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Operator
Welcome to the Computer Programs and Systems first quarter 2010 results.
(Operator instructions) As a reminder, this conference is being recorded Friday, April 23, 2010.
And I would now like to turn the conference over to Mr.
Boyd Douglas, President and CEO.
Please go ahead.
- President & CEO
Thank you, Jennifer.
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'll be happy to take your questions.
In the first quarter, we installed our financial and patient accounting system in five hospitals, our core clinical departmental applications at seven facilities, seven hospitals implemented nursing point of care, and one customer 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 16 facilities in the second quarter.
We anticipate 14 new installations of our core clinical departmental modules, 17 nursing point of care implementations, and one ImageLink installation.
In business management solutions during the first quarter, we executed ten new account receivable management contracts, one of which was for full business management services and the remaining nine for private pay collections.
During first quarter, revenue from this segment of our business grew 14% year-over-year.
Clearly, we're disappointed that our first quarter results did not meet our expectations.
As we pointed out in the press release yesterday, client decisions to delay two system installations adversely affected our quarterly results.
Both of these installations were full system implementations, through point of care patient and documentation.
One of them also included our ImageLink PACS system.
They have both been rescheduled for later in the year, one in the second quarter and the other in the third quarter.
Of much greater significance, is that our investment over the past year in adding staff to increase our implementation capacity is now beginning to show significant returns for the company, as indicated by the installation numbers that I mentioned earlier.
Furthermore, we are confident that this increase in demand for system implementations will continue throughout the remainder of the year.
It is also important to note that, as we expected, we continue to see a rise in the utilization of our software as a service model.
Our second quarter installation numbers include eight implementations broken down as follows.
Three financial, two clinicals, and three point of cares that were purchased via a SAS agreement.
In total this represents $1.8 million of revenue that will be recognized over the term of the SAS contracts instead of in the current quarter, as would be the case if these were traditional license purchases.
We continue to be confident of our position in the community hospital marketplace.
We remain fully committed to meeting all certification requirements that will be required under the ARRA, and we are well prepared to help each and every one of our customers and prospective customers achieve the meaningful use status, thus maximizing the benefits for which they qualify under the ARRA.
At this time, I would like to turn it over to Darrell for a few comments on the financials.
- CFO
Thanks, Boyd.
Our DSOs were 54 days for the first quarter, which is an increase of one day from year-end.
Cash provided by operations for the quarter was $5.8 million, compared with $3.7 million provided by operations in the first quarter of last year.
Free cash flow was $4.5 million for the quarter, compared with $3.3 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 $1.3 million, compared with $328,000 for the prior year quarter.
This increase was largely due to our expansion of our outsourcing operations and the addition of a additional facility and the build out on that.
We anticipate a similar amount of CapEx -- CapEx expenditures, during the second quarter.
Depreciation for the quarter was $469,000, compared with $437,000 last year.
Our cash collections were $32.1 million for the quarter, compared with $29.5 million in the prior year.
We anticipate our effective tax rate to be 39% for the remainder of 2010.
Our headcount at quarter end was 1,072, a decrease of 15 for the quarter.
Jennifer, we would like to open the call for questions at this time.
Operator
Thank you.
(Operator instructions)
Our first question comes from the line of Jamie Stockton with Morgan Keegan.
Please proceed with your question.
Your line is open.
- Analyst
Thanks, guys, for taking my questions.
The first one, Boyd, if you could talk about what a -- or Darrell, if you could talk about what a SAS deal normally looks like for you guys versus a traditional licensing deal, since you're seeing a increase in the number of SAS-related deals, it sounds like.
- President & CEO
Sure, I will.
A SAS really is a -- they don't own the software or the hardware, so it's a rental.
But they do have a buyout clause in them.
Traditionally, they change them, as I've said plenty of times before on these conference calls, every deal is a little bit different.
But on the average, they have a buyout, up to two years, where they can put a certain amount -- certain percentage of what they pay toward it, excluding the support, obviously, so they actually can buy it out and purchase it.
