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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the Computer Programs and Systems second quarter 2011 earnings conference call.
During the presentation, all participants will be in a listen-only mode.
Afterwards, we will conduct a question-and-answer session.
(Operator Instructions) As a reminder, this conference is being recorded Friday, July 29, 2011.
It is now my pleasure to turn the conference over to Mr.
Boyd Douglas, President and Chief Executive Officer with Computer Programs and Systems.
Please go ahead, sir.
- President, CEO
Thank you, Savannah.
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 of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
We caution you that any such forward-looking statements only reflect management expectations and predictions based upon currently available information and are not guarantees of future results or performance.
Actual results might differ materially from those expressed or implied by such forward-looking statements as a result of known and unknown 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 most 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 is David Dye, our Chief Financial Officer.
David and I have a few minutes of prepared comments, and then we will be happy to take your questions.
In the second quarter, we installed our financial and patient accounting system in seven hospitals and our core clinical departmental applications at 18 facilities.
Additionally, 19 hospitals implemented Nursing Point-of-Care, and 43 customers went live with CPOE.
Overall, add-on sales to existing clients made up 32% of our total revenue.
At this time, we expect to install our financial and patient accounting system at 5 facilities in the third quarter.
We anticipate 13 new installations of core clinical departmental modules, 14 Nursing Point-of-Care implementations, and 32 CPOE implementations.
In business management solutions during the second quarter, we executed 15 new accounts receivable management contracts, 1 of which was for full services, 13 for private pay services, and one for insurance follow up services.
During the second quarter, revenue from this segment of our business grew 8% year over year.
As you all know by now, we had an exceptional second quarter, and of course, we are very happy with those results.
We feel quite confident about our ability to continue to perform at a high level as indicated by our third-quarter outlook.
The stimulus package to continues to have a positive effect on our business, and we have no reason to expect this to change as long as hospitals and physicians are intent of receiving the funds available under the EHR adoption program.
As of July 25, we are aware of at least 26 clients who have now received Medicare and Medicaid payments for EHR adoption for a total amount of over $22 million.
This number continues to grow on an almost daily basis as we have a number of client hospitals that have been through the reporting period, completed the application, and have to have station process, and are now waiting on payments.
Finally, we continue to provide assistance to those clients who are still in their reporting period through a dedicated group of support staff within our Software Services division and fully expect those hospitals to conclude their EHR adoption projects successfully.
On the sales front, we are starting to see an increase in activity from a new client perspective.
It is difficult at this time to predict whether or not this is a long-term increase related to the stimulus payments now being made in substantial amounts, thereby bringing to the market those hospitals that were waiting on the sidelines, or if it is a shorter-term cyclical movement such as we have experienced many times in the past.
Ultimately, time will tell, but the activity and the new client sales pipeline has noticeably increased during the past quarter.
At this time, I'd like to turn it over to David for a few comments on the financials.
- CFO
Thanks, Boyd, and good morning.
I will quickly run through a few numbers, and then we will take your questions.
DSOs as of the end of the second quarter were 48 days, down 3 days sequentially and also 3 days year over year.
Cash provided from operations for the quarter was $2.8 million, which is equivalent to the prior-year period.
Free cash flow was $2.5 million compared with $0.8 million for the second quarter of 2010.
CapEx was $372,000 for the quarter, down from $1.980 million for the prior-year quarter.
Depreciation was $625,000, compared with $550,000 last year.
Cash collections were $43.9 million for the period, compared with $36.3 million for the prior year.
We recognized stock compensation expense of $247,000 in the quarter.
We anticipate approximately $305,000 in stock compensation expense in the third and subsequent quarters.
Our headcount as of June 30 was 1,223, an increase of 25 for the quarter and 123 year over year.
We expect a similar net increase of about 25 employees in the third quarter.
Before we open the call to questions, I will just mention that Boyd is traveling and on a separate line in the event that there is some delay or clutter on the line.
And Savannah, if we could now please open the call for questions.
Operator
(Operator Instructions) Jamie Stockton, Morgan Keegan.
