TruBridge Inc (TBRG) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the CPSI Year-End 2005 Earnings Conference Call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Friday, February 3, 2006.

If at any time during the conference you need to reach an operator, please press star, zero.

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

Please go ahead, sir.

Thanks Debra and good morning everyone.

During this conference call we may make statements regarding future operating plans, expectations and performance that constitute forward-looking statements 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 10K.

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 just a minute or two of comments and then we’ll jump right into Q&A.

In the fourth quarter, we installed our financial and patient accounting system at 10 new hospital clients; our core clinical departmental applications were installed at 10 hospitals; 10 facilities implemented nursing point-of-care and 6 hospitals went live with ImageLink PACS.

At this time, we expect to install our financial and patient accounting system at 12 facilities in the first quarter; we expect 10 new installations of our core clinical departmental modules, 5 nursing point-of-care implementations and 8 ImageLink installs.

In outsourcing services for the fourth quarter, we executed 4 new business office outsourcing contracts, 2 of which were for private pay collections only and 2 for full business office outsourcing.

I’ll turn it over to Steve for a minute and then we’ll take questions.

Thanks David.

I’d like to highlight just a few points before we open the call to questions.

Our DSO’s were 40 days for the fourth quarter, down 4 days from the third quarter and finished below our range of 45 to 50 days.

Cash provided in operations for the fourth quarter was $6 million; cash provided by operations for the entire year was $18 million.

Pre-cash flow was $5.2 million for the quarter and $15.3 million for the year.

We defined pre-cash flow as net cash provided by operating activities less CapEx.

CapEx for the quarter was $0.8 million.

Cash collections were $28.5 million for the quarter compared with $24.4 million for 2004.

Cash collections for the entire year were $107.7 million compared with $83.9 million for ’04.

As noted in our earnings release, we will recognize stock compensation expense of $259,000 in the first quarter of 2006 after adopting FAS 123R.

After applying income taxes, net income will be impacted $157,000 or $0.0150 (1½ cents) per diluted share.

We project adoption of FAS 123R to increase our cost of sales by 40 bps and our SG&A expenses by 50 bps.

Our employee headcount for the quarter end was 846, an increase of 1 for the quarter.

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.

Good morning, guys.

Could you talk about the deals that you did sign in the fourth quarter, especially given the average deal size being a little lower than previous quarters?

Sure.

Sean, the reason the average deal sign was down is consistent with the reason it’s been down sometimes previously in that everybody that signed on to be a new client with CPSI signed up for financial and patient accounting; but a lesser percentage of them this time signed on, at least up front, for the clinical and nursing point-of-care and ImageLink-type modules.

We, obviously, prefer to get as much as we can in the initial contract; several of the contracts that were not committed to purchase it, they do have price protection in the event that they sell those applications say in the first 24 months.

As always, we care more about the number of hospitals than we do about the average deal size and that we feel very strongly that it’s very likely that over the course of the next, anywhere from months to a few years, that those that didn’t install the clinical applications up-front will eventually install those applications, especially with all the momentum behind the electronic medical records, etc.

And how much of the revenue in the fourth quarter was from add-on sales?

15% of total revenue was from add-on sales.

And in particular-- and I think because of all this momentum behind electronic medical records, I think we hopefully will see this for some time, but add-on sales are particularly strong right now.

The portion of our customer base that in years past - whether it be a decade ago or months or just a couple of years ago - that installed just the financial and patient accounting are really starting to ramp up the buying of the CPSI Clinical Modules in order to move towards that electronic medical record.

Okay.

And do you have any bigger hospitals sign on your solution?

Again, this is for the fourth quarter bookings number?

We don’t give specifics on hospital sizes anymore.

We do continue to feel real good about what we’re doing across all segments of the 100 to 200, 200 to 300 and under 100 bed category and we feel extremely good about our prospect risk and our pipeline and some of the hospitals that are in there in terms of the size of the hospital and therefore the potential deal size.

Something has happened this year, as well, that happened the last two years that I don’t remember as much from years previous to that is that as January 1st sort of came and went and then boom the pipeline just opened up tremendously - not that it was weak before - but I do think that people look at this concept of buying a new information system as such an important and big task right now that a lot of folks don’t really kick it off late in the year and wait until the beginning of the year.

So we feel really good about where the pipeline is for all sized hospitals, right now.

Now when you say pipeline, are these deals that you are competing against another vendor with currently?

Is that how you define it?

Yes.

It is.

We don’t really think of our sales work for add-on sales to existing customers, as pipeline; although I would characterize the potential add-on sales as very positive right now.

I think that we’ll see the percentage of total sales to come from add-on sales to existing customers to continue to pick up.

