TruBridge Inc (TBRG) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Computer Programs and Systems year-end conference call.

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

Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded Friday, February 2, 2007.

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

Please go ahead, sir.

Thank you, Kimberly.

Good morning, everyone, and thank you for joining us.

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

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

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

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

With me this morning is our Chief Financial Officer, Steve Walker.

Steve and I have about ten minutes of prepared comments, and then we will take your questions.

In the fourth quarter, we installed our financial and patient system and our core clinical departmental applications at ten new hospital clients, ten facilities implementing nursing point of care, and seven hospitals went live with ImageLink packs.

Add-on sales to existing clients made up 27% of total revenue.

After a remarkable 2005 which saw 31% topline growth and 106% bottom-line growth, we are pleased with our growth in 2006.

During the past year, we grew our top line by 6.6% and our bottom line by 8.5%.

As stated in earnings release, in the fourth quarter, we signed nine contracts for new system implementations.

We were pleased to see the number of contract signings returned to more normal levels.

Our win rate for the fourth quarter remained around 60%.

In addition, I am happy to report that the average size for these nine contracts is up significantly from our historical average.

At this time, we expect to install our financial and patient accounting system at five facilities in the first quarter.

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

Clearly, we are not satisfied with our guidance of first quarter '07.

There are three issues that I would like to discuss relative to this guidance.

First, one of the five installations for the quarter was sold under an ASP agreement.

This customer is installing our full suite of financial and clinical products, which translate into a larger-than average contract.

However, with an ASP model, we will recognize the revenue from this contract over the life of the contract, as opposed to recognizing all the revenue during the quarter during which the system was installed, as would normally be done under our standard agreement.

We typically do not offer our system on an ASP basis, but this was unique situation where it was in the best interest of CPSI and our customer to execute a contract under this arrangement.

Second, we executed five contracts during the third quarter of '06, which is below our historical average.

With our normal leadtime of 90 to 120 days between contract execution and system installation, the low number of signings in the third quarter of '06 to a large degree translates into reduced guidance for this quarter.

As I stated earlier in my comments, we are pleased to see the contract signings during the most recent quarter return to more normal levels.

Third, we have three recently contracted installations that are currently scheduled for the second half of 2007.

This is atypical and worth mentioning because, as I've just pointed out, our normal timeframe between contract execution and system installation is 90 to 120 days.

Looking at 2006 as a whole, the number of prospective client hospitals within our new sales pipeline that made a decision during the year was 59.

We won 35 of those deals and lost 24, giving us a win rate of 59%.

By comparison, there were 84 decisions in 2005, 70 in 2004, and 75 in 2003.

Clearly, there were noticeably fewer hospitals in the market for IT systems during 2006 than in the years past.

We believe there are a couple of possible reasons for this change.

We think the primary factor is a large degree of indecision in the marketplace.

Plainly, the government is taking a more active role in the use of Information Technology within our healthcare system, which we expect in the long-term well actually generate more activity in the HIT sector.

However, in the short term, many hospitals appear to be taking a wait-and-see approach.

They want to be sure how the government will address such issues as the use of electronic health records, regional and national health information networks, and the ongoing certification of software under the auspices of CCHIT.

There is a great deal of uncertainty right now on what will or won't be mandated, how it could possibly affect provider and physician reimbursement, and what funds will be made available towards a more complete adoption of technology.

This, in combination with what we see as a good amount of just plain misinformation in the marketplace, appears to be causing hospitals to take a more cautious approach on decisions regarding their HIT systems.

Secondarily would be historical cyclical trends.

Past history indicates that community hospitals evaluate their IT system and strategy about every five years.

On other occasions in the past, we have experience six to nine-month periods of a general slowness in the market.

We don't really have a good explanation for why this is.

We just know that it occurs periodically and in the past has always been a short-term condition.

We have no reason to think any differently now.

These are a couple of the possible reasons for the current softness that we're seeing in our marketplace.

