TruBridge Inc (TBRG) 2008 Q3 法說會逐字稿

Welcome to the Computer Programs and Systems third quarter earnings call.

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

Afterwards, we'll conduct a question and answer session.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Friday, October 24, 2008.

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

Boyd Douglas, President and CEO.

Please go ahead, sir.

Thank you, Chris.

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.

Joining me on the call this morning is Darrell West, our Chief Financial Officer.

Darrell and I have about five minutes of prepared comments and then we will be glad to take your questions.

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

Add-on sales to existing clients made up 22% of total revenue.

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

We anticipate 10 new installations of our core clinical departmental modules, nine nursing point of care implementations, and six ImageLink installs.

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

During the third quarter, revenue from this segment of our business grew 12% 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's been no significant change in the competitive landscape.

Our move to the Linux Operating System, CCHIT approval, and our full suite of business management services continue to give us a distinctive advantage over our competition.

The current economic and credit conditions that the country is currently experiencing are not having an effect on our operations at this time.

Our customers continue to pursue their strategic plans and IT objectives, and as you can tell from our third quarter results and fourth quarter guidance, we are confident we will finish the year with strong performance.

We have now completed 98 installations of the Linux Operating System at our client sites.

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

The migration to the Linux operating system continues to go extremely well and should be seen as a sign of our commitment and ability to provide our customer base with the latest technology at an affordable price.

In closing, we continue to be extremely pleased with our performance and feel like we're in a great position within our marketplace.

We're expecting a particularly strong fourth quarter and are happy about the momentum as it carries us into 2009.

At this time I would like to turn things over to Darrell for a few comments on the financials.

Thanks, Boyd.

Our DSOs were 45 days for the third quarter, up two days from the second quarter.

Cash provided from operations for the quarter was $2.8 million compared with $4.3 million last year.

Free cash flow was $2.6 million for the quarter compared with $4 million for the prior year quarter.

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

CapEx for the quarter was $209,000 compared with $234,000 for the prior year quarter.

Depreciation for the quarter was $404,000 compared with $443,000 in the prior year.

Cash collections were $29 million for the third quarter compared with $28.7 million in 2007.

We recognized stock compensation expense of $229,000 in the third quarter of 2008 and anticipate a charge of $229,000 in the fourth quarter.

Our effective tax rate for 2008 is 37.8%.

Our headcount at quarter end was 863, an increase of 3 for the quarter.

Chris, we would like to open the call to questions at this time.

Thank you, sir.

(OPERATOR INSTRUCTIONS) Our first question comes from Corey Tobin from William Blair and Company.

Hi, good morning guys.

Congrats on the nice quarter.

Thank you.

This is Jeremy for Corey by the way.

Good morning.

Just wanted to hit on the strong results.

I know last quarter you talked about a record number of decisions and I didn't notice any comments along those lines this quarter, although it appears just from the change in backlog that you had another strong quarter.

I wonder if you could give us a little bit perspective about how this quarter compared to last quarter in terms of the strength you saw?

Well it certainly wasn't -- I think I even said on the last call as well, certainly didn't expect to do that again.

It was just a tremendous quarter last quarter as far as contract signings, but it was a strong one as you can tell from the backlog so we're pleased to see that the momentum has continued.

And is there anything you can point to as you talk to your salespeople about why these last two quarters have been so strong relative to the past few prior to that?

Is there any high level trends you're seeing that have changed?

No.

There really hasn't.

I think this just demonstrates as well as probably any two quarters we've seen that we just have natural ebbs and flows within this market, and we're on a high right now and a lot of people are making decisions and we are earning a lot of that business.

Great.

And shifting gears, two items on the expense line.

Outsourcing margins, it looks like they improved nicely in the quarter I wonder if A) what's going on and B) do you feel it's sustainable going forward and I also have a question about the tax rate.

It seems like that ticked down a little bit, wondering if that's sustainable as well?

Thanks.

On the tax rate, that dropped some from an actual filing and settlement of our 2007 tax return.

It ended up a little bit better than we had anticipated.

Some tax credits related to the hurricane a number of years ago were extended and we had not anticipated that happening.

So that improved our tax rate some and we should see the number that I gave -- the 37.8% should be pretty close to what we'll see for the year.

And as far as on the outsourcing margins, we certainly were pleased with that.

I don't know that you'll see a whole lot more improvement there because as we talked about before, every time we add new contracts, that's people intensive, so we certainly have to add people.

So certainly doing everything we can to improve that margin, but I wouldn't say any significant improvement.

Okay, thank you.

Sure.

Our next question comes from the line of Jamie Stockton from Morgan Keegan.

Please proceed.

Hi, guys, good quarter.

Good guidance.

I appreciate you taking my questions.

I was wondering, how did the bad debt expense trend from the June quarter to the September quarter and what's your outlook there?

