TruBridge Inc (TBRG) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Computer Programs and Systems second-quarter conference call. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded Friday, July 21, 2006, and it is my pleasure now to turn the call over to Mr. Boyd Douglas, President and Chief Executive Officer for Computer Programs and Systems.

Please proceed, sir.

Thank you and good morning, everyone.

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 predications 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 cautioned 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 this call this morning is Steve Walker, our Chief Financial Officer.

Before I get to the numbers, I would like to thank everyone for joining us this morning.

I'm glad to be with you on my first call as the new CEO of CPSI.

It goes without saying, but please note how excited all of us here at CPSI are about our Company.

While we are certainly proud of our past accomplishments, more importantly we are hard work to ensure that we capitalize on our exciting prospects for the future.

I believe that the health care information technology industry and more specifically the community hospital marketplace still finds itself in the early stages of an eight to 12 year period of aggressive adoption of information technology.

While the nationwide move toward interoperable electronic health records will remain slow and fraught with controversy, its momentum cannot be stopped.

The penetration of CPSI's high-end clinical products such as ChartLink, CPOE and PACS among our installed customer base is higher than any of our competitors.

We believe that this fact combined with our continued focus on providing the only integrated solution to include software, hardware, conversion and complete installation and training services will continue to set us apart in the years to come.

And now let us look at the numbers.

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 nine hospitals.

Eight facilities implemented nursing point of care, and six hospitals went live with ImageLink PACS.

Add-on sales to existing clients continued a recent strong trend, representing 20% of total revenue.

At this time we expect to install our financial and patient accounting system at 10 facilities in the third quarter.

We anticipate eight new installations of our core clinical departmental modules, eight nursing point of care implementations and five ImageLink installs.

We are pleased that in the second quarter we assigned contracts to install our system in 12 new client hospitals.

Please note that for competitive reasons we are no longer providing an average contract size with our quarterly earnings press release.

I would like to take a moment to discuss personnel growth in our sales division.

Since the beginning of the year, we have increased the size of this division by more than 22%, and since becoming CEO I have increased our number of nationwide sales territories from six to eight.

This was done for two reasons.

First, I along with our sales management felt that we needed more of an on-site face-to-face presence in front of our current and potential customers.

Second, we believe we need more of a sales presence in the Western one-third of the United States.

As always, all of our new sales personnel have at least five years experience in the support areas of our Company.

We are excited about the potential long-term positive impact of this continued growth in our sales division.

Changing gears to outsourcing services, for the second quarter we executed five new business office outsourcing contracts, two of which were for private pay collections only and three for full business office outsourcing.

As I stated in the earnings press release, we are very pleased with our recent sales success in the outsourcing segment of our business and look for continued growth in outsourcing services in the quarters ahead.

We now have 42 business office outsourcing customers, 354 statement outsourcing clients and 344 hospitals utilizing our electronic billing outsourcing.

Our strongest potential for growth in outsourcing services is clearly with the business office outsourcing component.

While the sale of that product to a community hospital remains challenging due to the fact that we are typically replacing jobs in the community, we can now show improved cash collections for all outsourcing clients that have been with us for more than six months.

We believe that as this book of client references continues to grow, our potential for sales in this area will improve as well.

Now I will turn it over to Steve for a few comments on the financials.

I would like to highlight a few points, and then we will open the call for questions.

Our DSOs were 42 days for the second quarter, up three days from the first quarter and finished below our range of 45 to 60 days.

Cash provided by operations for the second quarter was 3.7 million.

Free cash flow was 3.1 million for the quarter.

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

CapEx for the quarter was .6 million compared with .5 million in '05.

Depreciation for the quarter was 489,000.

Cash collections were 28 million for the quarter compared with 25.1 million in '05.

We recognized stock compensation expense of 377,000 in the second quarter of '06 after adopting FAS 123R.

After applying income taxes, net income was impacted 229,000 or $0.02 per diluted share.

