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Operator
Ladies and gentlemen, thank you very much for standing by and welcome to the Computer Programs and Systems Inc.
third-quarter earnings 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, October 23, 2009.
It's now my pleasure to turn the conference over to Boyd Douglas, President and Chief Executive Officer at Computer Programs and Systems Inc.
Please go ahead, Mr.
Douglas.
Boyd Douglas - President & CEO
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 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 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 a few 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 10 hospitals, our core clinical departmental applications in 12 facilities, nine hospitals implemented nursing point of care, and three customers went live with ImageLink PACS.
Add-on sales to existing clients made up 23% of total revenue.
At this time we expect to install our financial and patient accounting system in 13 facilities in the third quarter -- I'm sorry, in the fourth quarter.
We anticipate 13 new installations of our core clinical departmental modules, 12 nursing point of care implementations.
This time we are not scheduled to install ImageLink at any facilities.
In Business Management Solutions during the third quarter we executed 10 new accounts receivable management contracts, five of which were for full business management services and the remaining five for private pay collections.
During the third quarter revenue from this segment of our business grew 20% year-over-year.
On the Sales front we continued to see movement as a result of the ARRA, especially amongst our existing client base.
Demand from current customers for add-on software continues to be strong.
For perspective clients we continue to experience what we believe to be a temporary increase in the length of the sales cycle as hospital executives are assessing the potential financial impact of the stimulus plan on their individual facilities.
We have increased our headcount in our Support and Installation division by 45 personnel.
These employees began their training in October.
We continue to be confident that we are in an excellent position within our market to capitalize on the increased demand for our software and services as a result of the ARRA.
We remain fully committed to meeting all certification requirements that will be required under the stimulus plan and we are well prepared to help each and every one of our customers and prospective customers to achieve meaningful use status, thus maximizing the financial benefits for which they qualify under the ARRA.
At this time I would like to turn things over to Darrell for a few comments on the financials.
Darrell West - VP, Finance & CFO
Thanks, Boyd.
Our DSOs were 53 days for the third quarter which was an increase of eight days from year-end.
Cash used in operations for the quarter was $1.3 million compared with $2.9 million provided by operations last year.
Capital expenditures for the quarter were $464,000 compared with $209,000 for the prior-year quarter.
Depreciation for the quarter was $401,000 compared with $404,000 last year.
Our cash collections were $29.1 million for the third quarter, up from $29 million in the 2008 quarter.
We recognized stock opposition expense of $229,000 in the third quarter and anticipate a charge of $229,000 for the fourth quarter.
Our effective tax rate is projected to be 37.5% for the remainder of the year.
Our headcount at quarter end was 998, which was a decrease of one for the quarter.
We would like to open the call to questions at this time.
Operator
(Operator Instructions) Richard Close, Jefferies & Co.
Dana Hambley - Analyst
Good morning.
This is actually [Dana Hambley] in for Richard.
Just a couple questions; the first, Darrell, on the sequential increase in the DSOs is anything going on there that we should be aware of?
Darrell West - VP, Finance & CFO
Part of it is we had an increase of about $2.2 million in revenue from the second to third quarter and a lot of that was backend loaded in the quarter.
So there were some, I think, just some timing issues on AR collections.
There has also been some pressures at the hospital level from a cash standpoint that have slowed payments down a little bit.
But we believe it's really a timing issue and hope to have that back in line by the end of the year.
Dana Hambley - Analyst
Okay.
Secondly, the gross profit was a little bit lower than what we were looking for.
Was there anything in there, higher hardware sales during the quarter or anything that you could point or is this about where you expected it?
Darrell West - VP, Finance & CFO
Well, hardware sales were up higher than projected.
We are also in the process of moving out a lot of servers to our existing customers so that they are prepared for additional add-on clinical modules.
And with some of those our discounting on the hardware was a little more than what we normally see.
We will probably see that in the hardware area for the next quarter or two.
Dana Hambley - Analyst
Okay.
Just the last -- I think you mentioned that of the business contracts five of them were fully outsourced, is that correct?
Boyd Douglas - President & CEO
That is correct.
Five were for full business office services.
Dana Hambley - Analyst
Okay.
And I think you had pointed last quarter that you haven't done any this year and that was really the biggest impact that you were seeing from the economy.
So with doing five in the quarter have things almost returned to normal at this point in your view?
Boyd Douglas - President & CEO
Certainly five in a quarter -- I didn't go back and look -- probably is a record or close to a record anyway.
Whether we can sustain that or not time will tell, but certainly obviously there was a little bit of pressure that came off with being able to get five up and going.
Dana Hambley - Analyst
Okay, thank you.