Again, we believe this to be a temporary condition, and we're confident that the market will return to its previous level shortly.

In the meantime, we're going to concern ourselves with factors that are within our control, ensuring that we are considered in every decision, improving our win rate, and continuing to expand our product and service offerings to our existing customers.

First and foremost, we continue to place an emphasis on our current customers receiving the very best support that we can offer.

There's no stronger sales tool in our business than good references.

By continuing to stress the importance of taking care of our current customers first, we will ensure that our references will be strong.

Secondly, we are constantly working with our sales division to present our product and services to current and potential clients in the most effective manner possible.

We believe that we will begin to experience improved performance from the changes that we made to our sales staff in May if 2006.

These additional sales personnel should translate into making sure that we are in every prospective client deal as well as generating more sales interaction with our existing clients.

Also, as they gain more experience in their new sales roles, we expect to see improved results from their efforts.

In outsourcing services for the fourth quarter, we executed four new business office outsourcing contracts, three of which were for private pay collections only with one for full business office outsourcing.

For the first quarter, we are projecting 25% year-over-year growth in outsourcing revenue.

We obviously are pleased with the continued growth in our outsourcing division.

We also remain convinced of the long-term potential for our outsourcing business and are confident that it will be our fastest-growing revenue segment into the future.

As we mentioned in the press release, we have opened a new facility in Lanett, Alabama, which we plan to utilize to facilitate our outsourcing growth.

This facility opened its doors on January 3, and we currently employ 25 employees at that location.

This facility has the capacity to house up to 100 outsourcing employees.

At this time, I would like to turn it over to Steve for a few comments on the financials.

Thanks, Boyd.

Our DSOs were 43 days in the fourth quarter, down 4 days from the third quarter and below our range of 45 to 60 days.

Cash provided by operations from operations for the quarter was 4.2 million and 14.5 million for the year.

Free cash flow was 3.6 million for the quarter.

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

CapEx for the quarter was 0.6 million, compared with 0.7 million for '05.

Depreciation for the quarter was 527,000 and for the year, 2 million.

Cash collections were 28.8 million for the fourth quarter, compared with 28.5 million in '05.

For the year, cash collections were 113.7 million, compared with 107.7 million in 2005.

We recognized stock comp expense of 0.4 million in the fourth quarter of 2006 and 1.4 million for the year after adopting FAS 123R.

After applying income taxes, net income was impacted by 217,000 or $0.02 per fully diluted share in the fourth quarter and 840,000 or $0.07 per fully diluted share for the year.

For comparative purposes, excluding the impact of FAS 123R from both periods, net income for the quarter ended December 31, 2006 equaled the same quarter last year of 4.4 million or $0.41 per fully diluted share.

Also, for comparative purposes, excluding the impact of 123R from both periods, net income for the year ended December 31, '06 increased 14.1% to 16.6 million, or $1.55 per fully delete share, compared with 2005's net income of 14.6 million or $1.37 per fully diluted share.

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

Thank you very much. (OPERATOR INSTRUCTIONS).

Corey Tobin, William Blair.

It's Jeremy for Corey.

Boyd, can you repeat the number of decisions that you listed for 2006?

Can you give some thoughts?

If I'm hearing you right, it sounds like you are expecting a year roughly in line with that number for '07.

As far as the decisions for 2006, it was 59.

I didn't make any references to how many we think this year.

Obviously, we hope it returns back to the 70, 75, 80, but obviously it's just too early for us to tell on that.

Okay.

Using Q1 revenue, Q1 revenue forecast as a reference point, can you talk qualitatively about how you think that directionally might turn out for the rest of the year?

Really, we don't give guidance past one quarter out.

With respect to the dividend, I mean you guys did about $1.15 by my calculations of free cash flow per share.

Thoughts on the dividend policy going forward--because it looks like you had a run-rate greater than the free cash flow per share.

You know, when we set the dividend, consideration is given such that the dividend amount does not need to be adjusted due to one or two down quarters of cash flow in our net income.