Bad debt expense for the quarter was only $75,000, which was down significantly from the previous two quarters.

We had had some trouble with a couple specific accounts earlier in the year and have not seen I guess any significant deterioration in our AR at this point, and expect that this quarter's $75,000 should is what we're projecting for the fourth quarter as well.

Okay.

And on the tax rate next year, any outlook there?

It should most likely move back up to around 39%.

Okay.

And on the stock option expense, could you just give us the breakdown with the individual expense lines?

Yes.

In Operations, it was $75,000of expense, $50,000 for sales and marketing and $105,000 in G&A.

That was for the quarter as well as, that was third quarter numbers as well as what we're projecting for fourth quarter.

Okay.

I appreciate it and then I guess the only other thing, was there any in your system sales, the mix between software and hardware, was there anything going on there during the quarter?

Hardware was up significantly during the quarter, and that increase had to do with the volume of installations that are going in in the fourth quarter.

Hardware is typically sold a month ahead of an install and so we have a couple of large installs going in in the fourth quarter that the hardware is included in the third quarter to increase that number significantly.

Okay, and so the mix is probably going to shift back towards software in the fourth quarter?

Yes.

We should have a smaller hardware sales in the fourth quarter.

All right, that's all I got.

I appreciate it.

Thanks, Jamie.

Thanks.

Our next question comes from the line of Tom Carpenter from Hilliard Lyons.

Please proceed.

Good morning, Boyd.

Good morning, Darrell.

Good morning, Tom.

Can you help us understand what's going on out there?

Are you seeing more decisions being made?

Are you guys flipping some competitors?

Is there strength in certain geographies, just maybe help us understand what's contributing to the good results and the strong outlook?

I certainly credit a little bit to everything that you mentioned.

There are certainly more decisions being made and in our win rate while we don't talk about it specifically, we're extremely pleased with that.

We've made a lot of progress there and we are having some success with some of the smaller vendors replacing their systems.

Are there certain geographies, are you seeing more strength?

I know you guys moved salespeople out West a couple of years ago.

Are you seeing particular strength there, or is it more in the traditional?

It's pretty even throughout the country.

Okay, and when you see the folks giving feedback from the salespeople and some of the sales where you're involved, can you give us an idea of what you're hearing out there, why at the community hospital level that sales cycles aren't lengthening?

Because you are starting to hear chatter out there or you're seeing reports in papers at least at the bigger hospital side they are starting to delay bigger projects.

Well, as far as certainly the sales cycle has lengthened, I think we've seen that over the last six to eight quarters and that's part of the reason we were so slow at the end of last year and the beginning of this year.

I think you saw that sales cycle lengthen.

But there was still new ones coming into the process into the sales pipeline.

And so you're starting to see some of that flush out now.

The good news is we're still seeing some come in on the front end of the pipeline, even now, and we have not seen any of our hospitals delay because of the credit crisis or anything like that that's out there.

You might have picked up from the numbers -- we did have one particularly large install that was going to go in September and October, but that was not related to financial issues at the hospital.

It was some other issues that were going on at the hospital, within the hospital.

Okay, and --

The cycle has lengthened, certainly, but again we're not seeing put off decisions or installations so far.

Okay.

And can you just refresh our memory as you seen it at this point in time I guess near the end of October, are all of those slots that you have for the fourth quarter, are they filled at this time?

I know you guys have to get stuff in advance and the doctors and IT, nurses, get all of the people trained there.

Are those hard numbers that are already all slotted?

We really don't expect to have any more in fourth quarter, if that's what you're asking -- the numbers I gave earlier as far as we'll put in nine facilities in the fourth quarter, 10 clinicals and nine point of cares and six ImageLinks.

We're pretty full.

If a small one popped out we might be able to do it if it was a financials only or something like that, but I really think we're about where, we're very pleased with the fourth quarter with the installs where we are and pretty much anybody that's talking to us now is signing contracts, we're pointing them toward first quarter, January-February timeframe.

Okay, but I guess flipping it over -- because of the lead time the hospitals need to get everything ready, these are things that are already hard dates?

That's correct.

Okay, great.

Thank you, guys.

Good luck.

You're welcome.

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

Please proceed.

Good morning, gentlemen.

Just a couple of quick questions.

I know you sort of already touched upon this with -- not seeing the effect from the credit markets.

Can you talk just generally with when looking at your hospitals, your hospital customers -- how much of their, how many of those deals are generally focused or utilizing financing as opposed to just funding for particular cash flow from operations?

Do you have a sense of that?

We've talked about that a lot and our best guess is about half probably use some kind of financing to do it.

Whether that's us -- as you know, we finance several of the deals and these third party financing, particularly the financing that our hospitals use is dedicated to healthcare and in a lot of cases even rural healthcare, rural community hospitals.