Really, all the way up to four years.
Anywhere from the day they do it up to four years.
And it's a sliding scale, as far as how much of their principal they get to put toward the purchase.
Clearly it was set up in a way that, they can't afford to purchase this software right now but they know they've got to get it in place to meet meaningful use, and then once they meet meaningful use and receive the funds, then they can go ahead and make the purchase.
- Analyst
Okay.
And would you expect -- do you think, given kind of what you have been seeing in the marketplace since the quarter ended, that you are going to see the incidence of SAS deals increase or maybe stay at this level going forward?
- President & CEO
Of course, again, every deal is standing on its own, and every particular situation has its own nuances, but if I had to guess, I would anticipate them being somewhere around the same.
Maybe a little tick-up.
- Analyst
Okay.
The other question I had was on implementation capacity.
You guys have obviously seen a big acceleration here.
You're benefiting from all the people that you hired last year.
Can you give us an update on where your capacity stands today?
I think previously it's been somewhere around 18 facilities a quarter.
Is it still in that same range?
- CFO
Yes, it is.
That's exactly where it is, as a matter of fact.
- Analyst
Okay.
Have you -- I think we've talked in the past, that you guys have thought about maybe bringing people to Mobile and doing some more training there as opposed to on-site at hospitals.
Has there been any changes on that front, or do you anticipate there being any changes there?
- President & CEO
There really haven't been any changes.
We do have some implementations that we can do with a lighter staff, including some training here in Mobile, and more work on the hospital there.
We're very up-front with the hospitals.
You're going to have to work harder.
Hopefully we can achieve the same goal and have a successful implementation.
To date, we haven't had any hospitals that are interested in that.
Obviously, it's a little cheaper for them as far as paying CPSI, but if you start factoring in overtime and everything at the hospital, it's probably going to be roughly the same.
Maybe your chances aren't quite as good as having a successful installation.
To date, we haven't had anybody want to venture out on that limb.
But we also haven't had, to date, implementations that needed to go in, where we had a capacity problem.
We're running, as you can see, 80% capacity or so, which is kind of where we like to run anyway.
It gives us a little flexibility, if we need a few more people on an install or something like that.
We have not had anybody take us up on that, yet.
- Analyst
Okay.
That's it for me.
Thanks, guys.
- President & CEO
Sure.
Operator
Thank you.
Our next question comes from the line of George Hill with Leerink Swann.
Please proceed with your question.
- Analyst
Hi, guys.
Good morning, and appreciate you taking the question.
Boyd or Darrell, is there any chance you guys would update the amount of customers that you guys have on the core system?
I know that that's a number that you stopped giving a while ago, and I ask that question because I'm just wondering, maybe can you talk about if there's any type of significant churn?
- CFO
There has not been any significant churn at all.
We have 658 customers now.
- Analyst
Okay.
Appreciate that.
And maybe, just with respect to the pricing environment, appreciate the color that you guys gave us on what you look to install in Q2.
I'd say based upon my understanding of the pricing, if you guys turn on everything that you expect to turn on, the revenue number that you guys should actually print should be significantly higher than what you guided to.
From a price perspective, has anything changed, or is there a greater SAS mix in the upcoming deals that you plan to put into place that you could give us a little more color on?
- President & CEO
Pricing hasn't changed at all.
The SAS number, what I gave in the comments, was $1.8 million.
That would have been revenue, but they're going in SAS.
- Analyst
And -- the implied -- I'm sorry.
- President & CEO
I was going to say one more thing.
Maybe the size of the hospitals has an impact, the ones that are actually going in.
We quit giving the contract numbers a long time ago, but our average contract in the first quarter was up.
It's a good number, but some of these installations may have been signed before then.
So maybe some of the installations aren't quite as big as what your model suggests.
- Analyst
Okay.
All right.
Thank you very much.
- President & CEO
Sure.
Operator
Thank you.
Our next question comes from the line of Richard Close with Jefferies & Company.
Please proceed with your question.
- Analyst
Yes.