- Analyst
My first question, David, is on the system sales line.
You seem like you got a big bump during the quarter.
I was curious if there was an impact from any of the hospitals that had leased your system last year having to buy out those leases as they started to receive their EHR incentive checks?
- CFO
No, Jamie.
There was no impact from that.
I think I stated this on the last call.
We might see minimal impact in that in the second half of this year.
I think that is going to be more of a 2012, 2013 event, but there was no impact in the second quarter.
- Analyst
Is there any color around if pricing on systems might have driven the upside during the quarter?
- CFO
It probably sounds like I'm beating a dead horse, but it's just as a result of this stimulus, our inter-quarter sales are unprecedented, virtually all on the clinical side.
A good portion of it is existing clients that have been utilizing the high-end clinical stuff for some time, like Nursing Point-of-Care and ChartLink and CPOE, that maybe they'd been utilizing on a limited basis, and then they go hospital-wide with it in anticipation of meaningful use, and they convert to a site license.
There is virtually no expense for us in that conversion because we don't have to send people to that site to do any training because they are already utilizing the application.
We had a lot of that in the second quarter.
- Analyst
So taking systems that maybe the hospital had already implemented something, going hospital wide, drove a material part of it?
- CFO
That's correct.
- Analyst
Then Boyd, on your comment about new client activities starting to pick up, can you quantify the number of deals that might be in the pipeline that you guys are working on as a reflection of that or when you think from a timing standpoint you will actually start to see contracts close?
- President, CEO
What we're seeing, we don't comment specifically on numbers, but the way I would characterize it is a pipeline is maturing.
It's not necessarily that there's a ton more hospitals in it, but certainly a lot of then are getting ready or at the tail end of the process and should be making decisions.
We expect quite a few decisions, actually, in the third quarter, so we'll see.
Quite a few relative to what we have seen in the last couple of quarters.
We are excited about that and seeing them through, and we feel like from talking to our salesmen that we are in a good position in a lot of those deals.
- Analyst
(Inaudible) accounts was up a fair amount during the quarter.
Obviously, you had a great quarter, so maybe you took the opportunity to just increase that.
Is there any other color around that we should know about?
- CFO
Maybe minimal color, and you might be somewhat correct, but we've always been really conservative in that regard as evidenced by our DSOs.
We continue to be -- we had a couple bankruptcies in the quarter, so we just continue to be real conservative.
Operator
George Hill, Citigroup.
- Analyst
To follow up on Jamie's question, directionally, is there any way we can to quantify the increase in new client activity that you're seeing maybe versus the last quarter or year ago?
And trying to parse out as you guys think about the pipeline, how do you think about the pipeline?
Of what portion is the up-sell opportunity from current clients versus what portion of the pipeline is a new footprint?
- President, CEO
I don't know that I can give any more quantifiable numbers on the pipeline, but certainly, when we talk about the pipeline we are talking about new customers.
I'm not talking about add-on sales to existing customers.
- Analyst
As we think about the up-sell opportunity, it seems like the demand for meds verification and CPOE is pretty high right now given the Meaningful Use stuff going on.
Do we have the math on that right, that you got just slightly less than 40% of the customer base there is penetrated with that functionality, and it's probably safer to assume that will ramp pretty quickly as we get to through the end of calendar 2012?
- President, CEO
That number is correct for the CPOE.
The Point-of-Care, I don't remember off the top of my head.
I want to say it's about 65% of our customers do have Point-of-Care.
It's only about 35% don't have it.
- Analyst
Okay.
And I didn't hear any mention -- I'm sorry.
Go ahead.
- CFO
I'm sorry, George.
You also mentioned Medication Administration in your question, and that number is slightly over 50%.
- Analyst
Maybe I missed this on the prepared comments.
I didn't hear mention of the SaaS deals in the quarter?
Any new SaaS deals, or what's the outlook there?
- CFO
None of the new installs from the quarter are SaaS deals.
Operator
Ryan Daniels, William Blair.
- Analyst
I want to hit the pipeline again, not to beat a dead horse, but I'm curious if you are seeing anything specific there?