And in your larger deals you’re talking about that you’re in the pipeline with, are the competitors of those deals are they the same people or are you seeing some of the bigger vendors going down a little bit?

Essentially it’s the same people.

The couple that are at the very large end of our category, I believe that we’re on the same-- some of the larger vendors that you are familiar with are included on the list of RFP’s, etc.

But for the vast majority of those that are over in that 100 to 300 bed category, it’s the same folks that we compete with.

Thank you.

Thank you, Sean.

Our next question comes from the line of Robert Dodd of Morgan Keegan.

Please proceed.

Hi guys.

I’ve got several-- Can you give us the employee count at the end of the quarter?

46.

Then, when you look at the nursing point-of-care, the installations that you’re expecting in Q1 are down a little; is there any particular theme you’re picking up from prospects as to why they are not installing it earlier in the cycle?

Robert, I don’t think so.

I think that a quarter is such a short period of time.

I’m very confident that that number will increase in the second quarter.

I don’t know if I can blame it on seasonality?

I can’t honestly give you a good reason that there’s only-- that they’re down from I think it was-- was supposed to be 10 in the fourth quarter.

The number of hospitals that are interested in point-of-care remains at an all-time high;

I think it was more of a timing thing than anything else.

I think you’ll see that number strong in the quarters to come.

And, as far as the new hospitals that are installing CPSI, installing point-of-care up front, generally speaking when they don’t purchase all of it up front it’s due to one of two reasons.

The most common is they don’t have the money in their budget to purchase the entire system; and a close second is they don’t feel like they are geared up for or necessarily have the information technology staff in place to handle an installation that includes all those applications up front so they prefer to phase it in.

Can you talk a moment about the PACS pipeline as well?

Obviously, you’ve expanded capacity for installations.

What does demand look like for that beyond this quarter?

I mean, just in general?

I would characterize that as absolutely fantastic; the demand for PACS.

We couldn’t be more pleased with what’s been installed so far and the fact that we said starting with the first quarter of ’06 that we’d like to have the capacity to install 8 PACS per quarter.

We are slated to do that at this point.

I feel relatively confident that-- I don’t think we’ll necessarily do 8 every quarter because you never know when an install might slide at a point that it’s too late to put somebody else in a particular slot for whatever reason; but I do think that we’ll be, if not at capacity, very close to that capacity for the full year.

And then two final-- are you scheduled to lose any of your business process outsourcing or private pay outsourcing customers in the next couple of quarters?

Scheduled to lose--?

In the immediate quarter, absolutely not; in the second quarter, I think there is some that – just like in anything else – there’s an automatic contract roll-over and we feel relatively confident that those will roll over at this point.

And then the final one.

In the past you’ve been pretty conservative about voting add-on sales into your guidance.

Can you give us some idea how much of that’s factored in?

It sounds like just demand is continuing to increase; but how much of that have you really factored into your guidance for Q1?

We factored in what we think is the appropriate amount based on-- we have a pretty good idea at this point, given we’re a third of the way through the quarter, what’s already installed and what’s at least scheduled to install at this point; and that includes add-on-- at least the major add-on stuff like laboratory, radiology, pharmacy, nursing point-of-care, that type of thing.

What we’ve been pleasantly surprised with lately in terms of add-on sales and hope we’re continued to be pleasantly surprised by and we can – we factor some of this in – is if you add on software sales to existing clients like nursing point-of-care client that’s been running it in a couple of nursing stations but decided to roll it out in a new part of the hospital or say our electronic forms application, somebody that needs to purchase additional licenses because they plan to roll it out in their ICU or their OR.

I think that we should continue to see more of that because there is such a focus right now – especially within hospitals that have already started the automation process within their clinical departments – that have had some success, they are anxious to roll it out in as many new places in the hospital as they possibly can; and that’s what we benefited from and think we will continue to do so.

Thanks.

Thank you, Robert.

Our next question comes from the line of Duane Pfennigwerth of Raymond James.

Please proceed.

Hi.

Good morning.

Just wanted to ask you a couple of margin questions; specifically, systems gross margin.

Was that a record for the Company?

I think it’s a record since we’ve been public.

I don’t know that it’s a record all the way back.

But I believe it has been a record since we’ve been public and been tracking that data.

What is driving that improvement?

Obviously some of the driving is in the mix between equipment and software sales, predominately.

And, also, we’re running probably 85 to 90% capacity right now so we’re utilizing our resources very well at the moment.

So if you look at a 46% gross margin, how do we think about that going forward?

Do you think, sort of over time, you have an opportunity to move that up?

