TruBridge Inc (TBRG) 2008 Q2 法說會逐字稿

Welcome to the Computer Programs and Systems second quarter earnings conference call.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Friday, July 25th, 2008.

I would now like to turn the conference over to Mr.

Boyd Douglas, President and Chief Executive Officer.

Please go ahead, sir.

Thank you, Susie.

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 risk, 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.

We take 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 Darrell West, our Chief Financial Officer.

Darrell and I have a few minutes of prepared comments and then we'll be glad to take your questions.

In the second quarter we installed our financial and patient accounting system in five hospitals, our core clinical departmental applications at four facilities, eight hospitals implemented nursing Point of Care, and three customers went live with ImageLink PACS.

Add-on sales to existing clients made up 24% of our total revenue.

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

We anticipate five new installations of our core clinical departmental modules, nine nursing Point of Care implementations and five ImageLink installs.

In business management solutions during the second quarter, we executed seven new accounts receivable management contracts, one of which was for full accounts receivable service, five for private pay collections and one for insurance follow-up services.

During the second quarter, revenue from this segment of our business grew 15% year-over-year.

Demand for our business management solutions continues to be strong and we're very pleased with our operations in this segment of our business.

On the sales front, there has been no significant change in the competitive landscape.

Our move to the Linux operating system, CCH IT approval, and our full suite of business management services continue to give us a distinct advantage over our competition.

We're very pleased to have experienced such a significant turnaround in our marketplace.

Our sales pipeline is strong and we expect the increased demand to continue into the third quarter.

As I have said many times before, often there's no single catalyst that we can point to which signifies a rebound in our market.

This is precisely the case now.

There's been no notable change to Medicare or Medicaid reimbursement policies.

Yet, during the last quarter a record number of HIS purchasing decisions were made.

We're extremely pleased with our sales performance during the last quarter.

And we feel we're positioned quite well to take full advantage of the HIS decisions that we anticipate being made in the third quarter.

I'm also happy to report that we now have completed 63 installations of the Linux operating system at our clients' sites.

We anticipate installing an additional 30 by the end of the third quarter.

This conversion has gone extremely well and, as you can tell by the numbers, has been a huge success with our customer base and with potential clients.

In summary, I would like to reiterate that we are very pleased with our performance during the second quarter, and we're excited about our prospects for the upcoming quarter.

We're firing on all cylinders and we're well-positioned in our marketplace with our products, services and most importantly our industry-leading support.

At this time, I'd like to turn the call over to Darrell for a few comments on the financials.

Thanks, Boyd.

Our DSOs were 43 days for the second quarter, down one day from the first quarter and below our normal range of 45 to 60 days.

Cash provided from operations for the quarter was $5.2 million compared with $5.2 million from the previous year.

Free cash flow was $4.9 million for the second quarter compared with $4.9 million for the prior year quarter.

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

Capex for the quarter was $266,000 compared with $308,000 for the prior year quarter.

Depreciation for the quarter was $487,000 compared with $528,000 last year.

Cash collections were $30.4 million for the second quarter compared with $27.6 million for 2007.

We recognized stock compensation expense of $229,000 in the second quarter, and anticipated charge of $229,000 in the third quarter of 2008.

Our effective tax rate is anticipated to be 39.2%.

Our head count at quarter end was 860, a decrease of 27 for the quarter.

Susie, we would like to open the calls to questions at this time.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question coming from the line of Corey Tobin from William Blair.

Please proceed with your question.

Good morning, gentlemen.

It's Jeremy for Corey.

Boyd, congratulations on the quarter, first of all.

I wanted to key in on some of the quote in the press release that talked about demand and some of the comments you made.

You had talked about a number of record decisions.

I'm wondering if you can give us more color on that in terms of quantifying in terms of number of new footprints versus add-on sales.

Do you have any thoughts there about how you see that shaking out next quarter and the past quarter?

First of all, I'm referring to, in the press release and in my comments today, I'm talking about new system sales, not add-on sales.

As far as the decisions that were made, as you know, probably almost a year ago we quit giving the numbers on how many decisions were made, how many contracts, and things like that because we thought it was hurting us competitively.

But, it certainly, as far as the number of decisions, it was the most decisions that we've seen in a quarter in several years now.