Just to be clear on software as a service that you're talking about, this $1.8 million, those essentially -- is that full $1.8 million would have been recognized under a typical license agreement in the second quarter?
Is that what you're saying?
- President & CEO
That's correct.
- Analyst
Okay.
And then just on the software as a service, this model, is it -- are you hosting this software, or are you implementing it at the site, and these guys are just paying for it over time?
- President & CEO
We actually have the flexibility to do it both ways and we've done it both ways.
We have service here that we can host it, or we actually can put the server on site.
We can do it either way.
- Analyst
In these particular ones that you're talking about, the three financial, two clinical, and three point of care, are those most likely on site, or you hosting it?
- President & CEO
It's probably half -- I don't really know.
It's really immaterial where the computer is.
We own it.
And I don't know that answer off the top of my head, whether it's hosted here or on site, for those.
- Analyst
Okay.
And then just -- I guess follow up on George's, I guess, question.
Pretty big ramp in the number of installations expected for the second quarter.
So you're essentially saying those are probably smaller deals and thus, a greater number of implementations, but essentially less revenue?
- President & CEO
Well, based on his question that he said he thought we should have more revenue from them, that's coming from his model so my comment was maybe his model's got those models bigger.
As far as we know, those were average installations, and we went through and valued each one of those, figured out what the revenue's going to be from it, and that's how we come up with our guidance.
- Analyst
Okay.
And then when we think about these installations, is it fair to say that these were essentially purchases -- I'm just trying to get a feel of when were the purchases actually made, when were the contracts signed and, with respect to, let's say, the 16 on the financial.
Was it like the last two quarters, or was that something that was signed here solely in the first quarter?
I mean, how quick is the implementation, do you move from signing to actually on site and start implementing?
- President & CEO
It's about 90 days.
So the majority of these were signed in the first quarter.
Some of them were obviously signed in the fourth quarter.
If I had to break down, I would say maybe 30% were in the fourth quarter and 70% were in the first quarter.
- Analyst
Okay.
So you essentially have seen -- definitely have seen an up-tick in actually the number of purchasing, maybe not necessarily the size of contracts, but you have seen an increase in the level of customers signing contracts.
- President & CEO
That's correct.
- Analyst
Okay.
Great.
Thanks.
- President & CEO
Sure.
One thing I'd like to add before we move to the next question, to clear up something, too.
On the software as a service, we try to collect as much as we can, or build them -- structure them in a way where we cover all of our costs, hardware costs, travel costs, implementation costs and things.
So, it's -- not all of them are strictly just the revenues recognized on a monthly basis.
We do -- sometimes are able to get some money up-front to at least cover our costs.
At least, that's our goal.
- Analyst
Okay.
Thank you again.
- President & CEO
Sure.
Operator
Thank you.
Our next question comes from the line of Dale Warmington with Delaware Capital Management.
Please proceed with your question.
- Analyst
Yes.
Quick question.
In reference to the landscape in terms of competitors, recently we saw some activity last week in terms of some merger.
Have you seen any change in terms of bigger players trying to encroach on your turf?
- President & CEO
No, we have not.
- Analyst
Okay.
Thank you.
- President & CEO
Sure.
Operator
Thank you.
Our next question comes from the line of Sandy Draper with Raymond James.
Please proceed with your question.
- Analyst
Thanks very much.
A couple questions.
One, maybe on the outsourcing side, I know, Boyd, you said that the revenue was up year-over-year about 14%, but it was sort of flat down a little bit sequentially.
Is there any seasonality, maybe weather stuff?
Any commentary there?
And then I would assume the margin decline there was primarily a function of the opening up of the new facility and you'd be expecting to start ramping margins back up.
- President & CEO
Yes, that's all true.
I'm trying to think what the first part of your question was.
- Analyst
In terms of the revenues being up year-over-year, but they were flat to down sequentially, were there any lost customers, or was that seasonality or what contributed to the lack of sequential growth?
- President & CEO
There was one full lost customer that we actually lost in December, that finished their services in December, so that affected those numbers.
