TruBridge Inc (TBRG) 2005 Q3 法說會逐字稿

(in progress) Thank you, Nelson, and good morning, everyone. During this conference call, we may make statements regarding the 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 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 & 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.

And joining me on the call this morning is our Chief Financial Officer, Steve Walker. Steve and I will, very briefly, go over some data not included in the earnings release, and then we'll take questions.

In the third quarter, we installed our financial and patient accounting system at 11 new hospital clients. Our core clinical departmental applications were installed at nine hospitals. Nine facilities implemented nursing Point-of-Care. And six hospitals went live with ImageLink PACS. At this time, we expect to install our financial and patient accounting system at 11 facilities in the fourth quarter and anticipate 10 new installations of our core clinical departmental modules and nursing Point-of-Care implementations and six ImageLink installs.

In outsourcing services for the third quarter, we executed four new business outsourcing contracts, all of which were for private pay collections only. During the quarter, we stopped providing business office outsourcing for two hospital clients. In September, we began processing for two new outsourcing customers. And with four additional clients scheduled to begin in the fourth quarter, we expect the revenue growth in outsourcing to resume. I'm now going to turn the call over to Steve and then we'll take questions.

Thanks, David, and good morning, everyone. I would like to highlight a few points before we open the call for questions. Our DSOs were 44 days for the third quarter, up one day from the first quarter, and finished below our range of 45 to 60 days. Cash provided from operations for the third quarter was 5.4 million. Cash provided from operations for the nine months was 11.8 million.

Free cash flow was a 4.8 million for the quarter and 10.1 million year-to-date. We define free cash flow as net cash provided by operating activities less capital expenditures. CapEx for the quarter was 0.6 million. Cash collections for the quarter were 27.7 million compared with 20.9 million in 2004. Our employee headcount at the quarter-end was 145, an increase of 18 for the quarter. The increases by division were software eight and clinical 10. Operator, we would now like to open the call to questions.

Thank you. (Operator Instructions). Our first question comes from the line of Sean Jackson, Avondale Partners. Please proceed with the question.

Yes. Good morning, guys.

Good morning, Sean.

Hey, can you just briefly talk about the explanation for the two clients in the outsourcing that stopped?

Sure. It's -- that happens a lot more regularly than the very rare occasion where we lose a core customer in terms of our general financial and patient accounting software in that, our typical outsourcing contract is a year. In many cases, the idea at the time of the hospital is that they've had some turnover and that they'll turn it over to us for a year before they bring it back in-house.

Also, in a lot of cases, if there's turnover at the management of the hospital -- the most notably a new CFO comes in, which is in the case of one of these two -- and it's being outsourced, then at the end of the contract, they choose to bring it in-house. It's a - the turnover in the outsourcing -- business office outsourcing is something that we anticipated, and it's turned out to be a lot higher than our core hospital information system business.

Okay. And also can you talk about on the cost of sales and specifically on systems sales? It was a little more than what we thought. Did that surprise you? And if so, is it going to be around that same level?

It did not surprise us. We also had included in that cost some hurricane-related activities, which would probably pick it up 0.4%, and increases in salary also pick it up a little bit. And overall there was a little bit downtick in the business office outsourcing revenue that brought the percentage up just a little bit also. But those were the main factors involved in that.

Okay. And a comment on the signed contracts in the quarter. And you said, I think, the average deal size was 625, which is less than last quarter. Obviously, your last quarter was almost an anomaly. So can you just comment on that? What are you seeing as far as new contract sales as compared to last quarter?

I would note no necessarily significant change. I would say that, frankly, that 625 is slightly below what we would like to see on a long-term basis. And certainly, we don't consider it to be a quarter -- much of a measuring stick there with regard to contracts. But the mix of -- the size of the hospital mix was about where we like it overall. We don't give that detailed information anymore. If it was slightly below where we would like to see it over a long term, it was more because we had a few hospitals that elected to just include financial and patient accounting in their initial contract and not commit to installing at least initially the clinical applications.