You know, additionally, other than to award reward our shareholders, we have no other use for our excess cash, so we're not concerned with temporary fluctuations.

As far as the free cash flow, I don't know that--Steve, do you have that number?

I don't have that that was--that sounded a little low to me for 2006.

For 2006, our free cash flow was 14--let me see.

No, it was 12.4 million on free cash flow.

Typically. the other thing, Jeremy, our cash flow typically, after we've grown such as we've done in 2005 and 2006, you know, if that growth does slow, typically our cash flow greatly improves at that point.

So I guess there's two ways to looking at it.

If our growth slows, our cash flow should pick up because we're going to collect all that money.

If the growth continues, then obviously we're pleased with that and that's what we want to see.

The dividend is just not a concern for us right now.

Obviously, that is something we look at every quarter but cash is not our problem right now, so we saw no reason to change the dividend.

Sean Jackson, Avondale Partners.

(technical difficulty) number of decisions made that you made, that you saw in '06.

Does the sales coverage play a function in that?

Are you guys seeing every deal out there, or if not, you know, what deals do you thing you are missing?

Yes, we are certainly not aware of deals we are missing.

You know, our goal obviously is to be in every deal.

Certainly, if a year goes by, I think to categorize it, we would probably say we made, throughout a year, see two or three that we were necessarily aware of that we were worried about in a trade magazine or something like that.

But we feel like we are in 95% of them, but one of the reasons we increased our sales staff back in May was we added some more outside salesmen so we could make sure we were getting in every deal that we can.

Okay.

Also, you mentioned there's some installations that got postponed or just are waiting in the second half of '07, which is unusual for you guys.

What were the reasons behind that?

I think hospitals, some of them, again I think it all goes back to how I was talking.

There's just a more cautious approach.

Typically, they're putting in more.

As I mentioned, the contract size is up so they're putting in more of the software, and they are just trying to give themselves in these cases more time at the hospital to prepare for the conversion and the installation.

How does the financial health of your hospital customers compare now to, say, last year or two years ago?

Roughly the same.

You know, ever since the push with the Medicare Prescription Drug bill, when they increased reimbursement, we haven't seen a significant change either way since then, so about the same.

All right, thanks, guys.

Richard Close, Jefferies.

Yes, I was wondering if you could sort of give us some indication of what you think stock comp will be in 2007.

Is it going to be similar to 2006?

The first quarter is certainly going to be exactly the same as it was in the fourth quarter of 2006.

After the first quarter, we will see a slight reduction in it.

One of the stock plans does play out in May of '07, and then it will be consistent from there forward.

So if you look at the last page of our press release, 356,000 stock comp expense in the fourth quarter of '06 with carryover into the first quarter of '07, and then we would see about a $45,000 decrease in it in the second quarter and a $9,000 decrease in that in the third and fourth quarter each.

Okay.

Then with respect to I guess the number of deals in 2006, how, you know, I guess degrees of certainty--is it just the number of deals are down, or your belief that people are being cautious in the marketplace?

How do you weigh that belief of people are being more cautious against possibly that the marketplace is fully implemented or hearing full penetration?

Just the numbers--I don't think we are near full penetration.

You just look at the numbers of hospitals in our marketplace, it's roughly 5000 between us and our two major competitors.

We have about 2500 of them.

So there's 2500 out there.

Certainly, we don't think all 5000 will be on one of the three of us, but the vast majority are.

So I still think we've got five to ten years left of the number of decisions that we've seen historically in the 70 or so range.

Okay.

Now, have you seen any customer defections in I guess in the fourth quarter or in 2006 of note?

Nothing of note.

You know, every now and then, you have hospital that closes or hospital that changes management, ownership or something like that, but nothing of note, a very small percentage.

Okay.

Then, with respect to, you know, you added salespeople in 2006.

Would there be any inclination to cut back some people based on sort of what the outlook is?

Absolutely not.