Operator
Jamie Stockton, Morgan Keegan.
Jamie Stockton - Analyst
Thanks for taking my questions.
Boyd, I realize that you guys have the same people who are doing implementation and providing support so it's hard to get an exact feel for what your implementation capacity is.
But once you get these 45 new people up and running where, roughly, do you feel like your capacity utilization will be from an implementation standpoint?
Is it somewhere around 60% or --?
Boyd Douglas - President & CEO
I think it's probably still right around 50%.
We are just filling a couple of gaps that we felt like we needed to fill in.
Actually what we did, some of the people from the 100 or so that we hired back in May, we moved a lot of those people in to some other divisions other than Installation and Support, some product development roles.
Not necessarily the people that came out of training, but we took some people from Support and Installation and moved them into product development.
We moved some people -- we needed some more demonstration people, for example, in the sales area so we took some.
So some of the 45 is just replacing people that we have put elsewhere in the Company.
Jamie Stockton - Analyst
Okay.
Boyd Douglas - President & CEO
So the increase is still about 50%.
Jamie Stockton - Analyst
Okay.
And then I guess the next question would be do you anticipate needing to hire any more in the current quarter other than the 45 that came on early October?
Boyd Douglas - President & CEO
No, we don't anticipate -- it takes quite a while to get that up and running and get resumes in and do the interviews and all.
We don't anticipate hiring any more before the end of the year.
Jamie Stockton - Analyst
Okay.
And then just lastly, I caught the comment about you guys doing whatever it takes to get certified.
On the certification front are you planning on going after the preliminary ARRA certification that CCHIT has?
Boyd Douglas - President & CEO
We are still evaluating that.
We don't think feel like there is enough information out there to make that decision.
Is it going to be worth the effort to get that and then turn right around and still have to get the final or if we just wait for the final?
So the jury is still out on that.
We are obviously watching that very closely.
It still hasn't been determined that CCHIT is the one and only certification body anyway, so it could be that that one turns out to be irrelevant.
So we are still evaluating.
Jamie Stockton - Analyst
Okay, thanks guys.
Operator
Bret Jones, Brean Murray.
Bret Jones - Analyst
Good morning.
Thank you for taking the call.
If we could go back to the AR for a minute, I just wanted to make sure.
Darrell, has the age of the AR changed at all or materially?
Darrell West - VP, Finance & CFO
It has not materially changed.
I have got a few bigger balances that were holed over from the quarter, but not aged out any worse than my normal aging.
But we have seen some slight slowdowns in collections, but not a material amount at this time.
Bret Jones - Analyst
Okay.
And when you talk about the pressure that has been on hospitals, in the past you have had to write down some of these as uncollectible.
I was wondering, as you evaluate your customer base, do you foresee any issues down the road or are these at fairly well-capitalized hospitals?
Boyd Douglas - President & CEO
I wouldn't refer to them as fairly well-capitalized hospitals.
I don't know that there are that many in my customer base that would met that qualification.
But I am not seeing any -- we have not seen any activity or additional activity on the bankruptcy front.
There is always the potential that one of them could file bankruptcy and leave me stuck with a balance, but there has not been much that has occurred in the last couple of quarters from a bankruptcy standpoint.
We still feel confident that the AR is good and that we will collect it and get back to our -- a little below 50 on the DSOs.
Bret Jones - Analyst
Okay.
And in terms of payment terms have you guys changed the payment terms recently?
I know bookings picked up last quarter.
Were there any changes trying to accommodate some of the pressures that the hospitals are feeling on the financial side?
Boyd Douglas - President & CEO
A little bit.
Some of the term as far as deposits we have relaxed that a little bit in a few cases, but as a general rule we are trying to stick to our normal collection efforts and normal contract terms.
Bret Jones - Analyst
Okay, great.
And then just on the sales cycle, as you look out there I guess when you talk to clients what is going to cause them to change their mind or to trigger going forward and pushing through on the sale?
Do think it actually is the finalization of meaningful use or are we getting close to the point where some of these hospitals are ready to get off the fence?
Boyd Douglas - President & CEO
They are still saying that they are going to wait on the definition of meaningful use.
Of course, we don't agree with that and we tell them they ought to move forward with confidence that we will meet whatever requirements there are that are laid out for us.
But that is what they are saying, so time will tell whether they actually get off the fence and move.
I think the ones that are being prudent about it are doing so and we are saying a little activity there.
There are some hospitals making decisions because of the stimulus plan, but the majority of them still are waiting on a final definition of meaningful use.
Bret Jones - Analyst
Okay, thank you.
And then a final question and I will jump back in the queue.