And that's probably where you're seeing that.
- Analyst
Okay.
Great.
And when that happens, is that typically someone take it back in house or are they ever going to another outside provider?
- President & CEO
Typically, they're going back in-house, but every now and then they do go to another provider.
- Analyst
Okay.
Then, in terms of the margins on that, Boyd, we've talked about it a lot, it's a little bit misleading to look completely at the system sales and margins separate from support and maintenance because your people move back and forth.
The combined margin between those two was still low.
Obviously, that's just -- a lot of that is going to be due to the drop in system sales.
Would you expect to be able to ramp that number back up pretty quickly as you get your installs, and sort of what are your thoughts in terms of the margins there?
- CFO
Yes, Sandy, we do anticipate that that would ramp up rather quickly, because, you know, so much of that cost is people, and it doesn't go away when I'm not doing installations.
We anticipate that system sales, the margin there was down 2.4% in the first quarter, and historically, we like to see that more at the -- in the low 20s, anticipate that getting back up towards that number as we move forward.
- Analyst
Okay.
One other question.
Any incremental expense?
One of the points that you guys have a lot of leverage on is your total operating expenses.
You're sort of running around sort of at the high sevens, just under eight million a quarter right now.
Anything -- as you pick back up on the sales, are there a lot more commission dollars you have to start paying out, or should you sort of just be seeing a modest increase in operating expenses each quarter?
- CFO
There will be a pickup in commission dollars because that is driven by recognition of revenues.
So as we recognize more revenue, the related commission does increase, really right along with that.
But other than that, there shouldn't be anything of significance in the operating expenses that would change.
- Analyst
Okay, great.
Final quick question.
I may have missed it.
Did you get your stock comp number?
- CFO
I did not give that number.
That number, and the reason I didn't give it is because it's set at $229,000 a quarter, unless we make some change in what's been in the stock compensation program.
That's $229,000 in the first quarter, and anticipate the same $229,000 in the second quarter.
- Analyst
Okay.
Great.
Thank you very much.
- CFO
Thank you.
Operator
Thank you.
Our next question comes from the line of Sean Wieland with Piper Jaffray.
Please proceed with your question.
- Analyst
Hi, thanks.
Can you give us some confidence in the Q2 guidance?
Specifically, have you considered any changes to your methods to improve the odds at hitting the guidance?
- President & CEO
We have not.
If we go back to the first quarter, if you factor in those two and, kind of going off the call we just had with Sandy, talking about the margins and the impact of sales, those two installs that slid, that would hit the top line, but the vast majority of that would flow straight through all the way to the bottom line, because, as Darrell mentioned, our expenses are fairly fixed, other than, obviously, the cost of hardware and some travel expenses and things like that.
So had those two not slid, we would have been right within our guidance.
And so no, we haven't changed the way we do guidance at all.
We're confident in our numbers, given that the installs go in as they -- as they're scheduled to.
- Analyst
Why did the two deals slide?
- President & CEO
The two deals slid, there was a three hospital -- it's a for-profit chain that had three hospitals.
They put the first one in, in February, the second two were scheduled to go in, in March.
When they realized the impact that it had on their facility from a human resources point of view, the level of effort it took them, they didn't want to absorb all of that expense or cost in one quarter, and they wanted to separate that out over the next two quarters so we moved one to second quarter and one to third.
I think it's something to note as well, you know, because we have this increased capacity right now, we were able the accommodate them that in request.
We've had times in the company, and hopefully we're coming up on some times here pretty quickly, I think you can see from our numbers, where we're running at or near capacity.
And when that's the case, the opportunity to slide an install back to another quarter, sometimes is very slim.
You don't have a chance to.
If you don't want to go in, in the month you're scheduled, you may have to wait six, seven, eight months, and that might have factored into their decision.
They might have decided to go ahead and swallow it and do it in March.
But given that we had room to do an install in second quarter, then another one to accommodate them in the third quarter, they chose to do that.
So I think that's a factor that, you know, people need to be aware of.
