TruBridge Inc (TBRG) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CPSI second-quarter 2007 conference call.

During this presentation, all participants are in a listen-only mode.

Afterwards, we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS).

As a reminder, today's conference is being recorded on Friday, July 20, 2007.

It is my pleasure and extreme honor to turn the conference over to Mr.

Boyd Douglas, President and Chief Executive Officer at CPSI.

Please proceed, sir.

Thank you.

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

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 five minutes of prepared comments, and then we will take your questions.

In the second quarter, we installed our financial and patient accounting system in nine hospitals; our core clinical departmental applications at five facilities; five hospitals implemented nursing point of care; and six customers went live with ImageLink PACS.

Add-on sales to existing clients made up 23% of total revenue.

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

While this is down significantly from our first-quarter signings, it should be noted that our year-to-date total is 19, just one short of the 20 that we normally expect.

Our win rate for the first half of the year is 53%.

We are optimistic that our new system sales will return to the expected eight to 12 per quarter during the third quarter.

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

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

In outsourcing services, for the second quarter, we executed eight new business office outsourcing contracts, three of which were for private pay collections, three for insurance follow-up services and two for full business office outsourcing.

For the third quarter, we are projecting approximately 20% year-over-year growth in outsourcing revenue.

We continue to be very pleased with both the current growth and continued long-term potential for our outsourcing business, and we expect this to be our fastest-growing revenue segment indefinitely into the future.

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

Thanks, Boyd.

Our DSOs were 46 days for the first and the second quarters and within our range of 45 to 60 days.

Cash provided from operations for the quarter were $5.2 million compared with $3.7 million last year.

Free cash flow was $4.9 million for the quarter compared with $3.1 million last year.

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

CapEx for the quarter was $308,000 compared with $560,000 in '06.

Depreciation for the quarter was $527,000 compared with $489,000 in '06.

Cash collections were $27.6 million for the second quarter compared with $28 million for '06.

We recognized stock compensation expense of $280,000 in the second quarter of 2007 and anticipate a charge of $237,000 going forward for the third and fourth quarters of '07.

Our effective tax rate in 2007 is 36%.

This rate reduction from prior years is primarily derived from Hurricane Katrina credit which will expire in 2007.

Our headcount at quarter end was 932, a decrease of two for the quarter.

Our revenue guidance for the second quarter was $27.5 million and $29 million.

While we were within our revenue range at $28 million, the revenue mix did not match our projections.

Equipment sales were higher and license fees were lower than projections by $450,000.

Since equipment sales have a 70% cost factor, cost of sales or systems sales was $315,000 higher than we projected.

This additional equipment cost accounted for $0.02 reduction in our fully diluted EPS.

Operator, we would now like to turn the call over to questions.

(OPERATOR INSTRUCTIONS).

Richard Close, Jefferies & Co.

First question would be on last quarter's call, you mentioned you had about nine prospects that were currently customers, I guess the larger hospital vendors.

Did any of those prospects cross the finish line and come over to CPSI?

Richard, one of them did.

And we did sign a contract with them.

The other ones are still out there in the pipeline.

Was that for systems or was that an outsourcing contract?

That was a system sale -- a full system sale, actually, fairly large one.

So the sequential bookings, I guess, implied bookings growth from first quarter to second quarter -- would that be largely due to that customer win?

Because I guess on average you had less new customers this quarter than in the first quarter.

That is certainly a piece of it.

And then also on last quarter's call, you talked a little bit about, in talking about, I guess, some concerns with -- or market concerns with the larger vendors coming down into your sweet spot.

You mentioned your primary competitors as being HMS and then MEDITECH.

And in looking at MEDITECH, they grew in March, I guess, their top line around 11% or 12%.

Do you see -- do you believe that you are losing market share to HMS or MEDITECH at this current time?

No, we don't.

Benjamin Green, Avondale Partners.

Macro question -- looking at your 1Q numbers and win percentage, it looked like hospitals are starting to increase their decision-making again.

With your six client signings this quarter, do you think that is reversed?

Or would you attribute that to execution?

Could you comment on that?

I really think most of that is just a function of the market we are in.

It is fairly volatile between -- a quarter is such a short period.

And when you've got these sales cycles that last anywhere from six to 12 months, you just have a flurry of them sometimes and then sometimes you will have a quarter where not as many decisions are made.