And would you say that the quality of those decisions in terms of the amount of products decided on, is it higher than in the past as well, or are these starting out like the typical contracts where you start out small and they build over the years?

No, actually, we saw quite a few that were larger than what we've seen.

So we were pleased with that, as well.

And certainly I want to mention we were very pleased with our win rate.

And, again, without going into more specifics, we were very pleased with the win rate.

As you look at -- I know you only guide one quarter out but in terms of visibility, as you look out on your business, would you say you're more confident that this is sustainable, this kind of level of business is sustainable beyond Q3 and maybe even into 2009, or at this point are you not willing to make a stamp on it like that?

I'd rather not make a stamp like that.

Okay.

In terms of head count, you said you went down 20 to 25 -- I think 27, specifically.

Is there any appetite to slow that attrition or maybe even increase whether it be in sales or in the install team?

Sales -- we're steady in sales.

It's on the install teams we've hired in both of our -- actually, all three of our divisions -- Financial Support Services, Clinical Support Services and Technology Services.

Okay.

So where would you say the attrition --

We've hired in all three of those areas and we currently have people in class now.

Okay.

Good.

And do you think that hiring will continue or do you not foresee a need for that?

Right now today I would say it would probably continue.

Okay.

Great.

I'll jump in the queue again.

Thanks.

Okay.

Thank you.

Our next question coming from the line of Bret Jones from Leerink Swann.

P Please proceed with your question.

Good morning.

I wanted to hit on what you're drawing the confidence from.

I know you said you can't pinpoint specific areas as far as there hasn't been a change in Medicare reimbursement.

But as you evaluate the financial health of your customers, I know that was an issue last quarter with the spike in bad debt.

Is there some fundamental change where bad debt may have gone down within the hospitals themselves that's giving them the confidence to go ahead and start making these purchasing decisions?

Not that we know of.

I really don't think the financial condition of our customers has changed one way or another.

And that's why I've said in several calls before, I'm not sure that's the whole reason we were going through a slowdown.

This market, we've been doing this for a long time.

The natural ebbs and flows of this market sometimes go without really any real explanation.

But the financials at any of our typical hospitals have not changed at all.

Okay.

So when you talk to your customers, you're not hearing any comment theme as to why all of a sudden they're pulling the trigger now?

That is correct.

Okay.

Can we talk about bad debt for a second?

Was there a dramatic improvement?

I know record collections, so I assume -- there wasn't a reversal this quarter, though, was there, for that one that you were taking the big bad debt charge for last quarter?

No, there was not a reversal.

We actually increased our expense -- I won't say increased -- from the first quarter it was down a little bit.

But it was still in the $600,000 range, which is up above normal.

We did have one large account that we wrote off.

I do anticipate that in the third quarter that number's going to go back down to a more normal level for us.

Okay.

So that was just one client specific issue that was driving this quarter's bad debt also, or is it multiple-?

It was one client that drove the bad debt.

One client.

Okay.

Great.

Thank you very much.

Thank you.

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

Please proceed with your question.

Hi, guys, and congratulations on the pickup in demand.

How much, again, I think this is the focus, but we're coming to the end of the -- the third quarter's the end of the fiscal year for the hospitals.

How certain are you this isn't just some of your potential customers, some your prospects, finding themselves perhaps flush with a little bit of extra cash at the end of their year and spending it?

What's your level of confidence it's not just a short-term benefit from that versus going into how much can it carry forward into Q4 of this year, let alone in 2009?

I don't know.

You know, certainly there's a reason we only give guidance one quarter out.

I'll start by saying that.

I don't know I can put a number on the confidence.

But, as we move through this and when we do sign a large number of contracts, typically that will push the installs back a little bit more than the 60 to 90 days that we get.

So I tell you, we've got some installs slated for fourth quarter already.

And the pipeline is strong.

The number of prospects that are out there that we think are close to making decisions is strong.

And we feel good about our position in a lot of those deals.

Now, they're not signed on the dotted line yet, which is exactly why we only give the guidance one quarter out.

But, we feel good about the schedule, where it is now, and we feel good about the near-term prospects of the pipeline and the prospects that we've got.

Okay.

Thanks a lot.

Sure.

Thank you.

Our next question coming from the line of Richard Close from Jefferies Financial.

Please proceed with your question.

Thank you, Boyd.

Congratulations.

Just curious on the add-on sales.