- Analyst
Okay.
How sustainable is the growth that you're forecasting for the second quarter?
- President & CEO
If you're comparing -- I don't know if you're comparing it to the first quarter last year, or second quarter last year, or sequentially.
It's a good question.
We're at capacity, or close to capacity from our numbers.
Hopefully third quarter, and without giving the guidance for the third quarter, because again, the deals we're signing right now are hard to say.
But certainly we feel like we can, as I said in my comments, we can be at or near capacity for the third and the fourth quarter of this year.
- Analyst
Okay.
And then quick question on the SAS deals.
So what would be a safe number to assume, as a percentage of your bookings, that will go to SAS deals?
- President & CEO
I'll defer to Darrell on that one.
- CFO
Percentage of bookings?
Again, given that the number in the second quarter that he gave was the $1.8 million, how that number moves forward into future quarters, as far as how many we might have in the third quarter or fourth quarter and what the dollar value of those is at this time, we really don't have any feel for that.
- Analyst
Okay.
Would it be safe to kind of keep it at that kind of consistent maybe --
- CFO
I think that would be safe, to assume that it would stay at that level.
- Analyst
Okay.
And then last question --
- CFO
That's not our preferred selling method, but given that that's a hot issue out in the marketplace, and the inability of some of these hospitals to afford to buy a system up-front, it's a -- it's not what we go in from a sales standpoint wanting to sell, but when that's what it takes to make a deal happen, then we're willing to do that.
- Analyst
Okay.
Economically, kind of total value to you, what's a better deal for you, SAS or license?
- CFO
It depends on whether we want to look at it by quarter or over a period of time.
If you recall in previous years, we had the ASP model.
This is very similar to that, or almost exactly the same.
Our payback of what we would make under a normal deal is somewhere between 18 months and two years.
So if we look at a SAS over a two-year period, after two years I'm pretty much even, if I had done that as a traditional install.
So anything after 18 months to two years is additional income or additional revenue.
So over a three, four-year period, the SAS is an overall higher revenue deal.
But in the short term, I don't get the big bang of selling a license.
- Analyst
Okay.
And it sounds like you're recognizing implementation revenue on these up-front.
Can you give us some comfort that that is indeed okay, given what happened with Athena a couple of months ago?
- CFO
Recognizing -- the only revenue that we would recognize up-front, if it was installation, is typically that revenue would be equal to the cost, where they are actually paying for those expenses and matching them at the time that it goes in.
- Analyst
Okay, and so you're recognizing those as incurred?
- CFO
Yes.
- Analyst
Okay.
All right.
Thank you very much.
Operator
Thank you.
Our next question comes from the line of Corey Tobin with William Blair & Company.
Please proceed with your question.
- Analyst
Hi.
Good morning.
Just to hammer on the SAS thing just a little bit longer if I could.
I just want to be clear here.
You're saying it's a $1.4 million -- or $1.8 million rather -- across the eight contracts or so, and that's over four years?
I want to be clear.
You're saying that the revenue over the course of four years from these would be $1.8 million.
Is that correct?
- CFO
No, no, if that -- if these installs had gone in as a regular license sale, we would have recognized $1.8 million of revenue on them in the second quarter.
When we actually, under the SAS model, somewhere in the neighborhood of $1.8 million will be recognized over a two-year period.
- Analyst
Over a two-year period?
- CFO
Two-year period, yes.
- Analyst
Okay.
And then the contract, I just want to be clear, the contract doesn't end at that point, right?
Assuming that they don't convert and purchase the software, you'll continue to recognize revenue on this, arguably at, what, $900,000 a year in perpetuity?
- CFO
Yes.
It's a rental agreement.
So as long as that rental -- there's a monthly rent that's involved, and that continues on as long as they operate under this agreement.
- Analyst
Okay, understood.
And then shifting to bookings for a second, the bookings were obviously very strong from a growth perspective and running way ahead of recognized revenue.
What is the impact of bookings for these contracts?
Is it just the $1.8 million?
- CFO
For those in particular?