If that might be in markets where the Medicaid cuts are being checked?
If that's a stimulating growth in those markets?
Or maybe if that's the potential delay in meaningful use stage two is actually encouraging people to move forward because they now have more time?
Anything you can offer there would be helpful.
- President, CEO
I think both of those are factors.
We have lots of customers that are getting the money, and there are other hospitals that are getting money that are not necessarily our customers.
They are seeing neighboring hospitals or competitor hospitals receiving the funds, and that is getting the attention of some of these boards, CEOs, CFOs at small hospitals that say, we need to get moving on this thing.
Both of those are factors, but it's hard to pinpoint exactly why every hospital pipeline is where they are.
- Analyst
And then conversely, one of the things you talked about a couple of times on prior calls is the physician documentation.
I think you might have been doing beta testing very recently, so I'm curious how that is going.
Do you think that the delay of meaningful use stage two can actually push out the demand for your physician documentation, or will that be pretty strong over the coming year or 2?
- CFO
As far as physician documentation, that is going well.
It is in beta testing.
It's out in the field now, and we are really pleased with where we are there.
We are honing and refining our installation techniques to make sure we do a good job on those installs with the appropriate number of people.
So that is going extremely well.
We are happy with where we are there.
As far as the delay, I do think it will spread it out and make it a little bit smoother now that they can wait another year to get that on, which I think I've said before would be beneficial to us at our customers.
- Analyst
I want to make sure I understand the dynamic a little bit better.
You said the inter-quarter sales are unprecedented.
It sounds like is existing clients rolling out products hospital-wide, and you don't have any expense to that because there's no implementation and training.
Can you give us a feel for how much of that has taken place?
If we look at your book of business, is there still a lot of opportunity for that to happen?
Has most of that occurred at this point, Meaningful Use?
- CFO
There is still a lot of opportunity for that to happen as a result of the same reason why it happened in the second quarter.
In order to achieve Phase I Meaningful Use you have to have a certain amount of CPOE orders greater then 30%, so a lot of hospitals that only had a doctor or 2 utilizing it are now ramping up and going with there entire physician staff, and I think that will continue.
You've got some hospitals that are using Nursing Point-of-Care and several departments now rolling out hospital-wide.
And that obviously happened a lot in the second quarter but there's room for that to continue to happen over the next couple of years.
- Analyst
If we look at your CPOE that 40% penetration that you mentioned earlier based on your number of installs, that's almost a little misleading.
Your opportunity is probably bigger than that because there is still room within that even 40% penetrated to grow.
Is that a fair way to think about it?
- CFO
Yes, that's a fair way to think about it.
Operator
Brett Jones, Oppenheimer & Co.
- Analyst
In terms of the gross margin, I was wondering if you could quantify the impact of converting some of those sites over to a site license on the gross margin?
- CFO
I can't.
I don't have that.
It's a positive impact, but I can't quantify it directly.
- Analyst
Any way to quantify the amount of sales that were tied to the conversion site licenses?
- CFO
No.
And just an aside, this isn't the first quarter we've ever had sites convert to site licenses.
It has happened for a decade now that we have sold clinical applications in such a fashion.
It is just that because of Meaningful Use, it is happening more now than it has in the past.
This isn't something we just started doing in the second quarter.
- Analyst
Is the ASP changing?
As new hospitals are coming in, are they buying it on a site license basis, or department by department, generally speaking?
- CFO
As net new client hospitals are buying our system, generally speaking, now they are buying a site license because the primary reason is to get the Meaningful Use.
- Analyst
Would that explain why with the number of implementations down sequentially in Q3, your revenue expectations aren't down that much?
- CFO
Yes.
- Analyst
On the gross margin, 42.7 is a persistence margin that isn't going to be sustainable, but do you think you can sustain low 30s going forward in the rest of this year?
- CFO
It's hard to say because the only time would look at margins is the day before we have this call.
We just don't run our business that way.