In many cases -- and it's the case in several of these contracts this quarter -- we price-protect those applications in the contract such that if -- they have incentive to install them within a certain number of time -- 12 or 24 months from their installation of patient accounting. But in those cases, we don't obviously include that in the contract size. We only include in the average contract size what the hospitals are actually committed to install.

Okay. So you say they are incentives, though, for them to sign for clinical applications. Right?

There are -- in many cases, through price protection in their original contract, there are incentives for them to install within -- in some cases 12, in some cases 24 months of their initial financial implementation, there are incentives for them to install the clinical applications. Yes.

Okay. Are those incentives -- is that a common practice for you guys?

Absolutely. And it's common practice in the industry. In other words, they've got a set amount that they want to go to their board of directors what's -- that they are willing to spend initially. But yet in many cases, when they go to their board, they present or discuss some of the high-level clinical applications that will get them to an EMR within the facility.

And they go ahead and, sort of -- I suppose, you prep the board for the fact that they'll be coming back to them, whether it's six months or year later, asking for the final approval to spend the additional monies to get to the clinical apps so that it can get to an EMR.

Okay. And just lastly, quickly talk about the competitive landscape again. What was your approximate batting average for the quarter and if you saw -- if you're seeing any new competitors?

Our win rates -- I mean, it's been consistent all year. We're happy with that again, this quarter. The competitive landscape has not changed probably not surprisingly one bit. We're not seeing any new players in the space. We still view the industry in that ourselves and the less than handful of competitors in the community hospital space.

Today, we have about approximately half of the hospitals in the United States that are 300 beds and under. And those other half that are either still best of breed or they're still on paper for a great many of their applications or they've gotten some of the old legacy systems. We think over the course of the next, say, five to seven to only outset 10 years, as we move towards the discounts of the nationwide electronic medical record are going to have to go with a vendor like CPSI or one of our competitors.

Okay. Thanks. Great job.

Thank you, Sean.

Our next question comes from the line of Robert Dodd, Morgan Keegan. Please proceed with the question.

Hi, guys. Could you just give me the patient accounting installs in the quarter again? I missed that at the beginning.

Yes. Robert, there were 11.

11. Okay. Thank you. And now on, sort of, hospital budgets and that anything you're hearing there, could you give us some color? We're starting to see some discussion in the press and on the Hill about another Medicare savings bill and things like that to cut the deficit.

I mean is that starting to color any of the views that your smaller hospital prospects are having about spending or is everything just continuing on the track there?

We're not seeing -- I have seen the mention of a little bit of the same thing that you've seen. And you've got some talk of, potentially, some cutbacks. More notably, I think, on the Medicaid side than on the Medicare, and the Medicaid certainly affects us -- excuse me -- the Medicare certainly affects us more.

On the other hand, you're seeing all the political momentum behind area(ph), including some paper performance options through Medicare in order to incentivize folks to move towards an electronic medical record. And none of that's transpired yet, but certainly that would be a tremendous positive for CPSI and the healthcare IT industry, in general.

Now, I'd characterized the financial status of community hospitals. I don't think we'll ever say that it's -- or I never have and I never will say that it's overall very positive, but it's as good as we've ever seen it. And at this point, we anticipate that continuing for some time.

Okay. Thank you.

Thank you, Robert.

The next question comes from the line of Jeremy Lopez, William Blair. Please proceed with the question.

It's actually Corey Tobin at William Blair. A couple of questions here. First David, what were the add-on sales for software in the quarter?

14% of total revenue.

14%. And what was it last quarter, if you could remind me please?

Same thing.

About the same. Now just to go back to Sean's earlier question on the margin, it just -- it seems like the add-on sales are at a pretty high percentage, which I would think are pretty solid margin products, and the overall system sales is almost at an all-time high. Can you just once again clarify why we saw the downturn in system sales gross margin?

A good portion of it -- and I don't know if I can quantify at this point, but we did spend quite a bit of money on extra travel expenses due to the hurricanes. We had a lot of installs going on and in many cases we had to fly sometimes over 100 people out of town early and change tickets and all the associated fees to go along with that in order to make sure that our installations continued as scheduled.