Again, as I said in my statement, we want to make sure we are in every deal, and right now, each of our outside sales managers have approximately 700 clients that are potential targets.

So, we want to make sure that if any of those decide to go into the decision process, that we want to be a part of it.

So, we would have no reason at all to think that we would cut that number.

Okay, so and then I guess final question, with respect to the competitive landscape, you know, 60% win rate, that's pretty favorable from that standpoint.

You know, maybe the lower guidance is not any indication of a more competitive marketplace; you are not necessarily seeing McKesson with their Paragon product drop into your wheel house here?

We definitely have seen, over the last quarter or two, McKesson, they are certainly making a push down into our market.

The 60% win rate, you know, as I've stated on many of these calls, has remained roughly the same really since 1998 when I became involved with sales and tracking win rates.

So we haven't seen--we are certainly seeing more of them but we have not seen it affect our win rate at all.

Okay, thank you.

Dan Veru, Palisade Capital Management.

I just want to get some clarity for a second here.

So, it seems like, if I'm recapping correctly, it seems like the first-quarter guidance is the price you are paying from only signing five contracts in Q3.

You did a good job also in Q4 of very accurately predicting what the quarter was going to be when you announced guidance in Q3.

With regards to the Q4 guidance of '06, when you announced it, did you have greater visibility because of the lag effect of those couple of deals that were--that you closed but didn't start implementing until Q4?

No, I would say we have roughly the same amount of visibility between fourth quarter and this quarter.

Okay, so then I guess what I'm trying to understand is, within this quarter, when you gave--it's interesting.

You gave very similar guidance for Q1 in the fourth quarter of '05, and beat that handily because of add-on sales.

Are you giving us kind of the base-case range year without add-on sales for the first quarter?

No, this is what we think we will do in the first quarter.

Okay, all right.

So there won't be--so selling any other stuff to the installed base, you kind of have good visibility on what those numbers are going to be?

Yes.

Okay.

Then on the ASP side, that's kind of a surprise to me in terms of becoming a bigger component and moving the numbers around.

Historically, it hadn't moved the numbers around too much.

Is that something we're going to see a little bit more of?

No, I would not think so.

I think that's a fairly rare occurrence.

That's really why I mentioned it;

I just think that's kind of an anomaly that happened.

It was a unique situation, and really it was best for us and the customer but we certainly don't see that going forward.

So it was a large opportunity that turned out to be an ASP opportunity?

That's correct.

Okay, but out of the norm of what you would historically see on ASP-type sales?

Yes.

All right, that helps a lot.

So really then, we come back to the current win rate, which should bode well for, say, Qs 2 through 4 of this year.

Is that a fair way to look at it, given the implementation side, or should we really think that this is more a 9 to 12-month lag based on your earlier comments?

I would look at a 9 to 12-month lag.

You know, it's really just difficult to say how many.

As I mentioned I think in the press release, you know, the pipeline is solid.

We've got as many prospective customers out there really as we've ever had and what we like to see, so it's just a matter of actually getting them to make the decision.

Obviously, doing the best we can to obviously keep the win rate the same at the 60% level, but hopefully even improve it.

In the previous quarter, you talked about the pipeline being very robust, and I think you put a number on it on the last conference call, as I recall.

Do you have any similar comments regarding the pipeline of new deals?

I can say the number I put on it was a percent that it had grown (multiple speakers).

Right, that's what I meant, yes.

You know, it still is above where it was then.

I'm sorry, it's below where it was then but above where we normally see it.

There's four or five more hospitals in the pipeline than what I would consider normal.

Okay.

I really think that's a result of just the indecision in the marketplace.

Right, okay.

Then, these were--I know you don't give contracts sizes any more, but these were just directionally higher, these nine contracts that you just signed in terms of deals size?

That's correct.

I am pleased with the contract size for that.

Is that part of what your earlier comments, that they are buying more stuff and taking longer to implement it?

Yes, that certainly was the case for these nine contracts.