Yes.
- Analyst
Okay.
Great.
And then final, if I could.
You talked a little bit about the sequential downturn in outsourcing, and I just wanted to come back and talk about maintenance for a second.
We also saw maintenance slightly down in the quarter.
Can you give us -- which is obviously rare.
Can you give us a little bit of color as to why that number would have been down as opposed to growing, which is what I think most people would have expected to see, on a sequential basis?
- CFO
I'll be perfectly honest, that's not something that I have right off the top of my head, that I had looked at.
But there were no -- other than, within the fourth quarter, we sell forms and supplies to our customers.
And within the fourth quarter with end-of-year things and with W-2s and 1099s, our sale of forms and supplies are at their highest levelin the fourth quarter of the year.
And then they drop off drastically in the first quarter.
That would have an impact.
Other than that there is nothing, right off the top of my head, that would impact that number.
- Analyst
Got it.
So it wasn't a loss, or increase in churn?
- CFO
There was no loss of customers from fourth quarter to first quarter that would have caused a drop in our ongoing maintenance fees.
- Analyst
Okay, great.
And one other one, if I could, on the accounting for the SAS contracts.
Will that revenue, I guess the non-install portion of the revenue, on a go-forward basis, all show up in the systems component of the revenue line, or will it be spread across both systems and maintenance?
- CFO
That will show up in the systems service line.
- Analyst
Great.
Thank you.
Operator
Thank you.
Our next question comes from the line of Tom Carpenter with Hilliard Lyons.
Please proceed with your question.
- Analyst
Good morning, Boyd.
Good morning, Darrell.
- President & CEO
Hi, Tom.
- Analyst
Can you help us understand maybe the bucket that new customers are coming from and help us distinguish what percentage in the second quarter are critical access hospitals, then ones between 25 and 50 beds, 50 to 100 beds, and then maybe over 100 beds?
- President & CEO
There were not any over 100 beds, that I'm aware of.
Most of them are certainly, again, under 100 beds, and I would say the vast majority are under 50 beds.
I don't have the exact numbers on how many were critical access.
- Analyst
Okay.
Do you see that continuing, or do you see yourself competing more in maybe the 100- to 150-bed space?
- President & CEO
I certainly see it continuing in the under 100 beds.
- Analyst
On the SAS or ASP, it's kind of interesting with the stimulus money out there, and especially for critical access hospitals that have a different treatment historically, are these hospitals going that route?
I assume it's less critical hospitals and more beds under 25, or over 25.
Is it purely because they're having trouble getting financing?
They know the money is out there, and they want to go ahead and get ready, and this helps them get ready to qualify for federal money?
- President & CEO
Yes.
- Analyst
Okay.
Thank you.
- President & CEO
Sure.
Operator
Thank you.
We have a follow-up question from the line of George Hill with Leerink Swann.
Please proceed with your question.
- Analyst
Hi, guys.
Thanks for taking the follow-up.
Boyd and Darrell, could you just update us on what the average sales price is to the new customer, and then what is the -- I'll call it the soup to nuts cost to get a hospital from paper to fully electronic?
- President & CEO
Typically if you buy everything and want to go from paper to electronic, you're talking somewhere at a low of $750,000 to $1.5 million, depending on the size of the facility, how much data there is that needs to be converting, how much training and installation we have to do.
- Analyst
Okay.
And so -- all right.
But that's not the ASP.
So I guess then the follow-up question is, what percentage of new customers that come on that are buying the software licenses start with going for everything, versus how many go piecemeal?
- President & CEO
We're starting to see more and more go with everything.
So the average contract price is going up because, again, as we're getting closer to meeting meaningful use, they know they've got to have these systems in place through nursing point of care.
So we're certainly seeing a pickup in that.
If I had to take a guess at it, a little better than 50% are probably going in with everything.
- Analyst
Okay.
All right.
Appreciate the color.
- President & CEO
Sure.
Operator
Thank you.
Our next question comes from the line of Bret Jones with Brean Murray.
Please proceed with your question.