I mean that - we've received -- it was quite -- Hurricane Katrina was, I would say, an enormous challenging hurricane. Rita was a challenge. And if I had to guesstimate approximately $150,000 in extra travel expenses as a result of that that are loaded up in system sales. Our hardware mix was maybe a little bit higher than normal, which would be a factor there as well.

Okay. Great. Shifting gears. Did you -- I know the new installs that you have at sales, the six contracts that you had this quarter, did you quantify what percentage those took the clinical upfront -- I'm sorry, 11 new client hospitals. Did you quantify of the 11 how many took clinical upfront?

I did not. And I don't have that number.

Okay. But from your comments can we construe that it was down slightly as a percentage of normal -- of the normal percentage of case clinical upfront from previous quarters?

Should have been normal -- I don't -- as a percentage of what it's been the last couple of quarters, yes.

Okay. Great. And then on the PAC side, it looks like PAC sales continue to stay strong. Can you just give us a feeling for how the pipeline looks in that segment of the business?

The pipeline looks very good. And we actually anticipate at this time that maybe in the first quarter, certainly the second quarter of next year, we plan to go from six installs per quarter to eight based on the strength of the pipeline.

And so no signs of slowing down there.

No. That's signs of speeding up.

And that's -- and when those are -- at Q1?

Potentially Q1, certainly Q2.

Okay. And how many sales people you have dedicated to that effort right now?

To the PACs effort? We had some that crossed over, but I think if you average it all out it's probably adds about 2.5 FTEs.

That's great. Okay, excellent. Two others if I could real quick, I know you don't give specific pipeline information. But in general can you just comment on how the pipeline looks for the -- both on the hospital system sales side as well as on the outsourcing inside.

The pipeline is still - I would consider it extremely strong based on where it has been for the last couple of years, I would say that it's been in this strong state since the middle of '04 and it continues to at a minimum maintain where it's been since that time. I mean, the momentum is still there. I think we have two things going for us. The - and they're related -- the momentum behind electronic medical record and desire of notably physicians to get access to clinical information electronically is increasing and I would say close to a daily basis.

And then our efforts for the last, specifically, the last five years, our aggressive efforts to sort of really focusing in our high-end clinical applications, like our ChartLink application, like nursing point-of-care, like PACs, I think, it really paid off and we continue to enjoy competitive success within that momentum behind EMR

Excellent. And then the outsourcing side, same situation, pipeline looks good?

Pipeline looks good.

Great. Last question, if I could, on the G&A side, it looks like the G&A really came down here this quarter. And can you just comment real quick, I'm assuming it's payroll type issues and whatnot as you get later in the year, what should we look for in this first part of the year, as we go back into the first part of '06, as some of those payroll taxes and whatnot type of expenses roll back on?

Yes. Corey, the G&A for the third quarter did tick down a little bit but I expect it to get back into a more normal routine in the fourth quarters in the 15% neighborhood. And then when we go back to the first quarter, the retirement and payroll benefits will be more in line with the first quarter of '05, I believe, as far as percentage goes.

I think it was about 16% or so in Q1 '05, 16,17, that's what we should look for when we get back to the first half of the year?

I believe it's more like 18 and that would be a correct -- more like that.

Excellent. Thank you.

You bet.

Our next question comes from the line of Del Warmington, Delaware Capital Management. Please proceed with the question.

Yes. My question relates to random visibility. The release shows that you have backlog of about 10 to 7 million, of which bigger size is in service and the rest is systems, also deferred revenues of 2.4 million. Could you say what portion of this is recognized in the current quarter?

I'm not -- we didn't hear the entire question. Are you asking what percentage of the backlog --

Yes.

-- that you have which will be recognized in the current quarter?

current quarter, yes

Yes. I think our best -- we don't have that number exactly, but our -- the recurring number that's included in backlog is a 12-month number, so approximately one-fourth of that will be recognizable in the fourth quarter.

Now the system sales component of backlog, the $22.1 million number is typically -- approximately for us depends how far out we're booked in terms of our installation slots, but anywhere from a four to six-month number. So -- this is just pure guesstimate but approximately 70% of that or so in the fourth quarter.

And one last question as to the sales cycle. What's your typical sales cycle, and has there been any change recently?