Duane, I think that we have an opportunity to maintain.

I think that as we continue to install more and more systems, of course, with our methodology for installation it’s unlike any other vendor in the business where we 100% utilize our people to do the training, conversion, etc., we’ll have to continue to invest in new personnel resources to accommodate that demand.

So I think that that’s at the top-ish end of where you’re going to see it.

Okay.

Great.

And then any changes on the sales force front?

You gave your total headcount number – any specifics on the sales force?

We did not have any changes in the sales force in the fourth quarter.

We anticipate a couple more folks being directly involved – commission-based sales people – being added early ’06.

Great.

And then finally, can you tell me on an average quarter, or 4Q specifically, how much quarterly revenue would have been sold in that quarter?

Duane, I don’t have that number.

I just flat out don’t have that number.

We’ll look to have it next time.

Thanks very much.

Thank you.

Our next question comes from Josh Stewart of Sidoti and Company.

Please proceed.

Hi guys.

I was just going back to the add-ons question.

I was wondering if you could just give us an idea of the margins on like a nursing point-of-care or a PACS add-on versus an initial sale with a new system?

I would say they are roughly the same, Josh.

We probably have more as a percentage travel expense on a new sale, but then on the add-on sale with just a nursing point-of-care and PACS, you do have a piece of hardware component.

With the nursing point-of-care you’ve got the mobile devices that go from room to room.

That’s a reasonably significant hardware portion and then with the PACS, of course, you’ve got not only have the PACS server but you have all the high resolution monitors that go along with it.

So an add-on sale of say – applications like lab, radiology, pharmacy – where it’s a lot more software and not so much hardware would be-- those margins would be somewhat better than say a new install or a nursing point-of-care or PACS install.

Okay.

And are nursing point-of-care and PACS are they about the same as when you install the core financials and patient data management?

Yes.

They are.

And just wondering did a lot of these add-ons actually hit the backlog or are they intra-quarter things where you sign them, then implement them?

Most of them hit the backlog.

Most of the stuff that you’ve mentioned and the stuff that I’ve mentioned in answer to your first question, all hit the backlog.

I don’t want to say we never do it, but we rarely sell a PACS system or say a lab install intra-quarter, if you will.

And if we did it would be part of the quarter for something that’s going to install at the extreme end of the quarter; but due to the fact that we’re booked out as far as we are right now with our personnel resources because of the installations that’s a negligible event.

And then last thing, just wondering where the clinicals are selling better to your existing customers.

Is it your larger hospitals, your smaller or is it pretty much the same in all segments of your target market?

It’s across the board.

Put it in that-- in your question, I think it’s relevant to answer on the smaller end that we continue to see more and more hospitals that are critical access now.

I think that’s notably because of the increase in maximum bed size from 15 to 25.

We continue to see hospitals as large as 60 acute care beds scale down to become a critical access hospital to take advantage of the cost-base reimbursement and because they can roll a portion of the system cost into their reimbursement, that’s generally a positive for us.

We recently ran a cross reference of our customer set across a list of critical access hospitals nationwide and we have a better than 20% of that market now.

We have about 210 of our customers that are critical access facilities; so we are-- I think it’s not surprising that our larger customers are buying the clinical stuff; but the smaller hospitals certainly are as well and a large part of that is due to those critical access facilities.

Thanks.

Good color.

Thanks, guys.

Have a good day.

Our next question comes from Corey Tobin of William Blair.

Please proceed.

Hi.

Good morning.

Wanted to just take care of a couple of quick house-keeping things.

For Steve, what was the depreciation in the quarter?

Depreciation was $508,000, Corey.

And then the 15% add-on statistic that you provided.

Does that include PACS or is PACS outside of that number?

That includes some PACS.

That includes the PACS for the hospitals that have been existing clients for a year.

When we think of add-on sales, that’s sales of mostly software but some hardware to hospitals that have been on the system for 12 months or more.

And I don’t have the breakdown in the fourth quarter of how many of the PACS installs were to new customers and how many were to existing customers.

So if they contract for it up front it goes into the average deal side metric and if they don’t, it goes into to-- if it’s something that happens a year later, it goes into the add-on sales metric?

That’s correct.

So back to the margin side for a second, I’m just having a look – little bit of additional clarity if possible.

The margin in systems and sales jumped up from the low 30’s to the high 30’s here – and I guess what I’m hearing is that a good chunk of the add-on - I would have attributed a lot of that to some add-on sales - but it sounds like from what you’re saying a good, fair portion of the add-on sales is really in the same margin as the new system sales.

Well, specifically, Josh’s question was around point-of-care and PACS, and the margins on those aren’t as good as some of the other add-on stuff that would help the margins overall, Corey, like the lab, radiology, pharmacy.