The margins we had in the fourth quarter, which was 32.2 if I'm looking at that correctly, that was something that on a more than quarterly basis over, let's say, a longer-term period, 6 months to a year, if things continue to go well with stimulus, and nothing in that environment changes, and we continue to perform, I'd see that being a realistic number.
Operator
Sean Wieland, Piper Jaffray.
- Analyst
Can you just give us, without naming a customer name, a specific example with numbers, a customer that had implemented the module on a limited basis, what they paid and then they expanded that footprint and the incremental costs?
And also what percentage of your clients have still yet -- just to follow up on some of the prior questions.
We're trying to quantify what is the remaining opportunity left for this opportunity that is tough to predict.
- CFO
I will give you an example of an 80-bed hospital that rolled out CPOE to 4 doctors, and with implementation and training and license fees, spent approximately $60,000 to get it up and rolling and have our folks on site.
Then they go out hospital-wide with their entire staff, and they convert to a site license.
Very approximately, about $40,000 to do that conversion.
I don't have the exact numbers in front of me of what percentage of our sites with CPOE are on a site license and how many are not.
I do feel comfortable in saying that less than half are on a site license, but that's about all I can give you.
- Analyst
Less than half of the customers that have CPOE have a site license?
- CFO
That's correct.
- Analyst
What would you say to convert to a site license, would it be -- could we throw in an average of $40,000 per hospital?
- CFO
Yes.
- Analyst
And that is for CPOE?
- President, CEO
Some of these hospitals are really, really small, so we may never see that bump up from some of them.
If you are in a 25-bed hospital with 5 or 6 doctors, if you've already got it, then we may never see that hospital go to a full site license.
- Analyst
Why is it so difficult to predict when these sales come in?
- President, CEO
Mainly because were not necessarily in touch with these hospitals on a daily basis, and if they decide to go hospital-wide, it doesn't require any resources from our end to do that.
It's just a matter of turning on the licenses and making sure they have the logins and things, and then they go through the training.
We don't necessarily know when that's going to occur at any individual hospital.
- Analyst
Do you put these inter-quarter sales into your guidance at all?
- CFO
Yes.
- Analyst
Help us understand how do you factor them into your guidance so we can better factor them into our models.
- CFO
Obviously, I did a terrible job.
I really don't know what else to say.
Operator
Sebastian Paquette, Goldman Sachs.
- Analyst
On the bookings activity for core clinicals during the second quarter, can you quantify what proportion is from green field versus what proportion are from competitive replacements?
- President, CEO
On the clinicals?
- Analyst
Yes.
- President, CEO
Let's say we installed, I believe it was 7 patient accounting and the core clinicals were 18, I think it is safe to assume.
I don't have the specific numbers right in front of me, but the 7 that went in with the patient accounting more than likely went in the clinicals as well because most people are putting all these systems is so they can meet Meaningful Use.
I think it would be safe to assume we did 4 that were new customers to us and they put in the clinicals as well, and then the other 11 were simply add-ons to our existing customer base.
- Analyst
As you've seen the July 3 date attestation deadline for 2011 come and go, have you seen any meaningful change in bookings activity from the last month of the second quarter and the month of July?
- President, CEO
I wouldn't say anything meaningful.
The number of CPOE installs we did in June was abnormally high because of July 3.
But now I would think we are turning for the second half of the year back to the more normal patterns.
- Analyst
When you're thinking about competitive displacements, namely MEDITECH and Healthland following the acquisition of the roughly 150 hospitals, are you seeing -- are you in greater conversations with those hospitals and potential clients, maybe in terms of MEDITECH's focusing on larger and larger accounts or Healthland needing to upgrade on that 150-hospital base.
Can you give us any color on how you see those competitive winds trending?
- President, CEO
I don't know if I can add a lot of color to it.
Certainly, the acquisitions that Healthland did drove a certain amount of those customers to the market; we are competing for that and have done some installs there and are talking to some other hospitals.
I don't know that we have seen much of a trend at all as far as specifically the MEDITECH hospitals.
I know that's a lot of talk in the industry, but we hadn't necessarily experienced that in the under 100-bed marketplace.