Our typical sales cycle is approximately a year with the smaller end of our market segment of under 100 beds being more like 6 to 12 months, and the upper end of 100 beds to 300 beds being more like 12 to 18 months. And that has not changed over the course of the last 12 months or so.

Thanks a million.

Thank you.

Our next question comes from the line of Dan Veru, Palisade Capital Management. Please proceed with your question.

Good morning.

Good morning, Dan.

Just getting back on the question of backlog. As you go forward, it looks like your recurring -- the recurring revenue portion of your backlog is running at roughly a little -- almost 2.5 times your system orders. What -- translating that in terms of the overall company as the company continues to mature and grow, what will recurring revenues look like as a percentage of total sales. Now it's roughly, I guess, 50% to 55%. Where do you think that that will peak out as the company continues to grow?

Dan, that's a great question. It's hard to nail down because over the long-term, we've -- being the next several years, we anticipate at this time that system sales will be strong due to all this continued momentum behind an EMR and the number of hospitals out there that still need to integrate a product like a CPSI.

So we could have a lot of success with our recurring revenue piece notably to help the business office outsourcing piece but potentially that total percentage won't increase a whole heck of a lot of our systems sales growth is strong over the next few years. Now having said that, however, the biggest component of recurring revenue is still and probably will be for quite sometime, if not indefinitely, is the support and maintenance that comes from system sales.

So as system sales increase a portion of those -- of recurring revenues is just going to follow along in line. The -- I would probably anticipate that regardless of the strength of system sales growth over the next few years that we would, at this time anticipate that outsourcing growth would exceed the growth in system sales. Therefore, to directly answer your question, I would expect that recurring revenue as a percent of total revenue probably for the foreseeable future that peak out at around 60% of total revenue.

Okay. All right. And then switching over to the competitive landscape again and coming at it from a slightly different angle, with the recent announcement of the General Electric Company's acquisition of IDX Corp, could there be opportunities for you -- I'm sure IDX has small big hospitals and you from time to time have had big small hospitals as your customers.

I don't know if their small big hospitals are close to what you've ever served in your big small opportunities. And whether it's a -- are you seeing any more of that activity in, say, the 250-bed plus hospital environment and could there be targeted situations that you could take advantage of if there's any slippage as a result of the integration with GE?

With regard to -- of all those and I certainly don't consider myself to be a large hospital IT, Healthcare IT expert but with regarding to the players in that space being IDX and Cerner and Seimens and McKesson and Eclipsys, we see IDX or have seen in the past IDX by far is the least if ever, once again not claiming to be an expert but the hospital side of the IDX came from their acquisition of Famous --

Famous, right.

-- a decade or so ago. And their specialty was very large academic medical center-type facilities. So the direct answer to your question is no, I wouldn't anticipate any increased activity in the upbrand of our market as a result of that now. We see Eclipsys occasionally and we see Cerner occasionally, we see McKesson occasionally Seimens occasionally, but never IDX. I'd hesitate to say never but extremely rarely IDX, so I don't think there will be much of any effect on our marketplaces as a result of that acquisition.

Okay. And as the company continues to generate the free cash flow, you in the earlier days of the Company, when you first declared a dividend I think, people were scratching their heads and your response at one point was we never really had cash as a private company and we don't really need it as a public company. What's the right amount of balance sheet cash, and how does that translate into any changes in your dividend policy?

Well, the Board reviews the dividend, and it's obviously is declared and discussed briefly in each meeting, but the formal look at it, unless there is another look is necessary, during the year. But it is at the beginning of each calendar year, and you can see the results of that in terms of when we modify the dividend payout. We certainly feel that as we grow as the company, the amount of cash necessary on-hand is a safety net -- you know needs to increase.

Having said that, we don't like to see if cash waste both ways on the balance sheet, when we certainly have -- never had and continue to have no plans for acquisition. I don't have a direct answer to your question in terms of -- we don't have a percentage of projected revenue that we like to keep on-hand or anything like that. But we are happy to see that while we have had substantial increases in our dividends the last two years, we have been able to continually do, I would say substantial increase to cash balance on our bank balance sheet at the same time. And that would be our goal going forward.