With the level of placements that you guys have cited in terms of what you expect to implement in this upcoming quarter it seems as if -- and judging that with the revenue guidance you projected -- it seems as if the average deal size may have gone down or the size of these implementations may be down a little bit.
Is it because of the mix of add-on sales going forward or are these smaller hospitals you expect to implement next quarter?
Boyd Douglas - President & CEO
It's a little bit of everything.
There are some smaller hospitals.
There are several that are doing just phase 1, that are only putting in phase 1 which obviously translates into lower contracts.
So it's a little bit of both.
We do have strong add-on sales but it's kind of a chicken or egg thing.
If we have stronger add-on sales because we are only selling phase ones or really people are going with phase ones because we have got less clinical slots available to put it in right there.
But I think it's a combination of all of the above.
Bret Jones - Analyst
All right, great.
Thank you.
Operator
George Hill, Leerink Swann and Company.
George Hill - Analyst
Thanks for taking the question.
I guess, Boyd, as we think about deployment capacity now when all the new employees are online and staffed up, will the deployment capacity for the core clinicals and the core financials be about 20 to 22 per quarter?
Boyd Douglas - President & CEO
I think I have it mine so let me look at it.
We have got 18.
George Hill - Analyst
Okay, so 18 is the capacity now?
Boyd Douglas - President & CEO
Correct.
George Hill - Analyst
Okay.
Boyd Douglas - President & CEO
And I want to qualify that with we have always said if it's a lot of small ones then -- if there is some small ones thrown in there then we could possibly do 20 or 22 in a quarter.
On the other hand if we have got three or four really big ones in there then we may be only able to do 14 or 15.
So it just kind of depends on what resources are required, how the hospital is staffed as far as around-the-clock and things like that in different areas, when they want their training.
George Hill - Analyst
Okay, fair enough.
With respect to the competitive environment, circling back to the questions on ARRA and people waiting for certification, can you characterize a little bit the discussions you are having vis-a-vis other vendors?
And what are you hearing from customers regarding how other vendors are pitching their capability with respect to meaningful use and certification versus the conversations that you are having?
And are you getting any push back there?
Boyd Douglas - President & CEO
Not really.
I think all the vendor, the major players -- and we have said it -- all appear to be in good position to meet meaningful use, as we are too.
So not a lot there.
Customers are still making decisions on vendors based on the functionality and the level of support, the things that they have traditionally always based their decisions on.
I don't think that apprehension or whatever about meaningful use guidelines is affecting any vendor anymore positively or negatively than any other vendor.
George Hill - Analyst
Great.
And if I remember correctly, in the last quarter we had one big install slip from Q2 that was supposed to be recognized into Q3.
Did that happen and can you provide any color on the contribution of that in the quarter?
Boyd Douglas - President & CEO
It was actually two different ones and they both went in in July and they went very well.
I don't have the information on the impact of that, the financials on that.
That is something Darrell --
Darrell West - VP, Finance & CFO
I didn't come up with a specific impact on that move.
George Hill - Analyst
Okay, all right.
Just good to know that they were recognized.
Thanks for taking the time.
Operator
Tom Carpenter, Hilliard Lyons.
Tom Carpenter - Analyst
Good morning, Boyd.
Good morning, Darryl.
Can you give us an idea of number of installs that you guys had under 50 bed versus over 50 bed?
Boyd Douglas - President & CEO
I don't have that with me, Tom.
I can get that for you.
If you want to talk later today, I can --.
Tom Carpenter - Analyst
Okay, that would be fantastic.
And then going back to the competitive environment, I think some of the bigger vendors, in the press at least, are making noise about dropping down to your space and some us that have been in this area for a while realize it's very hard for their system to be run by the smaller hospitals.
They don't have the IT staff.
Can you give us an idea of what you are seeing out there and is it still primarily, in under 50 bed, you guys and Healthland?
Boyd Douglas - President & CEO
Yes, the competitive environment really hasn't changed at all.
I think maybe some of the bigger vendors are getting RFPs sent out; at least hospitals are sending them out.
But they get eliminated pretty quickly, so it's still us.
The larger hospitals in our market is certainly us MEDITECH and smaller ones us and Healthland most notably and the HMS is in there as well.
Tom Carpenter - Analyst
Then going forward once the definitions come out do you guys see being in more RFPs in the 100 bed, 150 bed space you have historically been in?
Boyd Douglas - President & CEO
Possibly.
I think probably some of them because of the sheer numbers are the ones that will be out there looking for systems and certainly it would be something we would welcome.
Tom Carpenter - Analyst
And that brings up an interesting question and then I will jump back in the queue.
With all of the hospitals out there and the time frame they have for ARRA will everybody that wants to upgrade be able to get slotting?