As stated in the press release, we anticipate third-quarter EPS of $0.32 to $0.34.

We project the third-quarter net income impact of FAS 123R will be 209,000 or $0.02 per fully diluted share.

Therefore, for comparative purposes, we anticipate earnings per share excluding the impact of FAS 123R to be 0.34 to $0.36 compared with $0.33 we reported for the third quarter of 2005.

Our employee headcount at quarter-end was 898 employees.

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

(OPERATOR INSTRUCTIONS).

Sean Jackson, Avondale Partners.

Nice quarter.

Can you talk about -- again you said you're not disclosing the average deal side for competitive reasons, but has that average deal size changed any?

Can you give us some indication of the direction it went in the quarter?

You know, that fluctuates, and I would say as average deal sizes have gone in the past, it is certainly within the ranges that we have seen in the past, so no major change.

Okay.

Also just on the guidance for the next quarter it seems that the last several quarters you guys when you have released guidance it has been slightly lower than the actual estimates that are out there, but then you end up comfortably beating those estimates or beating that guidance.

Is there a reason for that?

Are you just being conservative, or is there stuff that comes in in the business that you're not expecting at the beginning of the quarter?

It is certainly the latter.

Stuff comes in.

The add-on sales come in that it is just really hard to predict how that is going to come in.

So it is certainly that more than -- we don't really base anything based on what the street and what the analysts have out there.

We just do it, what orders we know that we have that are going to install, take our best guess at anything that is going to come in new, any add-on sales and go from there.

As we have mentioned before, there is always potential for some slippage in installs either backwards or forwards, so you've got to kind of make accommodations for that as well.

And lastly, you said you're accelerating on the sales front.

Can you just repeat that again?

You said 22% sales personnel growth at the beginning of the year.

Is that correct?

That is correct.

The biggest change previously we had the country divided into six territories and had sales managers or outside salesmen, one for each one of those territories, and we have now gone to eight.

Again, the main reason for that is just to give us more face-to-face time in front of our customers.

Also it allows us to concentrate more out west.

We are going to locate one of those salesman out west so it will be easier to get there.

We found that it takes basically a whole day to get from Mobile to out west somewhere, so we would rather spend that time in front of the client instead of on an airplane.

Robert Dodd, Morgan Keegan.

One question just going back to the guidance quickly.

This year so far you have had in the first two quarters 19 to 20% of system sales coming from add-on sales during the quarter, whereas your historic for the last year tended to be 13 to 15%.

Can you give us an idea what you're baking into the guidance?

I know it is very hard to predict, so.

Are you being conservative in sort of assuming you'll get something more like the 13, 14%, or can you give us an idea what you're looking at there?

We're looking at the 17 to 19% range.

Okay.

And then secondly, the employee count went up clearly significantly in the quarter compared to the first quarter.

Can you give us an idea other than adding on sales where you are adding those employees?

Yes, Robert, we added about 15 employees in the clinical side this time as we are seeing growth in our clinical sales.

Also, we added three in the ITS, five in the programming staff and 10 in outsourcing.

That should come up with around 33 that we increased.

Got it.

Then but we are getting to the end I guess of the hospital budget cycle.

They are all finishing up their budgets for next year for most of your customers with the September year-end.

Can you give us an idea what you're hearing from them?

I would imagine it sounds pretty good, but any comments you can give us there would be appreciated?

Reinvestments for Medicare and Medicaid are steady, and as you know they certainly improved about a year and a half ago, so they are steady.

I don't know that they are expecting any further increases, but I certainly think reimbursement is holding steady, which I always like to say reimbursements in community hospitals probably is never good, but it is as good as we have seen it in a while.

Corey Tobin, William Blair & Co.

Wanted to connect on the margins here for a couple of seconds if I could.

It looks like the margin level particularly in system sales was down pretty significantly sequentially, and I was just curious if there was an additional expense issue, or is it simply because it looks like the add-on sales were not as strong this quarter as they might have been in Q1?