And that's why I tried to point out in my prepared comments that we are kind of right where we expect to be through the first half of the year.

Also, you'd previously spoken about 2007 maybe being a little back end loaded.

Can we think about that being pushed out a little to 2008, considering your 3Q guidance?

Yes.

And one more question.

Weak systems sales margins seem to have been hurting your bottom line last couple of quarters.

Could you comment on that?

Is that just a function of lower revenues and being a large fixed cost component there?

That is exactly what it is.

It is all of our expenses -- you know, basically all of our expenses are fixed.

So our margins are going to fluctuate with new systems sales.

So you would expect those to return to normal levels with higher revenue.

Absolutely.

George Hill, Leerink Swann.

I guess I will jump in with a couple macro questions, too.

I will start with an easy one first.

Can you just give us some guidance on what we should look for for the tax rate for the back half of the year?

It continues to come down the last three quarters here.

We expect the tax rate to stay right at 36% or just a tad below it, 35.75%, in that neighborhood for the rest of the year and then expect it to return to more normal rates in '08.

And through the first half of the year, you guys have tracked close to 20 deals signed, in line with last year, but it looks like lumpiness seems to be going up.

Do you guys see anything that would contribute to increased lumpiness as opposed to more linearity in how the business is signed?

No, that is just really difficult.

We have always been a lumpy business, especially when it comes to these contract signings.

We would anticipate more of the same.

It's just very difficult to predict.

And I know that you guys have stopped giving average deal size, but could you maybe speak to it anecdotally, at least, from the RFP process?

Are you seeing hospitals that are RFP-ing to you guys right now?

Is average deal size going up, going down?

I would say remaining about the same, remaining flat.

And how do you feel going forward about the upsell process to the installed base of financial and administrative systems users?

And how penetrated do you feel like -- or what is the penetration rate of your financial and administrative systems users with the core clinical system?

We've got right around 390 of our customers are running our core clinical systems.

Last question is -- I know it is probably too early to call, but have you guys seen any change in the competitive posturing from Dairyland?

We have not.

We really haven't seen any changes from their announcement at all.

Robert Dodd, Morgan Keegan.

With investments to Q3, can you tell us were there any delays in terms of somebody had scheduled in Q3 that slipped to a later period and maybe you aren't able to fill a slot, or anything like that?

There was no slippage in the quarter.

And then secondly, on the equipment side, you said it was a bit higher this quarter.

Is there any just general mix shift?

Do you expect that to stay higher in the next quarter, or anything you can tell us in that regard?

Not really.

As we sell our PACS systems, and we did sell and install six PACS systems, they are a little bit more equipment heavy.

And sometimes it is difficult to judge exactly when we are going to ship equipment out, whether it is going to be 30 days ahead of the installation or 45 days, depending on the training cycle required at the hospital.

So it is a little more difficult to determine exactly when equipment is going to go out the door.

And we do recognize equipment sales at the time they go out the door.

So there is no trend there that I can say, except that I misjudged exactly how much of the equipment sales would get shipped out the door this quarter.

And my last question -- coming up on the end of your typical hospital fiscal year, the end of the -- can you give us an update on any changes you're hearing from your prospects or your current customers about budget plans for next year?

They are really more of the same.

I would say obviously everybody is anticipating the elections that are coming up and the changes that are going to happen there.

But I don't think anybody, obviously, has any crystal ball to know what to expect.

But certainly, they are aware that that is going on.

But no, it seems to be pretty much business as usual as far as that is concerned.

Corey Tobin, William Blair & Co.

It is Jeremy for Corey.

A quick housekeeping question to start off.

Steve, can you give us the breakdown of stock comp expense by line item and the different expense items?

Sure can.

The cost of sales systems is $56,000, cost of sales maintenance is $56,000, marketing $53,000, and G&A $115,000.

And with respect to your perspective on gross margin in Q3, I am wondering if you can give us some perspective on how the mix might shift, and within the different items where gross margins might trend qualitatively.

Actually, we are looking at margins fairly similar to the second quarter in all areas except systems sales.

We are going to look at somewhere in the 18% to 19% range in the systems sales.

And that would leave support and maintenance in the 59.5% to 60%, and outsourcing somewhere in the 38% to 39% range.

And with respect to the bookings, or the pipeline, rather, into existing accounts, can you maybe give us some color on what you guys are seeing from that perspective in maybe, like, the different areas within PACS and so forth?