They don't use the traditional credit markets that everybody is probably more familiar with.

And then again, the other 50% usually pay for the system out of operations.

Have you seen a shift in that at all in the last couple months, let's say as opposed to even going back farther -- just in the last couple months, would you say you've seen any change in that at all?

No, we haven't.

No increase?

And so if we think if we look at the operational health of your customers, I'm sure it's something you track pretty closely.

I know you've had issues with bad debt and I know you were watching their financials pretty closely.

What do you worry about the most?

Is it admissions or rise in bad debt from an operational standpoint to your customers?

Probably the thing is Medicare funding to the hospitals and they seem to be doing okay right now, as you know we talked about it a lot, the Medicare prescription drug bill passed a significant increase and that's why we saw the big jump in 2005 in our new system sales.

And there really hadn't been any significant changes since then.

Obviously a cut in the Medicare funding, should we get a new administration and they decide to do that, would not be favorable -- they come in and increase funding, we're liable to see a pretty good sized jump, like we did in 2005.

So it really just, that's probably the single factor that we look at.

What we've seen over 30 years of doing business is these hospitals aren't going to close.

The communities that they're in are going to find a way to keep them open, keep the doors open, and fortunately for us, their computer system is pretty important in a hospital to keep the doors open, get the bills out, and take care of the patients and right behind the power company, we're right on up there as far as importance to them.

I understand, but I guess I'm just struggling with why all of a sudden we're seeing a pickup in business.

I know the sales cycle is like you said has lengthened for the last six to eight quarters, and it's still around the same length right now.

Why would all of a sudden, now why would we start to see the pickup really in Q2 and Q3 and even into Q4 -- why are these deals closing now as opposed to before?

Is it simply that customers who have been holding off are seeing more of what I would term to be a budget press than a real shift in underlying business or am I going about this thinking -- ?

I think some of it is pent-up demand and some of it, I don't know that we have an explanation for it.

I know a lot of these calls I've talked about, everybody wants to point to why is it increasing and why does it decrease, and we talk about Medicare funding, because that's probably the single thing that you can somewhat point to and see some similarities.

But I've always said sometimes it's just the way it is in our marketplace and we've seen these natural ebbs and flows now for 30 years it's been like this.

And when you get these number of deals, 15 to 20 deals a quarter that are in -- 10 to 15 to 20 deals being decided.

Sometimes if there's 20 in a quarter or two then that obviously makes a significant difference especially if we're firing on all cylinders like we are and we are happy with our win rate, it really boosts the new system sales.

Fair enough.

Thank you very much.

Okay.

Our next question comes from the line of Leo Carpio from Caris & Company.

Please proceed.

Good morning Boyd, good morning Darryl.

I have a couple quick questions.

First for beating this whole credit crunch horse who's unfortunately probably glue by now, regarding your small hospitals, you mentioned 50% of them receive financing.

Can you give us some color in terms of who provides them the financing?

Is it like the GE Capitals of the world or just small rural entities or small banks?

Just trying to get some color there.

We do see some GE Capital a little bit.

I wouldn't say certainly that's not really prevalent.

The entities we're familiar with really focus on healthcare and some of them even are specific as healthcare IT community hospital vendors and we've got three or four names that we'll give to a customer if they don't have something.

But they're relatively small operations, but for whatever reason they've carved their niche in this market I guess like we have.

So it's names you probably hadn't necessarily heard of.

And in terms of the small hospital finances, it sounds like they're showing a lot of resilience here.

Is it just simply primary Medicare funding has been stable the last few years that's helping them out at this point?

I think that's certainly a factor in it, although when we were talking two or three quarters ago we were talking about how Medicare funding hadn't increased, but if you look at things from a bigger picture, maybe it isn't so bad after all compared to what other industries are going through.

Okay, and besides your systems, what particular healthcare product and services are you looking for?

Are you looking for clinicals, are you looking for revenue cycle management, or are they just buying the entire package upfront?

We see it all.

Some people are really interested in revenue cycle management and maybe on the smaller vendors and having a hard time billing and collecting and things like that and they really need help there, and our revenue cycle product can certainly help them there.

Some are moving towards the EMR and want to move to a fully paperless system and get the doctors using CPOE.

Obviously, none of those factors have gone away in our markets, so there's still a push to the EMR.

It may not be as prevalent in the media now because I guess they are busy talking about the credit crunch and all of the other things going on, but there's still a desire by our hospitals to get as much electronic as they can.

And just last question.

It sounds like for fourth quarter you're pretty much fully booked.

Any thoughts about adding capacity in early '09?

I think we talked about this in the past you could reallocate some of your current staff to provide some extra slack capacity, but at what point do you decide that I have to staff up again?

I wouldn't say we're there yet.

We're happy with our capacity.

We've got a full quarter and we're going to make $0.41 a share and we do have other resources that we can tap into, should we even need more.