- Analyst
Thank you for taking the question.
Darrell, when we talked last quarter on the call, we were trying to lay out what would -- how many system installs youd have to get to, in to order to get back to sort of a normalized margin, and I believe you said the number was around 12 would get you there.
Is there anything unusual associated with these installs?
It looks to me like the systems margin would be somewhere more like the mid-teens, based on your guidance.
- CFO
Again, it's a mix of the size of the hospitals and how much they're actually purchasing or how much we're installing of that during the quarter.
A ramp -- I guess a ramp back up of utilization of people.
And while that margin, you know, should increase significantly, and I'm not sure what -- I don't recall what number I gave up earlier.
I think I said the high teens.
That system margin, when I actually look at it, it should be in the low 20s for the first quarter -- for the second quarter, excuse me.
- Analyst
So system margin in the low 20s for the second quarter, and if you were to maintain this mix of deals going forward, even with the SAS, you would expect that to continue, it sounds like.
- CFO
Yes.
- Analyst
Okay.
And then, just a follow-up question on the SAS.
It seems like they're structured more like leases, given the two-year buyout clause.
Were these customers that could not find financing, or that you did not want to finance on your own?
- CFO
Yes, it's a combination of that.
Also, it's a -- I prefer not to take on the lease, and with some of these, what is involved in it is a commitment, or even possibly within the contract is, at the point they get to meaningful use, then they will buy it out.
So it's structured with the intent that they will buy this out, as soon as possible.
Their goal in doing this is to buy the thing out.
It's easier to do that under the SAS arrangement and them get credit for payments that they have made, or some proportional credit.
- Analyst
Okay.
And the buyout would essentially get them to that $1.8 million of total cost, is that right?
The buyout would be structured to get them to the equivalent of what a license deal would have been, or would you receive more money than that?
- CFO
Depending on how far out it goes.
Again, if it's within the first 24 months, we're going to give them 100% credit.
So yes, it would come back to the $1.8 million.
If it extends beyond the 24 months -- 24-month time frame, then they're going to get less than 100% credit for what they've paid.
- Analyst
Okay, that makes sense.
- CFO
So it would be more revenue at that point.
- Analyst
Okay, great.
And then just the last question is, the financing receivables decline in the quarter.
I know you've talked previously that you thought that would be going up, and now you're structuring these deals more as SAS and not wanting to take on the leases.
Is that a change of philosophy on your part, or was it more a fact of the creditworthiness of these customers in the current quarter?
- CFO
Really, it was just a creditworthiness issue or how the deals just fell out in the quarter.
- Analyst
Okay.
Great.
Thank you very much.
- CFO
That could shift back the other way in the next quarter, depending on the deals that happen.
- Analyst
All right.
Thank you.
- President & CEO
And this is Boyd.
Just to add to that.
A lot of times the way these deals happen is what our -- what a particular competitor is offering when you're in a deal, and who we're up against.
If they're offering a lease, then a lot of times they want to see a lease from us, or if they're talking a SAS agreement, then a lot of times we'll counter it with a SAS agreement.
So sometimes it's market-driven what we're offering, more than anything else.
- Analyst
All right.
Thank you.
- President & CEO
Sure.
Operator
Thank you.
Our next question comes from the line of Brad Hoover with Sidoti and Company.
Please proceed with your question.
- Analyst
Hi, good morning.
Just going back to capacity and hiring, you're at the 18 now, and I guess you're at 80% utilization, ornearing full.
If demand continues to accelerate through the year, should we expect you do again hire, as you did last year, implementation and training?
Kind of thinking about how that's going to affect the gross margin.
- President & CEO
Certainly if demand continues to increase, and we get to full capacity and aren't able to accommodate installs within a reasonable time frame, we wouldn't hesitate to add more staff in order to do.
But that's a decision that would be made -- it certainly hasn't been made now.
We want to get to capacity first.
- Analyst
So currently you're not hiring there in the second quarter.
- President & CEO
That's correct.
- Analyst
Would you remind us how long it takes from a new hire to start being productive for implementation and training?