Thanks.

I will jump off.

There haven't been a whole lot of changes there.

We're certainly seeing an increase in our ACD product, our MP EMR product.

There's certainly significant demand for that.

PACS is holding steady, as we have discussed several times on these calls.

The factors that are involved in selling a PACS system -- that can be a difficult sale because it is not selling just to our hospital, the existing customer.

You've got radiologists involved that sometimes aren't associated with the hospital except that they come there two or three days to read.

So we've got those factors that have always been there.

But as far as sales to existing customers, I certainly have seen a marked increase in the ACD product and everything else basically remaining steady.

Jeff Schmidt, Sidoti.

Can you give a little color on the pipeline versus last quarter?

It is relatively the same number, been relatively stable.

So as many that came out and made decisions, we've got that many more new prospects coming in.

Great.

And then on the sustainability of the dividend, I know you guys generated some good free cash flow, but the bottom line was a little weak.

Is there any material changes there?

No material change to speak of at this point.

Obviously, we are very pleased with the cash flow, and certainly going to do everything we can to maintain that, and really not any changes to the dividend at all expected at this point.

And just finally, you mentioned the third-quarter projection for outsourcing revenue.

I missed it.

Can you guys restate that?

We basically expect about 20% year-over-year growth for the revenue, which is consistent with the last several quarters.

John Souter, Rail-Splitter.

Boyd, I just want to make sure -- you are optimistic that the signings in Q3 can return to the historic eight to 12 level.

And what are the reasons for that optimism?

Based on the pipeline and where a lot of the prospects are within the sales process.

I believe we've got enough that are close enough to making decisions that if they do and we get our traditional 50% to 60% of those that we will get the 10 contracts.

Of course, that is an unknown.

There's plenty that are there that are toward the end of the sales process.

But you just never know what is going to come up to affect them making their decisions.

Sure.

And when you look out at them, at the pipeline, is it weighted in any way towards financial or clinical or the ImageLink?

Is there anything different in kind of where you would see the next quarter or two coming out in terms of signings?

No, it is all relatively the same, what we have seen the last several quarters.

And lastly, Boyd, I guess just given the Dairyland transaction and the fact that the Street certainly does not like lumpiness and likes kind of consistent visibility, have you had any discussion or any more thoughts about CPSI being a private company rather than in the limelight and having to have 90-day consistency here?

We really haven't.

We are comfortable being a public company.

It was a decision, obviously, we made approximately five years ago.

We've got the reporting requirements and things like that behind us.

I think the vast majority of our investor base, our large investors who we obviously meet with on a regular basis, understand our business, understand the lumpiness is something we have said all along, that there is going to be lumpiness there.

And I think the vast majority of them understand that and can see past just a quarter or two.

Sure.

Great.

Thanks, Boyd.

Tom Carpenter, Hilliard Lyons.

Steve, I missed one of the numbers you mentioned earlier.

You mentioned cost of equipment sales was a couple hundred thousand higher than expected, which led to 2% lower EPS.

How much was that dollar amount?

It was $315,000.

And free cash flow for the first six months of this year, looks like it is about 32% above first half of '06 levels.

In the second quarter, did you have any income tax benefit from stock option exercises and cash flow from operations?

We did.

I think it was around $240,000, $250,000, right in that neighborhood.

During the quarter, Boyd, was there any linearity -- were April and May kind of a normal rate and June slowed down?

Can you give us any color on that?

You mean as far as the contract signings?

Yes.

They were equally spread out.

Would it be normal, where you guys -- the decision-making is stronger usually in the last month of the quarter?

I really don't think so.

It is pretty much spread out.

Hospitals don't really -- the quarterly effect, I guess, doesn't really have an effect on the hospitals in general.

Last year you guys bumped up the salesforce, increase the size of it, and it looked like it paid off in the first quarter.

I think you guys positioned some people out West full time in this quarter, a little bit slower win rate than you guys would like to see.

What are you seeing out West from positioning -- I think you guys have three people out there full time now.

Correct.

We are very pleased with those moves.

In fact, I was talking to our VP of Sales yesterday.

We think that has gone extremely well for us.

As far as the mix, I think we've got a few more hospitals in the pipeline from out West than we probably normally would have had.

So we are very pleased with that.