It seemed to pick up as percentage, if I'm not mistaken -- did you say 24%?

Yes.

I guess it was 20% in the first quarter or after a couple quarters.

Anything that's primarily driving that specifically or --

It's a function of new system sales and how many we have.

We didn't install but five hospitals in the quarter.

So consequently, that leaves more slots open to do add-on sales.

So that will make that number go higher when we don't do as many installs.

Okay.

If you look at -- I'm sorry?

I was going to say I would anticipate next quarter that that number won't be as high.

Okay.

And you look at maybe the new footprints in the second quarter, you look at your expectations for the third quarter.

Is there anything you can draw upon those customers, any qualities on those customers that are maybe different than other customers that you have -- I guess bifurcation in the type of customers that you're serving?

No, there's no change at all.

It's just your typical rural community hospital.

The majority of them are under 100 beds.

Okay.

And then are you seeing any success out West?

I know you expanded out there a couple years ago.

Maybe seeing an increased interest from a different geographic area?

We are.

Several of these sites are out West, so we're certainly pleased with our performance out there.

That was obviously a good move for us.

Okay.

With respect to your customers, and you mentioned the rollout -- or the installations of the Linux.

Can you talk a little about how that's all progressing and the success there, and then how many installations -- or how penetrated are you on that front?

Obviously, that continues to go well.

We now have -- I'im looking back at the numbers -- 63 installations of that system in place.

And we've got -- we're expecting to do 30 more this quarter.

So that's 90 out of our 600 or so customers.

The ones that are installed, the 63 and the upcoming 30, is a combination of existing customers that are upgrading their systems from the Unix-based system to Linux and getting a new server in the process.

And obviously every new install that we do is going in with Linux.

How big of a price tag -- well, you're probably not going to answer that -- maybe -- in order of magnitude, is that a significant process in terms of converting over to that or the Linux implementation?

And then are you seeing, when you do that, that you're getting additional add-on sales for different products at the same time?

Is that driving maybe some additional purchasing?

You know, they go hand in hand.

A lot of times we see if someone's adding,s ay, Point of Care, they may need more processing power.

In order to install Point of Care they've got to go ahead and install a new server with Linux.

They may have their existing server, they may have been running it the last five or six years, and it's time for a server upgrade anyway.

So we'll upgrade their server and then maybe a month later will come in and install Point of Care, for example.

So they're intertwined into both.

As far as what the hospital has to go through, we've now converted 60 of them.

We've got that process down and are very good at it.

It requires minimal down time on their part.

It's not a huge use of resources on the hospital's part to convert over.

And then on the R&D front, what was R&D as a percentage -- or, what was R&D, and then I guess I can figure it out as a percentage of revenue?

Darrell, you want to take that?

Richard, that's not a number that I have readily available.

We have -- but I will look into that and get --

Okay.

I'll follow up with you.

Maybe on a higher level, how do you guys feel about your level of R&D spending?

Is there anything coming around the corner product-wise or upgrade-wise that you're maybe planning for an increase?

Do you feel like you're at the right level of R&D spending to stay competitive in the marketplace?

Absolutely.

We've only got one version of our system so obviously it's in our best interest to keep that competitive.

The way that really works, as a directive from the board, Mike and I have as much leeway as we need to hire as many programmers or developers or whatever we need to do to keep ourselves competitive and stay at the forefront of the community hospital marketplace.

We have no problems with that at all.

The reason we don't keep that number or do anything, there's -- out of our 860 employees, a lot of those are involved in some way or another in research and development.

Just in our product development division, just,purely developers, all they do is develop, is 127 employees.

But that's just the people that are developing the software.

That's not the ones that are going out, doing the user assessments, user needs assessments, things like that.

We get that from all areas of the company, whether it's people in software, or Mike spends a lot of his time doing it, I spend a lot of my time coming out with new systems.

Second kind of answer, or second part of your question, I don't see any significant projects on the scale of like a PACS or anything in the near future that we would spend a lot of extra money on.

Okay.

And then just getting back to -- and this will be my last question, thanks for the time -- just getting back to the record number of decisions.

I think you mentioned that that's the most that has occurred in several years.

Maybe if you could directionally tell us the order of magnitude in terms of, is it like 10%?

5%, 10% higher than the record -- previous record level?

Than the previous record?

