bit of stuff already scheduled out in next year as well.

I don't know if I've answered your question.

Certainly the non-recurring number is much more heavily weighted into the third and fourth quarters of this year as opposed to into next year.

Okay.

On the -- you said you signed 11 new client hospitals.

Does that include the six in the new Carilion Health System?

Yes, it does.

Okay, got you.

Also just regarding that deal, you said there was one hospital there, it was a 600-bed hospital.

I assume that is the largest hospital you guys have --

No, we didn't say that.

That is in their -- at the bottom of the press release (multiple speakers) about CPSI and about Carilion Health System.

That is just their standard.

That describes Carilion Health System.

That is their tertiary facility that is there in Roanoke, Virginia.

Our contract does not include that hospital and will not include that hospital.

Okay.

Thank you.

Michael Baker from Raymond James.

I was wondering if you could update us with respect to your thoughts on headcount at the end of the year, and how that kind of breaks down.

Yes, Michael.

We would anticipate headcount to be somewhere over 850, it maybe closer to 875.

As far as how the total -- are you asking how the total breaks down?

Yes.

I mean, last time you kind of gave us a sense of outsourcing, financial software, that kind of breakdown.

Yes.

We would anticipate that hiring to be fairly evenly across the software, clinical, and outsourcing divisions.

Those departments are fairly evenly balanced right now, with about 200 in each of those three departments.

Okay.

Then the other question I had was more one related to growth.

Clearly in the past you've indicated 15% growth, possibly a little bit more than that.

Given the demand that you are seeing, are you kind of changing off that stated rate?

No, Michael.

Whenever we've stated 15% we have always said long-term.

So our policy, of course, is to just give guidance for the very next quarter.

Beyond that, we are consistent with our message that our long-term growth rate, our target, is 15%.

Then I just had a follow-up with Steve.

Seems like sales and marketing and G&A came in a little bit less than I expected, with sales and marketing kind of ticking down sequentially.

Can you give me a sense of some of the factors?

Kind of looking forward, should we expect a little bit of pick-up there?

In the G&A section we are always heavily weighted in the first quarter.

Because most of the employee benefits are in the G&A section, and so we expected to tick down there.

Actually sales and marketing really the only change into it is commissions, and that is related to the increased sales.

So both of those are pretty much right in trend with what we had projected.

Because sales and marketing, if I look in the first quarter, it was 1.8; and then in the second quarter it ticked down to about 1.7, 1.77.

I would have expected, kind of given the level of sales, that it would have picked up a little bit.

Has there been any change in the commission rate or anything to that effect?

No, there hasn't been any change in the commission rate.

$100,000 I am sure is just spread over all the different accounts.

Let's see, we're trying to look that up now.

That is all right, I don't want to take too much time if you want.

That is all I have for questions right now.

Travel, I will go ahead and say this.

The majority or a good portion of our regional use group sessions are in the first quarter, which requires a lot, a bit of marketing travel to be there for those meetings and to do the demonstrations that are associated there, etc.

So that may have been a piece of it.

That is helpful, thank you.

Dale Warmington (ph) from Delaware Capital Management.

Paul Delaware, (ph) Delaware Capital.

Steve, should we assume, going forward, that DSOs will be in the 45 days range?

Our 45 to 60 days is our range.

We've been a little bit below that the last couple of quarters, but I don't expect to see much change in the DSOs.

Last night I was on the call with one of your competitors and they indicate that they are going to move down into the smaller hospital range.

Do you see any change in terms of the landscape, in terms of new entries, in terms of competitors?

We have not.

We have not, and we do not expect to.

In our view, while we certainly keep our eyes open and are certainly not overconfident about the possibility of those vendors that focus on large hospitals coming downstream, we've been hearing those comments for years and the landscape has not changed for years.

So we have -- the way we look at it is that the good news is that there is less than a handful of vendors that can sell products at a price that community hospitals can afford that have viable products in the community hospital space.

Certainly we think or we are confident that we are one of those vendors.