Operator
Brad Hoover, Sidoti and Co.
- Analyst
You mentioned seeing new client activity recently increasing as far as the pipeline goes.
Do you anticipate in seeing a need to hire an increase install implementation capacity before year-end, or do you think you're set with what you have in place today?
- President, CEO
I think we are set with what we have.
I think David said in the call we are expecting to add a few more bodies in different places.
Of course, his numbers include the business management services division as well.
We are adding here and there where we need to, but at this point don't anticipate a massive hiring like we did earlier between now and the end of the year.
- Analyst
And on the accounts receivable side -- contract side, specifically the private pay collection, is it is an anomaly in the quarter, or do you think you are seeing more demand for those services now compared to 6 or 9 months ago?
- President, CEO
There was an anomaly in the quarter.
We had a corporate client that had a lot of facilities they manage, and they moved forward with the contract for those services.
I think that was 8 or 9 of those 13.
- Analyst
David, do you have the hardware revenue from the quarter?
- CFO
It's right at $5 million, Brad.
Operator
David Larsen, Leerink Swann.
- Analyst
With this physician documentation module, what's the price tag on that, and what percentage of your client base will need to purchase it?
- President, CEO
I think you can count on average sales price of around $40,000 and everybody that wants to meet Meaningful Use will have to have it.
It is required in stage 2 of Meaningful Use.
- Analyst
So it is a total opportunity of maybe at least like -- okay, sounds good, $26 million or so?
In general terms, why did the system sales bookings pick up this quarter relative to last quarter?
It seemed kind of slow last quarter.
- President, CEO
For the most part it's just the natural progression of our market.
Quarter-to-quarter, I've said it a lot of times, is a pretty horrible way to judge our Company, and things just -- the natural ebbs and flows of the market.
Some quarters bookings are better than others, and I think if you look at long-term trends, it's a much better way to look at our Company.
Operator
(Operator Instructions) Gene Mannheimer, Auriga.
- Analyst
Are you seeing any benefit or impact from hospital consolidation, i.e., CPSI customers that have merged with or acquiring other hospitals?
Was that evident in the quarter or in general?
- President, CEO
No, we haven't seen a significant amount of that at all.
- Analyst
And from the capacity standpoint, just looking at the system sales again in the quarter, can the installation schedule get much more robust than what you demonstrated, or is there still room to expand there?
- President, CEO
There's not a lot of room to expand in phases 2, 3, and 4, the clinicals and the Point-of-Care and the CPOE.
Were pretty much running at peak capacity or near capacity.
There is some room for the new installs, which is why we are excited about the pipeline picking up.
We've got financial installation folks that we'll be able to utilize.
- Analyst
How frequently, if at all, are hospitals or your customers coming to you asking for integrated in-patient and ambulatory solutions?
- President, CEO
I would say almost every hospital that either owns or manages the physician clinics are very interested in that, and that is one of our competitive advantages that these systems have all been written together.
They all operate as close to the same as they can, and that is real attractive for these physicians that you don't have to learn 2 different CPOE systems between ambulatory and hospital system, and all your patient data is wrapped up in one nice package for an EMR.
Operator
Leo Carpio with Caris & Company.
- Analyst
I have 3 questions.
The first question regarding the competitive environment.
Have you seen any changes in the environment in terms of has like a Cerner or a Quality Systems make any inroads?
In terms of your peers, have you seen any changes in terms of pricing competition, or is everyone pretty much holding firm at this point?
- President, CEO
Everything is holding firm the best we can tell.
As far as the Cerner and Quality Systems, we have not really, any more than we've mentioned the last couple of quarters.
We have noticed them out there.
They have people in the field visiting our existing hospitals, and we see them typically early in a system selection process.
The activity has picked up, but haven't seen them making any kind of a significant push that's going to affect us in any way.
- Analyst
Last quarter you mentioned the bolt-on systems being an issue.
Is that still an issue this quarter, or has that faded a little bit in the last couple of months?