Okay.

Thanks a lot.

Duane Pfennigwerth, Raymond James.

You've talked in the past about expansion, specifically expanding your footprint in the West Coast.

I'm wondering if you could comment if you have any sort anecdotal returns from that effort so far.

We have--one of the deals we signed was a direct result of really moving one of our sales guys out there.

You know, we were going to put two out there total, two of the outside,; one is out there and one is relocating out there either this month or next month.

So obviously, we expect to see, in the future, more results out of that but yes, we have already gotten one deal that we feel is a direct result of him being out there.

Great, thanks.

Then in terms of the new business awards that you had this quarter, if you maintain that level, how many quarters would you need to put up that number before you could grow revenue sequentially?

That's a tough question to answer because it depends on contract size and everything else.

I would say maybe a quarter or two, or two.

Okay.

In terms of the new business seasonality, when is your sort of peak order time?

It's pretty much spread throughout the year.

I don't know that there's any peak time.

Looking back, before this call, I was looking back.

It looks like first quarter traditionally has been a little bit lower for us at least here in the last two or three years, than the second, third and fourth quarters. (multiple speakers)

Just lastly on headcount, you commented you're not going to cut back on the sales force.

Does your guidance assume sort of flat headcount or are you pulling back on your deployment teams in the guidance you've put back?

No, we are assuming basically a flat headcount.

Robert Dodd, Morgan Stanley.

Can you give us an idea?

With the HIMS conference coming up at the end of the this month beginning of March, are you seeing--starting to see any indications of whether hospitals are waiting around to peruse multiple vendors at that conference, or is that having any influence at this point?

I haven't seen any to this point.

Obviously, we will be able to speak better to that after the conference.

I don't see that that's going to be any big catalyst to make anybody make any decisions.

Okay.

Then actually can you give us the headcount number at the end of the quarter?

I don't think I got that.

Yes, the headcount number was 897.

Then on this ASP deal, I mean, is there--I mean obviously it's going to end up on the balance sheet and get recognized over a period of time.

But what was--and it was a big opportunity, etc., etc., but why it was the hospital--I mean, I'm asking you to read their minds here but why did they want to go with an ASP model rather than pay upfront?

Just the upfront costs of putting in the system, they didn't want to incur that.

Do you know if it was I guess--I will follow-up with that one with you off-line.

George Hill, Leerink Swann.

Most of my questions have really been answered, just a couple more.

Are you guys seeing any change from the RFP environment in hospitals mix, larger hospitals versus smaller hospitals?

No, that stayed relatively the same.

So have you guys seen what would call progress moving into hospitals over 100 beds?

Roughly about the same.

Okay, and how about any change in pricing environment?

Are you guys seeing-- you kind of said that you've always seen McKesson in the market.

But are you seeing them either change the pricing environment or change what's considered the value equation amongst your customers?

I would say the pricing is relatively stable.

We are all competing well against each other, but nobody is beating each other up on price.

I think we're holding our own there.

I will assume what I will call the declining profitability you guys have guided to in Q1 is just a result of you guys aren't doing anything really essentially with your fixed cost base, the number of the deployment teams you have and the number of salespeople, so we just need to see the sales rebound a little bit to see profitability improve.

That's correct.

Thanks a lot.

[Jeff Schmidt], Sidoti & Co.

Good morning, guys.

Just quick to touch back on the competitive landscape, are you seeing any other larger players besides McKesson coming down?

No, not at all.

What about on the smaller side, the HMS and MediTech space, and [Veriline]?

Is that still relatively the same?

Yes.

What about any success in--regarding the ambulatory product?

Have you guys seen any effects from the stock laws being relaxed?

We are starting to see some of that, a lot of interest.

I can't say that we've got any direct sales because of it, but certainly a lot of interest in a lot of existing customers that are calling in and saying they are looking at it, working with their doctors to see what they can do.

Okay, great.

My last question is was there--I'm assuming there was no slippage in the quarter.