The bad news is that we are all very good at what we do.

But we are not overly concerned with one of the larger vendors coming downstream, no.

Thanks a million.

Dan Veru from Palisades Capital Management.

I noticed within the headcount the biggest increase was in your outsourcing business.

Is there any business trends that are accounting for that?

Or what is happening there that caused you to want to staff that up so much more?

It has been the biggest growth area of our Company this year.

If you look at the three components in year-over-year growth, that number is by far the largest number.

It takes a lot of people to run business offices for hospitals and do a good job.

Of course -- Steve is showing it to me; the year-over-year growth rate is 90%.

So that is the reason why there is a bigger number there.

I think that number, I would say that I think we are at the finishing stages of ramping up the personnel, at least for now, in the business office outsourcing department; and that more of the hiring, at least for the remainder of 2005, are for the clinical and the financial software teams so that we can accommodate more installs and can accommodate supporting all those customers that we have installed so far and that we will continue to install this year.

It also looks like you had a pretty strong quarter for PACs.

Is that within the range of what your expectations are?

As I recall, I think last quarter it was a little bit below plan.

Yes, it it's just (technical difficulty) what we would expect and hope for.

We are able to comfortably accommodate, based on our staffing, two installs a month, which of course is six installs per quarter, which is what we did in this (technical difficulty) quarter and what we are currently slotted to do in the third quarter.

So that has picked up.

Will you make investments there to support more installs on a monthly or quarterly basis?

We have not made a decision at this time to do so.

But we could very well do that at some point in the relatively near future, if this demand continues at its current pace.

Then, Steve, from a free cash generation quarter, it seems like you had a few items in here that impacted free cash flow.

But also, given that your revenue growth is so rapid at this juncture in the cycle, that is also going to have a negative impact on free cash generation.

Yes, it is.

We did grow our receivables about 1.2 million.

But overall our cash flow was, what, 6.4 for the first six months on a 6.6 income.

So it is holding fairly steady, but there is of course pressures whenever you are growing your revenue.

Right, okay.

Then just as you look at the market, David, in general and you look at your Company, you are obviously in sort of the early phases of the recovery of the spending cycle.

How long did these cycles typically last?

I guess looking at the Company from the top down, what sort of a revenue base can the Company comfortably support without any major investments in personnel or facilities?

Okay, to answer to the first question, I'd say they are typically three to four-year up-cycles followed by one to two-year down-cycles, if you sort of look at our graph over the last 26 years.

That has been relatively consistent.

I think we mentioned on the last call that we are hopeful and think we have some reasons to be hopeful that perhaps this will be a longer up-cycle.

I'm talking long-term here, you know, over the course of years, not necessarily quarters.

But based on all the momentum behind the EMR and all the bipartisan push for this interoperability, in order for us to have interoperability every hospital out there is going to have to have a base computer system that allows them to store all this information electronically.

As we've documented before, there's a lot of hospitals out there that don't currently have that capability.

They are going to have to look to vendors like CPSI to provide them with that capability.

Because of that we are hopeful that this can be more of an extended upswing than what we have seen before in the past.

Of course that remains to be seen.

In terms of the second part of your question, what we can handle, that is a good one that I can't necessarily confidently answer.

I will say this, based on what I and the rest of us here in the management of CPSI know how to do, that was passed on by the founders, and that is how to grow the Company at an average rate of about 15%.

I feel very confident that based on where we are in terms of building capacity, property capacity, employee capacity, and the area in which we are located that we can very comfortably do that provided that the demand is there, which we certainly hope and think that it will be.

Any new product offerings that you think you need to begin working on or have been working on, that customers are asking for?

Are there any product opportunities out there with customers?

We are working on some what I would call smaller things at this point in time, and this can always change.

All the major applications we've got an answer for, in terms of our list of modules.

We are not at all concerned about that, based on the fact that our current customer base, although compared to some of the competition we think is much more heavily penetrated with those clinical applications.

We have a lot of room for several years to sell those clinical applications to our current customer base.