All right. Okay. And lastly getting back to PACS, it sounds like PACS is living up to everything and then some in terms of the opportunities, but as you continue to find new customers for PACS, does that lead you into new opportunities or does it follow you into opportunities. Is that a door opener with new prospects or is it something that once you're there you sell into the installed base?

It's been a lot more of selling into our already installed base. But it's the amount of new hospital prospects that are looking at us in a competitive situation versus our core competitors, are becoming more and more interested in the fact that we have PACS internally developed as part of an integrated solution, and our competition does not. And because of that we're seeing a slow but steady increase in the number of new hospital clients that either commit to install PACS as part of initial contract, or they follow through with PACS install whether its part of initial contracts or not within the first 6 to 12 months of going wide with our hedge in accounting and maybe some of our core clinical applications.

It's hard to quantify, but we do feel like in many cases competitively when we're trying to win new business whether they install our PACS system or not, initially the fact that we have a PACS system is part of something that they could look at as an integrated EMR over the course for the next two, five, 10 years, helps us win business over our competitors that do not.

And then one final question and I'll turn it back. You've talked in previous quarters that we were still early in the up-cycle for clinical information technology and just looking at what Cerner(ph) reported this morning in their robust quarter and increasing confidence for the following quarters. Do you have any change in your position as this cycle is likely to last longer than other up-cycles in hospital IT spending and if you could put some data points as to why that might be?

No, the typical -- the typical up-cycles in the 15.5 years I've been doing this in 26 years that CPSI's been in business are two to three years. I think I mentioned on last or two calls ago, that when I asked that we were optimistic, we think for somewhat good reason that this upcycle might be more or like a -- maybe at least a five to seven year timeframe.

And our logic behind that obviously is the -- all the political, federal momentum behind moving towards the nationwide AMR that the appointment two years ago of Dr. David Brailer by President Bush as the Healthcare IT czar, the declaration by President Bush that he wanted every American to have an electronic patient record that can move without them through the country by the year 2014.

And the fact that reimbursement is the financial backbone behind the health of our client base and is controlled in large part by Congress, it would be difficult to see although I'm sure anything's possible politically, it would be difficult to see all this talk on one hand about doing everything necessary to make sure hospitals have this technology and then cutting reimbursement on the others. So that's our logic.

All right. Okay. Great. Thank you and another great quarter.

Thank you, Dan.

(Operator Instructions). The next question is a follow-up from the line of Robert Dodd, Morgan Keegan. Please proceed with the question.

Hi guys. Yes. Just -- could you give us any idea, if there is any push out in terms of customers who were prospects and have decided to install say in the first quarter in next year or something like that because of concern about flu or anything, you know at delaying installs to a later period?

We haven't heard a bit of that, Robert. There is -- and I would also say that there has been no pushback of -- at signed up for a system and based on their -- installed date when they sign that they've all held true despite the hurricanes. I would say it's impossible to quantify. And this isn't question that you asked, but I think it's of interest that probably we'd had a few more contracts in the quarter, I say a few -- a couple - were it not for the combination of two hurricanes.

And we've got some hospitals that were active in the pipeline that suffered this thing from their mind now pursuing a new information system and with applied, we'll probably pick back up with them in the competitive cycle, who knows six months, 12 months from now. But no, nothing -- regarding your specific question on flu we've heard nothing of that.

Okay. Excellent. Thank you.

Next question comes from the line of Michael Baker of Raymond James. Please proceed with the question.

Thanks. Just a couple of questions. First off, I know over the couple of months you've done a lot to educate your client base on kind of the path way to electronic medical record. I was wondering if you've seen some follow through in terms of add-on sales and if so, kind of, where are we in the ramp related to that?

Well, we certainly think we're still -- the ramp's in its infancy. We still got 35% of our total customer base that don't have the core clinical marginal. We still have 60% plus that don't have nursing point-of-care, 75% that don't have ChartLink, 90% that don't have PACS et cetera. So, I mean, we still very much feel the ramp-up in its infancy.