That is exactly right.

The sales for -- new sales were not quite as strong, and therefore, the margins deteriorated slightly.

If I look at the number of installs, Steve, the number of installs seems to have remained fairly constant in the last couple of quarters.

Is that correct?

That is correct.

We are seeing on the new sales they are buying a little bit less of the total package and, of course, being supplemented by the add-on sales where they are buying a little more than normal in the add-on sales area.

Okay.

And I'm assuming your guidance implies that those types of trends will continue going forward?

Yes.

Okay.

And then on the margin on the outsourcing side, the margin on the outsourcing side was actually down sequentially as well, and I'm just curious why that would be the case given that you have had such nice growth there lately?

We believe those are little bit up.

In, I'm sorry, support and maintenance.

I apologize, not outsourcing, support and maintenance.

Well, support and maintenance is a fairly fixed number.

I think that is down -- what, is it down about just 2/10.

I think that's probably just a relationship to the sales being down a little bit.

They are actually in dollarwise right in line with our expectations.

Okay.

Understood.

Then finally, just shifting years for a second going to the competitive environment, any thoughts on how the competitive situation remains at this time, and have you seen any impact on -- do you feel that any changes in the competitive environment have had an impact on new system sales?

Well, we really have not seen any changes.

It is about the same as it has been here for the last 12 to 18 months.

I think with the reimbursement being where it is fairly good for these community hospitals.

Us and our competitors are all competing extremely hard while the hospitals are in a buying mode, so it is competitive but it always is but no major changes.

So win rates remain consistent?

Yes.

Finally, one last housekeeping one if I could, Steve.

Where is the option expense spread throughout the P&L?

If you can just give us the buckets that that falls into, that would be great.

Let me grab that number here.

Looking forward at '03, cost of sales system we're looking at 76,000.

In that bucket cost of sales support and maintenance at 76,000 also.

On the operating side, sales and marketing at 55,000 and G&A has 135,000 in it, and that should add up to close to 343,000 for the third quarter of '06.

Our tax added 134,000, so that gives me the 209,000 net income.

George Hill, Leerink Swann.

It looks like this could be a rapid fire call this morning.

One of my first questions is, you guys are increasing these sales or have increased the sales team by about 22%.

Are there any plans to add another deployment team to maybe match the sales increase that the news sales people could bring on?

Not right at this time.

We certainly think that by making these changes that we will hopefully sell more systems, but we don't see a need right now to add more deployment teams.

As Steve mentioned, we have added some people in our clinical areas so that we can maybe squeeze in a few more installs there, but no major changes to any of our teams at this point.

Okay.

What do you think the -- I will say what capacity utilization do you think you guys are at from a deployment perspective?

We look like we are at about 80 to 85%.

Sometimes we will get as high as 90 depending on the month.

Okay.

One other thing is there is a -- I'm sure you guys saw the announcement this week that CCHIT announced the AMR approvals for the ambulatory products.

I know that you guys are working on a physician practice product.

Are there any plans to submit the product for approval and have it I guess EMR certified is what they are calling it?

Absolutely.

We're hoping to do that before the end of the year.

We have still got a few things we are ramping up.

As you know, the testing for that is extremely involved.

We have got 99% of the programming done.

We're working on the scripts and things like that for the testing, so we are certainly planning on doing that.

And I guess the last question I will just ask to you, Boyd, is I know that you come from the technical side of the organization, and I got the sense that David was more from the sales side of the organization.

Can you just tell me what you think you are bringing to the organization that is different and any different direction where you might take the Company?

I really don't see any changes.

Actually David and I both came up through software support.

Once we spent our five or six years in software support, he was -- he came up really through the technical side.

I came up more through the application programming side.

We were both equally involved with the sales.

In 1998 he and I worked together with the founders of the Company and with the VP of Sales at the time to kind of formalize our sales process.

I really worked on it more from an application programming point of view and wrote some programs internally here to help us track that win rate and things like that.