- President & CEO
It really depends on the area which they will be doing and what their background is.
For example, a nurse can be brought up to speed much more quickly on point of care, and be able to train on point of care, because he or she's already got the nursing background and everything else.
So that may only be a three-month time period.
But someone else, in another discipline that doesn't have quite that background, it may take six months.
But anywhere from three to six months we feel like is when they're able to be a part of a team.
Now, certainly we're not going to send out a whole team of people that have been here six months.
We put these in amongst very senior people, very senior project leaders, managers and things, where they can supplement the team.
- Analyst
Okay, thanks.
That's helpful.
- President & CEO
Sure.
- Analyst
And then just lastly, obviously that final definition is not out yet for meaningful use, but given the preliminary one, where are you in terms of looking at your system and seeing if it meets it, in terms of the time line, and what you're working on to do any kind of changes to your system, if it doesn't currently meet that preliminary definition that was announced previously?
- President & CEO
We feel very good about where we are with the preliminary definitions for this first year.
And in fact, we're working on the definitions for like '12 and '13, the things that are going to be applied there.
So we feel like we're in great position as for as development.
- Analyst
Okay.
Great.
Thank you, guys.
- President & CEO
Sure.
Operator
Thank you.
We have a follow-up question from the line of Sandy Draper with Raymond James.
Please proceed with your question.
- Analyst
Thanks.
My follow-ups were already asked and answered.
Thank you.
Operator
Thank you.
We'll proceed to the next question.
We have a follow-up question from Richard Close with Jefferies and Company.
Please proceed with your question.
- Analyst
Yes.
Just really quick on the headcount.
I think you said it went down 15.
If you can talk to us about where that was and why.
- CFO
That was really just -- it was across the board, in financial, clinical, ITS, and our business management services, just a few turnover there, just routine turnover of people leaving, going elsewhere.
But nothing of any significance.
- Analyst
Okay.
And then just to hit on the implementations again, going up pretty significantly in the second quarter, although the revenue guidance seems low compared to those implementations, yet you stated that, I think, Boyd, you said the average contract size is going up.
Is the average contract size going up overall across the firm, or is it just average contract size maybe in these smaller hospitals?
A difference, I guess, in the size of the customer base that you're seeing?
- President & CEO
I think the main driver between the average contract size going up is more people are buying everything and wanting to install it up-front.
My comment was specific to the contracts that we signed in the first quarter, which aren't necessarily going to be installed in the second quarter.
As you can imagine, with the second quarter where it is, some of our months are booked out.
So we're actually having to go out first and starting putting things on the schedule for the third quarter.
So some of those will show up in the third quarter.
- Analyst
Okay.
Thank you.
- President & CEO
Sure.
Operator
Thank you.
We have a follow-up question from the line of Tom Carpenter with Hilliard Lyons.
Please proceed with your question.
- Analyst
Hi, Boyd.
I apologize if you guys already answered this.
So let's say a 2Q '10 SAS hospital is implemented at 50 beds, then in the second quarter of 2012, they've met meaningful use and certification requirements, and they decide to go purchase.
How would that work on your second quarter 2012 revenue?
- CFO
At that point, the revenue we would recognize would be -- what would it look like, we would take the full sale price of the license and reduce that by payments that we are allowing them to apply to it, and the net of that would be the revenue recognized.
- Analyst
Where I'm going with the question, would you have a pretty sizable system sales impact that quarter, or would it be minimal?
I'm going for magnitude.
- CFO
On a-- two years out, it would be minimal.
- Analyst
Okay.
So the amount you would recognize in the second quarter 2012 would be minimal.
- CFO
That is correct.
- Analyst
Mainly maintenance going forward.
That's very helpful.
- CFO
Maintenance going forward.
- Analyst
Thank you, Darrell.
Operator
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.
- President & CEO
Great.
Thank you, Jennifer.
Thanks, everyone for being on the call.
Thanks for your interest in CPSI and have a great weekend.
Operator
(Operator instructions)