As far as the win rate, one factor that came up, and I look at this as a good thing, actually -- we had a few more hospitals that made decisions that were of our key competitors -- mainly MEDITECH, HMS, Dairyland, obviously our three top competitors -- more of the hospitals that made decisions were actually customers of theirs.

And just like us, it is difficult to unseat the incumbent vendor.

So consequently, our win rate dropped a little bit because you've got a couple of our key competitors' hospitals that were out there looking.

And unfortunately, we didn't get the business; they were able to keep the business and sell them more of their products.

But that is part of the reason the win rate dropped a little bit.

Got it.

And is it fair to say -- I guess I am reading between the lines of what you're saying -- that the folks that have been shifted out West are out there full time now, that they are fully seasoned as far as calling on people -- I know they have been at the firm in a while in some other positions -- that they are fully seasoned as far as going out and calling on people and getting into RFPs?

Yes.

Absolutely.

And one final question here, if I can find it.

Actually, I am good.

Thank you.

(OPERATOR INSTRUCTIONS).

Sandy Draper, Raymond James.

I've got mostly housekeeping questions.

First, Steve, the stock comp numbers you gave -- that is pretax, correct?

That is correct.

Can you give those on an after-tax basis, or would I just do a standard apply the current-quarter tax rate, or is there any other calculation I need to adjust for that?

That is correct.

I have calculated about $208,000 in the second quarter and $153,000 in the third quarter after tax.

Great.

Second question -- I think this is for Boyd, just so I understand -- so basically when you are talking about the lower margins in some of the other questions asked, you are not seeing any pricing pressure?

I mean, it is obviously a price-competitive marketplace, but you are not seeing any significant price deterioration out there in the marketplace?

Not at all.

Third question -- in terms of the lower sequential EPS guidance, is that purely just a function of the slightly lower revenue?

Or are you assuming any either lower gross margins because of mix again or maybe higher expenses that would take down the EPS sequentially?

It's really just a function of the lower revenue.

And then the final question -- the support and maintenance revenue was flat or actually down slightly sequentially.

As you said, I don't want to make too much out of one quarter, but what should I think about that number going down a little bit?

Is there anything that goes on or anything that bumped it up in the first quarter that we wouldn't see as you're adding customers' growth and support and maintenance?

In that line item is included our ASP bills, our rental contracts.

And we had a larger rental contract in the first quarter that was a very short-term arrangement that went into a sale.

So that boost in the first quarter did not carry over to the second quarter.

So there wasn't a long-term ASP, someone just did some hosting for a short period of time -- you took that revenue and then they moved it in house?

That is correct.

Richard Close, Jefferies & Co.

If you look at your pipeline, could you sort of characterize it in terms of -- break it down in terms of size of hospitals so we have sort of a feel of what the opportunity is there?

The majority of it is based on bed size.

Certainly, the vast majority, just like our customers, are -- 80% of them are under 100 beds.

And then maybe a percentage of the pipeline that is over 100 beds?

About 20%.

And then when you look at the outsourcing, the growth there, obviously that is positive on a go-forward basis.

You said it is going to be the fastest-growing area of your business.

What are you seeing in the market trends on the outsourcing business in terms of, I guess, looking at the new contracts in the most recent quarter -- how much of those are new clients to you guys versus existing clients?

Does that trend towards new clients going forward?

It's really a 50/50 mix.

Some of them are new clients.

Certainly, the new clients typically are the new hospitals.

There are several different types of hospitals that are being built right now -- long-term, acute-care centers, surgery centers, things like that.

And we've got a better chance, obviously, of selling our outsourcing services to a facility like that if we can get in there early enough and show them what we've done for other facilities like them that are startups.

We can save them a significant amount of money on startup costs, getting that going.

So I would characterize it as roughly 50/50 of brand-new customers and brand-new facilities, and then the other 50% as sales to existing customers.

How much do you think the growth in the outsourcing potentially cannibalizes your existing business?

I'm not sure I'm understanding your question.

With respect to outsourcing, do you potentially lose anything on the system sales or on the systems side of things?

No.

In fact, we require them to buy all the software that we run here.

They've still got to have a license to run it on their computer.

So it is very, very small.

Gentlemen, there are no further questions from our audience.

We will return the presentation to you once again to continue or for your concluding remarks.

Great, thank you.

Thanks, everyone, for joining us.

Have a great weekend.

Thank you, sir.

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

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

Thank you once again, and have a great weekend.