So I would say we were equally involved with sales, and Mike Jones and I are going to remain involved to the extent that David and I were.

We meet with our sales force formally for several hours once a month to kind of see where we are, really focus on the hospitals that we have done a demonstration for and move forward from there.

But I am in touch because of our internal systems here with the sales process at every prospect on a daily basis.

Richard Close, Jefferies.

On the third quarter I guess revenue guidance, I was wondering if you can could characterize maybe trends in slippage over the last couple of quarters and what you're expecting in the third quarter?

We have not had a lot of slippage, so consequently we are accounting for not a lot of slippage.

Certainly there is always the case that that could happen, but we have got that factored into it a little bit.

But consistent with what we have seen the last couple of quarters, which has not been much.

Okay.

And then you mentioned that new sales or new clients are essentially buying less of the package.

Can you quantify that a little bit?

Maybe why that is and what you're hearing out there from that?

I think that is more just something that is a cyclical thing.

There is really not any explanation for it.

Only signing basically 12 contracts per quarter and consequently doing about 12 installs per quarter, I think that is a thing that is really tough to judge just on a quarterly basis.

Most of these hospitals when they are picking a new hospital information system have already decided upfront which modules they are going to install.

Typically they are going to replace the modules that they are already automated in on their prior system.

So we don't have a lot of control over what modules they do.

Of course, what we concentrate on is just winning the business so that down the road they will buy all of our modules.

How do you feel in terms of visibility with respect to your revenue guidance?

We are confident with the revenue guidance for this quarter.

Okay.

And then I guess getting back on the competitive landscape, with the revenue guidance being below what you guys just achieved and I guess in the first quarter it seems to me that that could be saying that the competitive landscape is heating up somewhat.

Maybe additional commentary there?

Again, I think a quarter is an extremely short amount of time to try to look at guidance and read between the lines there.

If you look back at how we're doing compared to last year which was obviously a good year for us, we're ahead of that.

So we are comfortable with where we are in the competitive marketplace.

Our win rates have remained the same, and we expect that going forward.

And then the final question I guess is on the 22% more sales individuals, was that -- that was through the first six months, correct?

That is correct.

Okay, and so what is that on an actual headcount number?

We now have 44 people that are in our sales and marketing.

Okay.

And so that is up from where at year-end?

36.

Okay, and then how quickly do those individuals -- how quickly are they actually producing?

Obviously that depends a lot on the individual.

It helps us a lot that they all have at least five years of software experience, so it's not a question of understanding the Company or knowing the software.

It is just a matter of being involved with the sales processes and procedures that we go through there.

And because these are coming from our support areas, they will be moving over.

They are not necessarily all 44 in sales right this second.

They have got previous commitments for whether it is installs or follow-up visits and things like that.

So they are moving over at various times certainly.

By the end of this quarter, everyone will be over there in sales.

But that is a tough number to say when they are on the ground, hit the ground running.

We certainly get them out there as soon as we can once we get them used to our sales process.

All right.

And then finally, I guess is there any particular region that is doing better or worse than the others?

And then maybe if you could sort of say the new clients, what size hospitals those are?

As far as the regions, they are all about equal.

I don't see any region doing any better or worse than any other region.

As far as the hospitals, what has been typical of us for the last 10 years really the vast majority of them are under 100 beds, and we slip in 100 to 300 beds every now and then.

We are really strongly with the critical access program.

As you're probably aware, we have got better than 10% of the critical access hospitals across the country.

So we're extremely competitive in that marketplace.

Duane Pfennigwerth, Raymond James.

I wonder if you could just review for us what the visibility on business office outsourcing contracts is?

What the contract term typically is, what an average deal looks like and what the pipeline looks like there?

The pipeline as I mentioned in my speech before and in the press release looks really good.

There is a tremendous amount of interest in it.

As I also mentioned, that is a tough sale because we are typically replacing jobs in these smaller communities.

So while it looks attractive to the hospital and looks like it can save them money, you have still got the issues of job replacements that we have to deal with.