We have done a lot over the last few months to try and educate our customer base on how they can get to an EMR with the CPSI system. And that process is never ending. And we have certainly, I think, realized some sales benefit from that. Once again, it's impossible to quantify. They don't say that hey, we're buying total management or were buying your lab system because of your presentation, but certainly it's had a -- we feel like we've noticed that it's had a positive impact.

Okay. And then another question I had was if you look historically at your financials, you typically see some Q1 weakness, obviously, with last -- this year, earlier this year being an outlier. I was just wondering if you had any early read on how that dynamic might work in '06?

I would say no other than the fact that you're right. I think that -- I don't know how far back our financials go. I think it's seven year or so, six out of the last seven years. Q1 was down sequentially over Q4 and that was not the case this year because of all of the momentum behind the sales cycle.

And really the sales cycle picked up very significantly or the number of prospects in the pipeline picked up significantly from the first quarter -- excuse me -- the fourth quarter of '03 into the first quarter of '04. And given that we have a 12-month sales cycle on average, that made the first quarter of '05 particularly strong. But I don't have and can't give you a window into Q1 '06 in that regard.

Okay. I was wondering also, Steve, can you give us kind of your projected headcount at year-end, and also the related buckets of that headcount?

Our headcount will be bumped just a little bit up from 845, maybe 865 or something of that nature. And as far as running down through some of the buckets, I assume that's what you were asking, our total software department is about 190 employees and clinical is around 225 and ITS department still run around 120 employees with programming in Blues, I mean, programming and outsourcing in around 183 employees. The rest are being made up in administration and marketing.

Okay. And then I was wondering finally were there any other line items on the financials that had hurricane impact that you haven't outlined for us yet?

No. There isn't. Salaries and travel were the two main items and they were already booked into the quarter.

How about sales-to-sales and marketing line? I saw that kind of pickup a little bit. Was there some -- any extra travel expense or anything of that affecting that line item?

Not related to hurricane, no, there wasn't. It's just an uptick in commissions mostly due to increase in sales volume and for the end of the year commission rates.

Thank you very much.

You bet.

Thank you, Michael

Our next question comes from line of Josh Stewart, Sidoti & Company. Please proceed with the question.

Hi, guys. Sorry to do this, but I missed when you gave your installations on nursing point-of-care and core clinicals for the quarter, and then also the guidance for those as well as PACS for the next quarter. Could you run over those really quick?

Sure, Josh. In the third quarter, we installed financial and patient accounting at 11 core clinical and nursing Point-of-Care were installed at nine each and PACS we had six installs. And as far as the fourth quarter, we anticipate 11 implementations of financial and patient accounting, 10 core clinical, 10 nursing Point-of-Care and six PACS.

Thanks. And then, another question is, just -- I know that in the past you've repeatedly said that you think you can grow the business at 15%. And I was wondering, and it seems like there really has been a change as far as this push for electronic medical records and I feel like maybe that that's something that would spur at least -- maybe a cycle at are higher than normal rate of growth. So I mean just looking to '06 with the up-cycle, do you think this is going to be a better sales period than your average normalized rate in the past?

Josh, it's impossible for us to answer that question accurately with our window of implementations always been somewhere between three and five months out the way we -- the way we do implementations I think, as you know there's so much difference in than in most everybody else in the industry, in terms of instead of the implementations, having parallel periods and taking years. At our stakes it's a matter of months.

So that's the only window that we've had. I will say that we have had obviously tremendous growth in '05 over '04. And then, our target growth rate going forward remains 15%. For several reasons, we think that's the best growth. The main reason being is that we think that's the best growth rate for our current customer base. We need to grow the business in order to continue to generate the capital and the free cash-flow to invest in the new technology and write applications like PACS and et cetera and in order to generate opportunities for promotions for the employees of CPSI.

At the same time, when we have peers where we grow significantly more then that it's very tough to maintain the quality of support to our customer base. So, that's -- with 26 years of experience in that business, we think that's the right growth rate for our company.

All right. Thanks guys.

Thank you.

Our next question comes from the line of Sean Boyd (ph), Westwood Capital Management. Please proceed with the question.

Good morning, gentlemen.

Morning, Sean.

Morning, Sean.