And typically that is not very competitive.

I mean, we've already got the financial and patient accounting.

The reason that they bought our system in the first place was because they wanted to go integrate it all the way through the clinical applications at some point in the future.

To roughly sum that up, of our 550-plus customers that all have basically financial and patient accounting, roughly 65% have the clinical departmental applications like lab and radiology and pharmacy.

That means 35% don't.

About 35% have Point-of-Care; that means 65% don't.

I don't know the exact percentage that has PACs, but it is extremely small;

I think we've got somewhere in the neighborhood of 30 or so PACs installed so far.

ChartLink is in over 100 hospitals; but there is obviously several hundred that don't have ChartLink.

So if you look at that, that is where we think our growth can come from in the next several years, not necessarily writing new applications.

Thinks a lot.

Corey Tobin from William Blair & Company.

Nice quarter.

A quick follow-up on the outsourcing segment.

We've seen very nice margin improvement in that business over the last couple of years.

Can you just give us a feeling for where you can expect or where we should look to expect this to trend to, looking out 12 months or so?

Margins?

Yes, margins.

I think, we'd estimate that they would about where they are right now.

I don't necessarily think that they have peaked.

But you are not going to see the upside that you have seen over the last 12 months in terms of continued margin expansion.

We feel good about where they are right now and think we can keep it there long term.

Just as a follow-up to Dan's question.

The pipeline for new business and that activity, and I apologize if you answered this already, but how do you look at the pipeline?

How does the pipeline for new business and outsourcing look at this point?

In outsourcing it looks good.

In terms of the prospects that we have out there now, that we think will make a decision within the next, say, six to nine months, it is as good as it has ever been.

It helps to have current clients that you can point to and say, look at how much we've reduced their AR days; look at how much we'd improved their cash flow.

And that is what we have right now.

So it looks good.

As I have stated before that is a tough nut to crack.

I mean, it is not an easy thing to sell, especially in community hospitals, when if they are to go with your complete business office outsourcing product you are replacing jobs in what is typically a small community.

So the opportunities aren't always there, and it is very difficult to create them.

Typically you have to wait for a turnover.

Start-up facilities are a great opportunity to pick up business office outsourcing clients, because they have not yet started to staff or ramped up the business office staff.

They have so many other things to worry about besides starting a business office that the fact that we offer that often is very much looked at as a positive.

Looking at this you are obviously -- I think you have (ph) very strong growth in that piece of the business.

Is there any reason why -- I know you don't want to give guidance too far out.

But is there any reason why we shouldn't look for that piece of business to grow significantly higher than the consolidated top line for the next couple of years?

Certainly the potential is there.

As I just stated, it is a tough nut to crack, and it is virtually impossible to predict how it will.

I think that the only thing we can control is the job that we are doing for the customers that we've already signed up, and I feel great about that.

Certainly we've got the sales staff out there at an extremely aggressive level, and we have some control over that as well.

So I think we are doing everything we can.

I think it has great long-term potential for our Company.

What exactly it will do over the next couple of years, I don't know.

But there is nothing that we are more excited about than what our potential is in terms of outsourcing for the next several years.

Okay.

Switching topics for a second, can you just give us the breakout, or what was the add-on sales in the quarter?

Could you split that out between PACs and other clinical add-ons?

I don't know if I can do that split.

The percent of total sales for the quarter that was from add-on business was 14%.

14% of total revenue.

Was for add-on sales.

In terms of what percentage of that was PACs and what percentage was other clinicals, I can't give you that right now.

Okay.

And then finally, can you just give us the installs by bed size, both in the second quarter and what you expect for Q3?

Corey, we've decided were not going to get that information out anymore for competitive reasons.

We have had success for the last couple years now across all our bed size categories in the range of 0 to 300 beds.

We think that by giving out the backlog and the average contract size every quarter, that people can take from that some information that is helpful in terms of modeling.

But for competitive reasons we don't want to give the bed size details anymore.

Understood.

Thanks.