Boyd Douglas - President & CEO
We don't believe so, which is why we think it's important now for those hospitals to go ahead and be moving forward.
I think there is going to be a serious capacity issue as we get closer and closer to 2011 for all vendors.
I think that is pretty much a shared view across all vendors.
I don't think any of us have the capacity to do every hospital across the country by 2011.
We just don't.
Tom Carpenter - Analyst
Well, that might be very helpful with pricing over the next couple of years.
Boyd Douglas - President & CEO
Yes, that is true.
Tom Carpenter - Analyst
Thank you.
Operator
Corey Tobin, William Blair & Company.
Corey Tobin - Analyst
Good morning.
One quick one if I could.
Just given all the new headcount from last quarter as well as it sounds like a fair amount this quarter too, looking at the third quarter what was your utilization of your services staff in terms of what percentage were billable or however you might measure it?
Darrell West - VP, Finance & CFO
During the third quarter the large hiring class that we had in May were still in training and so we did not effectively utilize them during the quarter.
They have all come out of training at this point; in early October they did so they are now in the queue for support as well as installations.
So we will be utilizing them on installs during the fourth quarter.
I don't believe it will be at full capacity, but we are utilizing them at this point.
Boyd Douglas - President & CEO
Corey, this is Boyd.
Just to add on to that, not only did we not utilize them but we did get them out and get them on sight and let them teach some of the easier applications and see some of the other applications being taught; a little on-site training.
That obviously cost us money to fly them out there and that isn't something that is reimbursed by the hospital that is going through the installation.
So actually our installation expenses were a little higher than normal because of just the big number of people that were out getting that on-site training.
Corey Tobin - Analyst
Got it.
So then just one other follow-up if I could, the increase that we saw sequentially in systems gross margin what would you attribute most of that improvement to?
Darrell West - VP, Finance & CFO
Just by the sheer volume -- with our systems sales because the way we allocate our people, we really do a standard allocation of my people, my time.
We do a time study and look at what is the normal usage of support versus installation.
We make that allegation and the sales revenue doesn't always come across to meet that allocation.
So when we see a tick up in the new system sales those margins can improve drastically, because effectively that salary cost is fixed what we are allocating.
Corey Tobin - Analyst
Understood, great.
Thank you.
Operator
(Operator Instructions) Brad Hoover, Sidoti & Company.
Brad Hoover - Analyst
Good morning, Boyd and Darrell.
You have done a good job of keeping costs down this year, just looking at the G&A versus last year.
Can you talk to that and what has allowed you to keep costs going down and what you expect from G&A going forward?
Darrell West - VP, Finance & CFO
We don't see any significant increases on the G&A side.
What changes we have seen there are related to benefits that do flow-through G&A as opposed to the cost of sales side of things.
We will see a little uptick in rental expense because we have gone out and leased some more space to house our staff, but I don't see any significant changes on the G&A line going forward.
Brad Hoover - Analyst
Okay, great.
And then looking at the industry and pricing, have you seen any additional pricing pressure at all from either MEDITECH, HMS, Healthland, or any other guys you compete with as hospitals are looking to find a way to get the clinical software with the stimulus coming up.
Hospital budgets don't seem to be improving too much.
Has there been any pricing pressure at all or any change there?
Boyd Douglas - President & CEO
Certainly.
We have always said pricing pressure, but we are not seeing any more than we have historically seen.
Brad Hoover - Analyst
Okay.
And then lastly and then I will jump back in.
I know you have been involved with the Louisiana Health Information Exchange; I think you had a press release earlier this year with 14 or 16 hospitals there.
Can you just maybe update us on how that is going and what kind of progress is being made there and if maybe that role is expanding for you guys at all in that exchange?
Boyd Douglas - President & CEO
That obviously is going extremely well with our hospitals.
They are submitting data to that and certainly our role is expanding as we install more systems in Louisiana.
We are doing very well there.
There has been a lot of grant money available in Louisiana over the last two or three years and we have been very fortunate and earned a lot of new business there in Louisiana.
So it's going very well.
Brad Hoover - Analyst
Okay, great.
Thanks for taking my questions.
Operator
Gentlemen, that appears to be the final question from our audience at this time.
I will put it back to you once again, Mr.
Douglas, for your concluding remarks.
Boyd Douglas - President & CEO
Okay.
I just want to thank everyone for their time this morning.
We really appreciate your interest in CPSI.
We are certainly looking forward to next quarter and next year with the stimulus package on the horizon.
These are very exciting times for us and we appreciate your time.
Hope everybody has a great weekend.
Operator
Thank you, Mr.
Douglas.
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 fantastic weekend.