There was none; that's correct.

Corey Tobin, William Blair.

One quick follow-up--I'm just wondering if you guys could provide some color on some of the (indiscernible) drivers, margin drivers implied in the Q1 earnings per share guidance.

I'm assuming this is mostly mix that's impacting the EPS.

It is mostly mix.

Of course, the largest margin decrease would be in the system sales.

All the other two margins are holding their own but we would see something in the 21-22% in the gross margin on the system sales.

Other than that, we expect margins to hold their own.

Okay, thanks.

(OPERATOR INSTRUCTIONS).

Richard Close, Jefferies.

Yes, just a point of clarification, Boyd.

I think you said you have more prospective customers now.

Is that a correct statement?

No, we have a few less.

But more than what we've seen over the last three or four quarters.

All right, thank you.

Dan Veru, Palisade Capital Management.

I had a question on backlog.

How does the--how is the backlog affected by more ASP or by the ASP business?

Is that impacting the component of system sales?

The backlog, the ASP backlog would be in the recurring backlog number at that point, so that number would be impacted positively going forward over the next 12 months.

Of course, it has already played through now, so an ASP would be a reduction in current backlog if there were any in the future.

We do not have any sitting out there right now to be installed, so it would not be in impact on the current backlog that we're giving right now.

But is it considered a system sale when it's signed?

No, is not.

Okay, that was actually my question, okay.

I didn't ask it the right way.

Okay, so that's kind of--and within your backlog, that sort of depressed the system sale component of it, but it got shifted to the recurring revenue component of it.

That's correct but it just gets spread out over a longer period of time.

Right, and how long again is that spread out over?

It's generally about, I believe this one was a five-year, but of course only 12 months of it would be reflected in our recurring backlog.

Okay.

Then just again not to harp on the comments on McKesson, but you know, so you are seeing them in the--you're in the waiting room with them, waiting to see the same customers, but they are not making any progress.

Is it a price issue or an implementation time issue that's causing their lack of success in your end of the market?

I really can't--and you are probably mischaracterizing a little bit.

Our win rate didn't change.

That does not necessarily mean--because in every deal, not everybody is in every deal, so I don't know.

I can't really speak to whether they are having success or not.

I'm just saying that we are seeing them more in some deals, and we're still winning 60% of the deals.

Right.

I'm just trying to understand how you are seeing them, Boyd.

You know when you (multiple speakers)

You know, when a hospital narrows down to the last two or three vendors, sometimes they are in there where historically they have not been.

When a hospital starts a process, that they start with five or six vendors, McKesson is not uncommon now to see McKesson as one of the early vendors in there.

Okay, and are they typically eliminated early on in the process?

That's difficult to say.

No, not necessarily always.

I wouldn't say that.

Okay, okay.

But you've seen that from other vendors from time to time as well, you know, that have come on and come off with product offerings.

Is that fair to say as well?

Yes, we have.

David Borah, Century Capital Management.

I'm just curious.

I want to push you a little bit about the size of the contract signings.

I know it's a stat that you used to give out but you don't any more.

You did say that it was up quite a bit from where it has been.

Any more detail that you can give on that statistic, either numerically or on a percentage basis?

Sure.

You know, basically, our average deal, what we've kind of historically said is around 0.5 million, and this is certainly north of there but not at $1 million.

How is that?

Anything besides--anything within 0.5 million to 1 million?

Any more details? (multiple speakers) 600 or 700?

No.

Okay, thanks anyway.

Richard Close, Jefferies.

Yes, just I guess one question on this McKesson competition--are you seeing--the deals that you are seeing them in, is it, you know, the larger deals that you are participating in or are they reaching down into, you know, your sweet spot more and more?

It's really probably in the 100-bed hospital range, around 100.

We don't really typically see them down in a 25-bed hospital.

Okay, thank you.

I have no further questions at this time.

Okay, great.

Everyone have a great day.

Happy groundhogs day!

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

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