(OPERATOR INSTRUCTIONS) Sean Jackson from Avondale Partners.

Another one just on the third-quarter guidance again.

I mean it looks like you are expecting a sequential decline for the third quarter.

Is that just because the second quarter was such a surprise on the upside?

Or is there any seasonality to that?

I am just trying to get my arms around that one.

There is certainly not a seasonality factor.

But we have sort of blown that whole seasonality thing out the window so far this year.

So it is tough to say on that one.

Traditionally the first quarter was lighter, certainly much so as a percentage to the other quarters; and then it somewhat ramped up throughout the year from that point forward.

We've had two consecutive quarters where the best way that I can think of to describe it is as a perfect storm of positive occurrences, in order for us to create the numbers that have been created, and certainly relative to the guidance that we gave.

By that I mean virtually no slippage in terms of folks postponing installs for any reasons.

Most of the time when that does occur it is beyond our control, and there hasn't been much if any of that.

Then the incremental sales, the licenses that are sold, software licenses as an example -- there's some other things, but that is the main component that are sold intra-quarter, if you will -- have been more than we've expected over the course of the first half of 2005.

So we prefer to look at it as the first two quarters have been positive surprises even to us, as opposed to necessarily a sequentially downturn going into the third quarter.

Third quarter looks like a pretty strong quarter to us.

Thanks.

Sean Boyd (ph) from Westwood Capital Management.

Just as a quick follow-up on that, in terms of the Q3 guidance.

Going back to your comments earlier on what's in the backlog and on the systems sales versus recurring, is that behind that guidance at all?

In other words, are some of those systems sales, these implementations, further out?

Certainly.

Certainly we've got -- we are as booked out in terms of installations to new clients and installations of add-on applications to current clients as we've ever been before in the history of the Company, which is certainly a positive thing.

Let me maybe back up and give a little further explanation of that, because of the fact we are different in health-care base (ph) technology in terms of the way we do implementation and training.

We use our people.

Our CPSI installers go out and install the applications.

The hospital doesn't do it themselves.

We don't use train them, (ph) the trainer; they don't use consultants.

Because of that we can only do X installs of, say, nursing Point-of-Care per month, or we can only install so many new client customers for financial and patient accounting per month.

So certainly if you look at the contracts signed, just as an example with new business, for the first half of the year I think the number is 32.

Depending on the size and scope of the install we can only handle three to four to five new installs per month.

So certainly we have got some pretty significant backlog that goes out beyond the third quarter in terms of the nonrecurring revenue.

Got you.

Okay.

That kind of gets to the other point, in that it is the business -- I know that you are trying to run the business for 15% growth.

But here at 40-plus we are somewhat capacity constrained on the install teams.

We are certainly closer than we've been in a while.

We are in certain months.

But we are not at a point where we field (ph) every install every month, no.

So, yes, I would call it close to capacity.

Okay.

The other question is on -- with the SG&A being down quarter to quarter, in terms of going forward, should we be thinking about this level in the 6.1 million range per quarter going forward?

Or is that just a temporary aberration and it will come back up?

SG&A probably for the third quarter will be in the same range as the second quarter.

The first quarter is usually a little heavier for me; and then the second and third quarters even out some; and then I see some ramp up in the fourth quarter for year end.

Okay, great.

Just one last question is on the -- with the lower gross margins, it looks like most of that was in the systems sales.

My question there is just is that the number -- at 33% on the systems sales, should we be using that going forward?

Or would we expect to see that back up to the fourth quarter, and the Q4 '04 and first-quarter '05 levels, up in that 35, 37 range?

I think that on a long-term range we are pretty comfortable with the low to mid-30s.

Okay.

Great quarter.

Thank you very much.

Thank you.

At this time, gentlemen, there are no further questions.

Thank you, Anna.

Thank you, everyone, for your time this morning.

Have a great day and a wonderful weekend.

Thank you.

Ladies and gentlemen this concludes the conference call for today.

We thank you for your participation, and we ask that you please disconnect your lines.

Thank you and have a wonderful day.