Just a couple of quick follow-ups here and I apologize for pounding this again, but I want to be perfectly clear. On the Hurricanes, there was about 150,000 travel expenses adequate to that 56 basis points on a gross margin, is that correct?

That is correct. That entire amount is not all in travel, it's combination of overtime and salary benefits, as well as travel -- it's split about 50/50 probably.

Okay. All right. And so now at the midpoint of the guidance for the fourth quarter, should I be thinking about -- like if you just take your 42.4., add that on, you're talking about a 43% level on the gross margins.

That could be correct if there are no other issues come up and everything meets on the line that we projected. But - well, some of our expenses came in a little bit low this quarter too. So, we're not - can't say for sure that we'll able to maintain the exact amount going forward, so that just the incremental amount of the hurricane may or may not be the final answer.

Okay. And the -- on the sales side - the other thing I wanted to understand -- it sounds like -- well, let's back up. What percentage of your set of customer base will impact it? Geographically, would you say is in impacted -- the area is impacted?

Less than 10%.

10%?

Less than 10% of our potential customer base, you know, less than -- well less than 5% of our current customer base.

Okay. And the other thing is on your comments earlier related to potential signings, when they -- when this kind of thing hits, they're push off for 6 to 12 months you said?

No, it depends on hit -- when someone's hit that's a relative term. I mean, hit the main hospital's wiped that all the way to -- they didn't have power for a couple days. And we have less than five, but some sales prospects that were in the pipeline that were hit significantly. Not to the point where they were totally destroyed, but to the point where their labor pool is virtually destroyed. Their patient base has dwindled and they do have structural damag as well.

And, I think -- I don't think any of us know exactly what's going to happen in certain areas that were affected by notably Katrina. But that -- my estimate of them being -- now there's no doubt that unless we're going to close to doors, which we don't anticipate that they're going to need a new information system when things get cranking again and my best estimate on that is 6 to 12 months down the road.

Got you. Okay. And just in terms of the operating margins kind of longer term. The company's drawing great margins right now. And it seems like the SG&A on a combined basis is growing at about half the rate of the sales growth on a year-over-year basis. And I think from conversations I've had that about half of that base is variable. So, should we -- can we continue to expect that going forward?

We are very pleased with our gross margin rates right now and they are at a high-end of the range. We do not expect a tremendous amount of increase in the gross margins. We would be real pleased to see the gross margins remain in their current level and ticking up just a small amount.

Okay. Steve, actually, the question is more on the SG&A, in terms of the leverage you're getting.

On SG&A, we anticipate our SG&A to be pretty historical in nature. In that the first quarter, I usually run in the 18% and then I'll start dropping down as the year goes. As long as sales maintains a fairly consistent growth pattern, like we've done all year, then I would expect to see the G&A decrease relative to the sales as you mentioned.

Got you. Okay. That's it. Great quarter, guys. Thank you.

Thanks Sean.

We have a follow up question from the line of Jeremy Lopez, William Blair Please proceed with the question.

Hi. It's Corey again. Just one quick question on the operating margin. And I know again you don't give long-term guidance here, but as typically thought of the business be in sort of a 20s type -- 20% range sort of the peak operating margin for the company.

And for last couple of quarters, you've been above 20% and it looks like the guidance for next year should be -- next quarter rather should be above 20% as well. Can you just give us a feeling as you think about the business, what's sort of the peak operating margin that you think you can achieve or that the business can achieve here in the next 12 to 18 months?

Do you think we're there right now at the peak? I think that over any substantial period of time which I define as a year that we could maintain based on the positive nature in the industry. And if that continues, there is some -- there is outsourcing growth is a factor in that obviously with the margins there. But I -- frankly a year ago I would have concurred with you that 20% would be a peakish sort of number and here we are slightly above that. So I don't -- frankly with what we have to invest in the business in order to grow in terms of new personnel, increase salaries et cetera, I can't see it getting much higher than this.

So the low 20s that we're seeing today is the right level to look at?

That's what we anticipate, yes.

Great. Thank you.

Thank you.

Mr. Dye, there are no further questions at this time.

Great. Thank you, Nelson. And thank you every one for your time this morning and for your interest in CPSI. Have a great day and a wonderful weekend.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.