And we’re still in a great – installing, if you will – a great deal of that’s software right now.

In addition to that, something that I haven’t mentioned yet on this call is the physician ChartLink licenses are going over extremely well both selling new licenses to add-on clients and then also hospitals that maybe bought enough licenses to hook-up with just a couple of doctors initially are now wanting to bring more of their medical staff on board with ChartLink.

So that’s a component in there, as well, that would be helping to drive that margin up.

If we want to put it to those two buckets between sort of the lower margin add-on sales, if you will, versus the higher margin add-on sales, can you just give us a feeling for – not specific numbers obviously – but are the add-on sales right now more weighted towards the higher margin stuff?

Is that the conclusion we can draw?

I would guestimate that it’s about half and half.

About half and half.

Okay.

Great.

Just a couple of other things, if I may, in terms of your backlog right now and I know the absolute dollar number, but can you give us a feeling for the number of hospitals that are in the backlog at this point?

In terms of new customers?

Right.

In terms of new customers.

It seems like in Q1 of this year you had a very large number of new hospitals that came on board and then it’s been sort of this steady state of installations that have pretty much maxed new additions.

So I’m just kind of curious-- I would assume that there’s a fairly healthy number of new hospitals that are in the backlog at this point.

Yes.

It’s a healthy number.

I’d say it’s – and I don’t have the list in front of me right now, Corey – it’s close to 20.

Okay.

And in terms of the install capacity, I think in the past you’ve mentioned somewhere between 10 and 15 hospitals a quarter depending on the size of the hospital.

Is this still a good metric to look at?

Yes.

It is.

And do you plan on adding new additional capacity at this point given Steve’s comments on running at 85 to 90% or do you think there’s some more time at the current level before you have to add other things?

We’re in the process of adding new capacity; but I don’t want to characterize that necessarily as saying that we think that that number is going to jump up to 12 to 17 per quarter.

I think that the new capacity that we are in the process of adding is – at this point we would guess – would be more inclined to help with the add-on sales.

The new sales we think will remain strong but I don’t know if - we’re seeing a strong pipeline - but I don’t see if we’re seeing a strong enough pipeline right now to ramp that up significantly.

But I do think-- well, I know that we’re in the process of adding some capacity; but in that capacity, obviously, the same talent that can handle an add-on install can handle a new install which is why I’m hesitant to give you specifics; but I think it would be more geared towards add-on business at this point.

Great.

Very nice quarter, particularly on the margins.

Congratulations.

Thank you, Corey.

Before we go to the next question, we would like to remind everyone to register for a question, please press the one followed by the four.

And our next question comes from the line of Del [Warmington] of [Delward] Management.

Please proceed.

Delward Capital Management.

Quick question.

You mentioned that you had 10 new customers this quarter, last quarter.

What’s your total number of customers right now?

580.

How much?

580.

And is there a partial geography that you have more stronger?

I’m sorry.

We didn’t under-- we couldn’t hear that.

Yes.

Is there parts of the geography in which you guys are much stronger?

I think of the just slightly more than 50 hospitals that we signed last year, if I remember correctly and I ran this number relatively recently, I think it was-- there were 28 states included among those 50 hospitals and several in the Northeast that I can think of; obviously we’re strong in the Southeast.

The Midwest we’ve always been strong and several on the West Coast, some Oregon, California in there.

So I don’t-- I think we’re particularly strong all over the country right now.

And we are now in 46 states with the recent addition of a hospital in New Jersey.

What about the New York area, apart from New Jersey?

We’ve got a dozen or so clients in New York State.

And I was on one of your competitor’s call and they had mentioned they are looking towards moving to lowering their market.

Are you still not in terms of pressure from the larger guys?

We are not.

Obviously it is something that we keep an eye on; but I’ve been in this business now for 16 years and we’ve heard that consistently for 16 years and we just think it’s proving difficult for the vendors that specialize in the larger hospitals, academic medical centers, tertiary facilities, etc., because it’s hard for them to sell a system at price that’s affordable for a community hospital and make any money doing it.

So we think that will continue to be the case; but I don’t mean that in an over confident way.

We certainly keep our eye on the market place.

Thanks a million.

Thank you.

Our next question comes from the line of George Hill of Leerink Swann.

Please proceed.

Good morning.

A lot of my questions have been answered so I just have one small housekeeping question.

I notice the tax rate dipped down about 150 bits in the quarter, any color behind that and is that sustainable?

It is sustainable.