Yeah.

Probably not -- 5%, 10% would probably be a pretty good number.

Okay, great.

Thank you.

Congratulations.

Thank you.

Thank you.

Our next question coming from the line of Jeff Schmidt from Sidoti.

Please proceed with your question.

Morning, guys.

Morning Jeff.

Can you comment on what you're seeing on the length of the deal process over the past quarter and you guys seem to have a pretty good quarter with bookings.

Can you comment on how long those deals were in the pipeline?

I would say average about a year in the pipeline.

The process we talked about before has lengthened.

Slowly over time because it's lengthened and the pipeline was building a little bit, we got a sudden burst of a significant number of them.

As optimistic as we are, and as full as the schedule is, I certainly don't think we'll have that many decisions again this quarter.

That's just how our marketplace works.

We'll have a sudden burst and then it'll go back down.

But we feel good about it.

Okay.

And then can you talk about your latest discussions with the dividends?

It seems pretty healthy with these free cash flow levels.

But as far as bringing that number up, even if you do do more than $1.44 in free cash?

Yeah, I don't know.

I would say, in general, the feeling of the board, until we get the EPS up to the $1.44, we'll probably leave it where it is.

I certainly hoped we've calmed all fears there.

I know there was a lot of angst about whether we were going to cut the dividend or not.

Frankly, if you go back and look a year ago, our cash is up, I think $4.5 million from a year ago after paying out the dividends that we've paid.

We've got a very strong cash position and certainly are glad to be able to pay the dividends to our shareholders.

Yeah, definitely seems that way.

Thanks, guys.

Sure.

Thank you.

Our next question is a follow-up question coming from the line of Corey Tobin from William Blair.

Please proceed with your question?

Hi.

I wanted to circle back and talk about margins a bit.

We've seen actually very nice uptick in the support and maintenance gross margins.

They're just kind of chugging along now around almost 64%.

I'm wondering what's driving that slow tick higher.

Could it be in any way the Linux platform is easier to support internally?

I'm wondering what your thoughts on that and the sustainability of that metric going forward.

The largest driver there, Jeremy, is actually head count.

And with the slowdown in business and a decrease in head count, we see improved efficiencies -- or improved margins and support and maintenance.

With the third quarter hiring, the couple of classes that we're adding, that number may drop a point.

But it should stay in that 64 to 65 range in the third quarter.

Okay.

Excellent.

And I missed the stock count number for Q2.

I got the Q3, that one for the outlook.

But I'm wondering what the Q2 number was.

It was the same.

The 229,000.

$229,000.

Okay.

Thanks.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question is a follow-up question coming from the line of Bret Jones from Leerink Swann.

Please proceed with your question.

Just a couple quick follow-up questions.

Can you break the stock comp up into the specific line items?

Sure.

In administration it's $104,000.

Marketing -- sales and marketing $50,000.

And then cost of sales is $75,000.

All right.

Thank you.

And if we circle back on where the strength for Q3 is coming from.

Is that specifically from the deals you signed in Q2 or are these deals that have built up and they've been holding off on implementations?

Because I thought there would be a longer lag of actually turning it into revenue from having a strong demand in Q2.

I thought that would have been more of a Q4 implementation cycle?

No.

It's contracts that were signed them in Q2.

We typically -- it only takes 60 do 90 days from contract signing to when we recognize the revenue, when we do the install.

Lastly, the installers, you said you were adding installers.

Are you adding a team?

I believe you were at four before.

No.

We're just building back up.

We let attrition take its course for the last 18 months now, so we're just filling in.

We still have the same number of install teams and install capacity.

One thing that's confusing that I'll maybe clear up a little bit, just because -- we've been letting that head count go down but we've got a lot of people -- everybody here has hired in entry level positions and comes through support.

So for example, we've got teams of people that do nothing but education.

And those people are certainly capable.

They're up on the software and they help us out with support calls.

Those people are capable of doing installs, as well.

While we let the head count go down, it's not a one-to-one correlation of, well we have less installers, because there are other people, other areas of the company we can pull from when we need those resources to do the installs.

All right, great.

Thank you very much.

Sure.

Thank you.

Mr.

Douglas, 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.

We appreciate everyone's time this morning and hope you all have a great weekend.

Thank you for your interest in CPSI.

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

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

Have a great day.