So it's not something that we're really ramping up at this time.

We have in the last call I think I told you we were planning on hiring two classes -- a financial software class, a clinical software class, and then since then we've also added another financial software class that actually started Monday.

So we're hiring where we need to in the areas that we need to beef up a little bit.

Okay, well, thanks and congrats on the quarter.

Sure, thanks.

Our next question comes from the line of Richard Close from Jefferies & Company.

Please proceed.

Yes, can you hear me okay?

Yes, we can hear you fine, Richard.

Okay, great.

Just curious, if you could talk a little bit about the budget process of the community hospitals that you serve, what is the typical fiscal year end for the hospitals?

I'd really say it's probably in thirds.

I have to ask Darrell his opinion.

I think you have one third that have a June 30 year-end, you have one third that have a September 30 year-end and one third on a calendar year.

Okay, and how closely do you guys work with them in terms of -- do they give you a sense of as they're going through the budget process whether IT allocation maybe is increasing or decreasing or holding the same?

As far as for our current customers, we work very closely with them.

The closer we can get to that process the better and that's what our account managers and our sales department do.

They visit each site at least twice a year and work with them through the budget process and talk to them about the modules that they haven't purchased yet and what the overall goals of that hospital are.

We try to encourage our hospitals to have a strategic plan, IT wise for the hospital and we certainly have people that can help them with that planning.

And we help guide them along the way, and when it's time to purchase new applications we'll help them formulate a budget for those items.

So we work very closely with current customers, obviously with prospective customers, it's not nearly as close because we don't have the relationship with them until we earn their business.

And then you touched upon this a little bit earlier, definitely need for an IT and it's a high priority.

With the community hospitals, what would you say is their highest priority from maybe a capital spending perspective?

Every situation is different.

I mean, we run into a lot that are in the process say right now, but they may put it off because they realize they've got to expand their bed capacity, whether it's more emergency rooms or more OR suites, so it's not uncommon to see a construction project leap ahead.

We may be on track for a nine month sales process with an install two or three months after that, so we're looking 12 months out to doing an install and all of a sudden they call us and say our Board has gotten together and we really need to add a new wing or add physician offices or whatever.

And we'll take a back seat to that, so I would say that's the single thing that if something leaps ahead of IT, it's certainly new construction and that's usually pretty badly needed at the time.

But with respect to I guess your earlier comment saying about I think it was 50% coming out of cash flow from operations for the hospitals in terms of spending on IT.

If that's the case you're not necessarily competing with respect to the capital projects?

That's correct.

In those cases, certainly not.

That's correct.

Okay, and then one just final question here and thanks for your time.

You have 640 client hospitals.

How much or what do you think your penetration rate is if you look at all your customers, how penetrated are you within that base?

You talking about with clinical sales and things like that?

Yes.

You know, I don't have those numbers right here in front of me off the top of my head -- clinical we're about 65% penetrated and point of care we're 35%, maybe 40% penetrated and then physician apps are less than that, maybe 10% penetrated.

Okay, and then I'll slip one more in.

With respect to the third quarter installs and fourth quarter expectations for installs, what's the breakdown between new customers and existing customers, and I apologize if I missed that earlier.

Well, we're putting in nine new financial and patient accounting systems so those are all new customers.

We're doing 10 clinical customers and I don't have the breakdown of those nine, how many.

If history dictates probably half of those, probably four or five of those are full system installs of the nine and then so that means we've got four or five others or five or six others that are add-on clinicals.

And same with the nursing point of care, probably i would guess out of the nine new facilities maybe three or four are putting in point of care and then the balance of them are existing customers that are adding point of care to what they've already got.

Okay, thank you, Boyd.

You're welcome.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Corey Tobin from William Blair & Company.

Please proceed.

Just one quick follow-up.

Darrell, your free cash flow has tracked fairly close with net income in the first it seems year-to-date.

Just wondering if that's anything within your billing, your normal course of billing and collection cycle that would cause that to change over the next couple quarters or do you anticipate it -- ?

We saw that number go down some this quarter.

And that's not unusual.

Many times with our customers a lot of their funding does come from states as well and a lot of times in the third quarter, in September, states will sometimes not issue Medicaid payments.

They will delay them until the beginning of the following fiscal year in October for those.

And so a lot of times they have to plan their cash flow relative to what's going on in their state and sometimes we get pushed back in the third quarter on receiving payment from them.

But going forward, we anticipate to be in line with where we've been historically.

Over a 12 month period you expect that to be fairly move at parity I would think, right?

Yes.

Okay, thank you.

Congratulations again.

Thank you.

Mr.

Douglas, there seems to be no further questions at this time.

I will turn the call back to you.

Please continue with your presentation.

Just want to thank everyone for joining us on the call this morning and I hope you have a good weekend.

Thank you very much.

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

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