It’s mostly related to the domestic deduction for – what’s the name of that? [Decap] deduction that was just initiated this past year for software sales, keeping the software costs in the United States as opposed to exporting it; so there is a deduction there that we look forward to keeping on the books for a few years.

And I guess my other question would just be, could you update us as to where you guys stand now?

What portion of your customers who run the core system have the clinicals, have the nursing, have the PACS, have medical verification and CPOA?

Just a little more color on what the upside opportunity is?

Sure, George, I’ll try on that.

I can give you some pretty accurate numbers on the add-on clinicals.

About 65% of our total clients have the core clinicals, like lab, radiology, pharmacy, etc.; just shy of 40% have nursing point-of-care;

I think CPOE we’ve got roughly 50 or so customers that are running CPOE at this point.

And I don’t have the number on medication verification.

If I had to guess I would estimate that that’s somewhere around 60 hospitals.

Okay.

And did you say PACS?

PACS is installed now at roughly 40 or so facilities.

And that’s actually installed.

And we were talking about your hospital backlog earlier.

Do you ever see any churn after hospitals have signed on and then as they are waiting for deployment do they examine other options?

Rarely.

Most of the time when we see churn is what we think of as beyond our control because the hospital gets acquired by a larger facility that forces them on their system that they have in the larger hospital or because the hospital gets acquired by a for-profit chain that does not have, does not utilize the CPSI system.

We do, very occasionally, lose a hospital because they are dissatisfied and want to look at other options; but that’s extremely rare and we think that will continue.

And is there any functionality that you don’t have right now that you think is important to help you win new business in the future?

We think we’ve covered the last real decent-sized hole there with the PACS implementation which is still something that we don’t think any of our competitors have at least built in-house themselves.

There are some small things.

Due to the fact that it’s an FDA approved application, we do not have a blood bank application; we have some blood-bank functionality but it flies below what’s necessary for FDA approval and that would be-- that’s a hole that we hope to and probably need to fill eventually.

That’s the only one that comes to mind.

Thank you.

Thank you, George.

And our next question is a follow-up question from Duane Pfennigwerth of Raymond James.

Please proceed.

Thanks.

David, just briefly on pricing, wondering if you could talk about if you’re getting any positive upward movement in pricing and specifically with maintenance renewals, do you have anything in there that would be sort of an inflationary upward movement on pricing?

Thanks.

On the maintenance contracts, we do typically increase about 3% per year when a hospital is at the end of term and it rolls over; and typically in most of our contracts, our potential increase is limited to CPI.

And on the new business – no, there’s been no positive pricing movement.

There certainly hasn’t been any negative pressure either.

I think that the condition of the hospitals right now is such that while we’ll never say fantastic in the community hospital industry, it’s pretty good so that’s helping; but on the other hand, I know you’re not surprised, it’s very competitive.

So that keeps us all in check, if you will.

So it’s sort of status quo on the pricing.

Thanks very much.

Thank you, Duane.

Our next question comes from the line of Josh Stewart of Sidoti and Company.

Please proceed.

This is really the last question.

I was wondering if you are seeing any other competition on the PACS side.

Who are you going up against?

Going up against a lot of folks.

There’s a lot of folks competing for that business right now; but there again, I think our key competitive advantage is that none of our core HIS competitors have built their own PACS system.

But in terms of, say, selling a stand-alone – well it’s not stand-alone – selling a PACS system to an existing client, we go up against GE, Kodak, Merge, Stantor, NovaRad, I mean there’s a number of firms that are out there competing for that business.

Is there anyone who is the most obvious competition in the smaller market?

I would say, no.

Of those I mentioned we see them about evenly across the board.

Great.

Thanks.

Thank you.

And we do have a follow-up question from the line of Robert Dodd of Morgan Keegan.

Please proceed.

Just following-up after that question.

When you’re talking about those competitors in the PACS system, can you give us an idea on what you’ve seen regarding what their price points are versus yours?

It looks to me that your price point is very competitive.

Do you think you’ve got a shot of pushing your pricing up in the PACS system or can you give an idea where you stand versus those competitors?

I think we’ll see our PACS pricing stay about in line with where it is now.

I’d say that we’re lower than the mega vendors that I just mentioned like the GE’s and the Kodak’s of the world and we’re in line with the ones that specialize in selling PACS systems to, say, community hospitals like the NovaRad’s, the Merge’s of the world.

So I don’t see much potential for us to increase our pricing.

We feel pretty good about where it is right now and we’ll maintain that.

Thank you.

Thank you, Robert.

Mr. Dye, 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, sir.

Great.

Thank you, Debra.

And thank you everyone for your time this morning and for your interest in CPSI.

Have a great day and a wonderful 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 lines.