- President, CEO
That is still out there and happening at some of these smaller facilities and the ones that maybe aren't in the best financial shape where this is something affordable they can do now to maybe, in their minds anyway, receive stimulus funds.
What we're counting on is they'll get those funds and realize for a long-term solution, fully integrated EMR, maybe that path is not the best, and then they will look at us or one of our main competitors.
- Analyst
In terms of the high-tech program, the rollout of the Medicaid piece from the states, has that driven or been a significant component of the first House '11 demand in terms of -- could you quantify what impact it may have had?
- President, CEO
That would be difficult to quantify the impact because every state seems to be handling it a little bit different and on a different timeframe.
Operator
George Hill, Citigroup.
- Analyst
Boyd, on the new deals that you guys are seeing, how has that transition from how many people are looking to start with core financials or maybe financials and core clinicals to how many looking to go full suite of products contracting right off the bat?
- President, CEO
I would say 90% to 95% of them are going from the full contract right off the bat because of Meaningful Use.
- Analyst
How many, as you guys go to market, are replacements of either a legacy financial systems technology that is looking to get displaced with no clinicals or are completely de novo opportunities?
- President, CEO
Most of them are running financials, and then they may have clinicals running on an individual basis, maybe a pharmacy system that is a stand-alone system or a lob stand-alone system.
I think it's fair to say that most hospitals are automated somewhat in the clinical areas at this point in time, but certainly not an integrated solution.
Sometimes not even interfaced back to the patient accounting system.
Operator
Jamie Stockton, Morgan Keegan.
- Analyst
Boyd, if you think about prior quarters when you had some clinicals implementation staff that were idle, you reinvested those resources in going out in seeing if there were any issues you could take care for clients.
Is there anything like that you are doing on the financial side oriented toward putting an extra focus on any of these potential new client opportunities since you have some extra capacity?
- President, CEO
Certainly to some degree.
I don't think it's to do the degree that you see us doing it with the clinicals when we have those slow periods because the financial applications typically are not as challenging to run.
GL is pretty much GL, and AP and payroll and things like that.
Even on the patient accounting and billing side, it's not a tremendous challenge.
We do go out and do that, and if we've got a hospital that we know doesn't have either phase 2 or 3 or 4 installed, we want to make sure they are a happy customer and happy with CPSI so when and if they decide to move forward with rest, that they do it with us.
Operator
Ryan Daniels, William Blair.
- Analyst
In regards to EDIS.
I think that is something you've also talked about developing, and I wondered 2 things.
1, if you can give an update on when that might be available.
And 2, within your client base, do you have knowledge if they are using any EDIS solution today, or is that going to be a total green field opportunity when that comes out?
- President, CEO
As far as EDIS, are you referring to billing systems?
- Analyst
Emergency department.
- President, CEO
We've got several of our applications that can be used in the emergency department now, and I think I've talked about this on calls before.
With our customer base, a lot of times the emergency department is not that big, so you certainly don't want to have automation overkill.
But we are in the process of developing an emergency room system, and frankly, we were on that path when the high-tech was passed and the stimulus package, so shifted gears to make sure we were in good shape there.
But we've already completed a lot of that work and are working on the programming and stuff for the ED system.
- Analyst
How big of a potential customer base do you think that is?
Is that maybe a third of your customers, 50% might actually be big enough to warrant that?
- President, CEO
I would probably go -- and it'd be interesting to see David's opinion on this, but I would say half would be a good guess, at least at this point.
- Analyst
Obviously, you've had some good success on the Meaningful Use front so far with what your clients are seeing, and I'm curious, anecdotally, if you've heard of anything in the market about what difficulties others might be seeing in getting the core measures and menus set?
Any big challenges out there that your consulting teams are having to help the clients work with?
- President, CEO
Nothing in particular.
No, not at this point.
Operator
There are no further questions at this time.
I will turn the call back to you.
Please continue with your presentation or closing remarks.
- President, CEO
Thank you, Savannah, and thank you everyone for being on the call this morning.
We appreciate your interest in CPSI and hope everyone is a great weekend.
Thank you.
Operator
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.