What is an average sized contract?

That is a difficult number to come at because we are all based on the -- we based our fees on a percent of cash collection.

So it really just depends on the size of the hospital.

But it depends on the cash collections at a hospital, and we are somewhere between 2% and 5% of cash collections depending on what type of hospital it is, what type of business they do.

And then what is the typical turn and what kind of churn are you seeing for existing customers?

I would say the average turn is about a year and a half.

We have signed some -- we don't do anything less than a year.

Ideally we would like to get a three-year contract out of everybody.

I would say the average probably ends up being about a year and a half, but we start working it early.

When the contract is within about eight months of expiring, we start working with that facility to try to get a longer-term deal, and we have been very fairly successful at doing that here recently.

Could you comment on sort of the ambulatory or physician office product you have, if there is sort of upgrade event or new product event that is coming up and how that might impact your systems pipeline?

It is a new product event.

We have got about 700 to 800 clinics that are on our hospital, so we have certainly got some potential to sell that product.

It is -- I don't know if you want the specifics of the product -- it is based on our Electronic Forms technology and builds a narrative that can then be electronically signed by the physician.

But obviously we have got a lot of potential there with our as I mentioned 750 or so practice sites out there.

So when will that be generally available?

It is generally available now.

We have it installed in six facilities now, and it is generally available.

Sandy Draper, JMP Securities.

Most of my questions have actually been answered, but I missed at the beginning of the call you went through the types, the numbers and types of implementations in the quarter.

Can you just review that one more time?

For the second quarter?

Yes.

We installed 10 new hospital clients, nine clinical, eight point of care and six ImageLink PACS.

Okay, and targets for the third quarter?

Targets for the third quarter, 10 financial and patient accounting, eight clinical, eight point of care, five ImageLink.

(OPERATOR INSTRUCTIONS).

Corey Tobin, William Blair & Co.

You went through the number of outsourcing clients you had by each area.

Could you just quickly go through that again and also give us a feeling for where that was a year ago?

I can certainly go through the numbers again.

I will have to think about the year ago. (multiple speakers)

Or even a quarter ago.

We have 42 business office outsourcing, 354 statement outsourcing, 344 electronic billing,

And where was that either a quarter ago or a year ago?

We are looking to see.

I'm not sure I have got those numbers.

How about if I give you at year-end?

That is great.

Statement outsourcing was 327, electronic billing was 324, and business office was 26.

26, so the ramp at business office (inaudible) is it very strong despite the cautious tone you had regarding displacement of employees?

Yes.

Do you expect to see --?

That number also includes private pay, and we actually don't displace as many employees when we do private pay.

Okay.

Understood.

And you expect to see continued strength in this area across all three but particularly business office outsourcing as you look ahead?

Particularly business office outsourcing.

You know the statements with 354 and 344 on electronic billing, we only offer these services to our hospitals, and we have got roughly 600 hospitals.

So the penetration or the opportunities there are limited.

Typically the other hospitals or other hospitals that are not using us are probably using somebody else at this point.

The growth there really is when we sell new systems we typically get their statement outsourcing and their electronic billing.

But business office outsourcing is certainly where we are going to see the grade.

And right now when you sell a new system, what is the take rate for one of these three products?

Is it over 50% of the time when you sell a new system you will get one of these three outsourcing contracts as well?

I would say we would certainly get one of those three more than 50% of the time.

Great.

And then, Steve, if you could just real quick on the options again, I know you gave us the Q3 projection.

Where was it in Q2 if you don't mind?

Where are the option expenses spread throughout the P&L?

I don't think I have that number in front of me.

I will be glad to give it to you off-line, but I did not bring that sheet with me.

I'm sorry.

No problem.

Thank you.

And I'm not showing any further questions.

Gentlemen, I will turn the call over back to you.

Thank you for the time this morning.

Have a great day and a wonderful weekend.

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

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

We thank you and have a good day, everyone.