TruBridge Inc (TBRG) 2011 Q4 法說會逐字稿

Welcome to the Computer Programs and Systems fourth quarter and year end 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, January 27, 2012.

I would now like to turn the conference over to Boyd Douglas, President and Chief Executive Officer, Computer Programs and Systems.

Please go ahead.

Thank you, Chris.

Good morning everyone and take 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 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, 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 day, 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 David Dye, our Chief Financial Officer.

David Dye and I have a few minutes of prepared comments, and then we'll be happy to take your questions.

In the fourth quarter, we installed our financial and patient accounting system in one hospital and our core clinical departmental app patients at 13 facilities.

Additionally, 13 hospitals implemented nursing point of care and 31 customers went live with CPOE.

Overall add-on sales of to existing clients made up 31% of our total revenue.

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

We anticipate 60 new installations of our core clinical departmental modules, 21 nursing point of care implementations, and 27 CPOE implementations.

In business management solutions during the fourth quarter, we executed seven new accounts receivable management contracts, three of which were for full services and four for private pay services.

There are several significant topics that I would like to spend a few minutes on this morning.

First, as those of you advancing our recent press release on the subject are aware, we recently released a new system platform.

The new platform consists of a Linux operating system, an open-source SQL compliant database, Java, and a cross-platform user interface or UI.

This environment significantly increases the tools that we can offer our customers to enhance their internal operations and allows us to implement other new complementary technologies such as rules-based customization, which is particularly important in our user interface.

Included also in our new platform is the ability to now provide access from a wide range of devices under the same UI, including iOS, Android, Windows, Mac, and Linux-based devices.

We have already migrated our physician applications to the new user interface, incorporating the rules-based customization and we will be migrating the rest of our application suite to the new UI over the upcoming releases.

The SQL compliant databases significant because it provides multiple ways for our customers to mind the mass of clinical data that is now being captured by the EMR system.

This is critical because it not only allows our customers to meet their own internal demand for this information, but is much more efficient in allowing us to meet regulatory and interoperability requirements as well.

We believe one of the primary reasons for our success over the past 30 years has been our ability to continually provide our customers with advanced technology while maintaining both reliability and cost-effectiveness.

We certainly see this new platform as the next step in the evolution of the CPSI system.

That being said, while advanced technology is no doubt important, we have always believed that what is even more important is that your system actually works and provides the necessary functionality.

That it has to be available when people need it and that the hospital has to be able to afford it, especially in our marketplace.

We believe the overwhelming success our clients have had in receiving stimulus funds for EHR adoption which I will address in a minute, is a telling testament to the soundness and success of our approach.

On the sales front, as you can gather from the number of installations we have scheduled for the first quarter, we did see the increase we expected a new system sales over the last quarter of 2011.

As we have said on numerous occasions regarding the subject, our new system sales will always have a considerable degree of cyclical nature to them and unfortunately there is very little if any predictability to those cycles.

The length of the sales cycle, hospital volumes which are also cyclical, the regulatory environment, changes in reimbursement, changes in ownership and hospital leadership all serve to affect the timing of purchasing decisions that are all beyond our control.

Regardless, we are encouraged by new system sales last quarter and feel very confident about our ability to continue to form at or above these levels for the upcoming year.

One last note with regard to sales, I wanted to provide you with an update on our progress with our new released physician documentation application.

After the successful installation of five beta sites at the end of 2011, we have since received 41 orders to date for implementation of the application at an average price of approximately $90,000 per order.

We believe this is a great start for this product and expect continued significant penetration into our user base with Stage II criteria on the horizon.

Finally, I would like to bring everyone current with regard to CPSI's and our clients' performance with regard to successfully attesting to meeting the Stage I meaningful use criteria and the resulting payments for that achievement.

As simply as I can put it, our success has been overwhelming.

We have established a clear dominance over our competition in the rural and critical access hospital marketplace.

Here are some facts from the CMS data released on November 30.

Of hospitals who have successfully attested using a complete EHR, 134 of those hospitals or 22% use the CPSI system.

This places us second overall among all vendors trailing only Epic, who had 164 hospitals or 26% share.

When compared to our competition in the rural and critical access hospital place, we have clearly established ourselves as the leading vendor by far.

Our next closest competitor had 54 hospitals that have successfully attested.

In fact, our total of 134 hospitals is more than the next three of our competitors combined.

Where critical access hospitals are concerned, the separation between CPSI and our competition is even greater.

Of the 97 critical access hospitals listed in the CMS data, 40 of those hospitals or 41% have CPSI as the complete EHR they attested with making us the leader by far for these hospitals.

Our total represents more than our next six competitors combined.

Where payments are concerned the CMS has not provided updated data since the end of 2011 Medicare fiscal year on September 30, 2011.

However, as part of our overall program in assisting our hospitals with meeting objectives, we are engaged with our client all the way through to receipt of their funds after they attest.

Based on information gathered as part of this process, it gives me great pleasure to tell you that as of January 20 of this year we have had 104 of our clients received payments totaling over $106 million.

Based on the numerous communications we have received from our clients after they received their checks, I believe that it is safe to say that the significance of these funds through to our clients cannot be measured.

Looking forward, as expected Stage II compliance for hospitals attesting in 2011 has been delayed until 2013.

We expect those hospitals who put off attestation in 2011 for fear of having to comply with Stage II in 2012 will now move forward in order to maximize the funds they can receive under the program.

We have no doubt we can continue to execute at a high level in assisting these hospitals and take full advantage of this opportunity over the next year.

I would like to finish my remarks on the subject with an observation regarding the provider side of the HR adoption equation.

While our focus has been primarily on our hospital clients and rightfully so, we have had several eligible providers successfully attest using our medical practice EMR application.

CPSI is one of only two vendors who have an internally developed, fully integrated EMR solution that has been used to successfully attest for both hospitals and eligible providers.

As more and more of our clients come to realize the benefit of having ambulatory application for their providers as a component of a complete end to end EMR solution for their health system, we see no reason that we won't enjoy the same level of success on the eligible providers side as we have on the hospital side.

At this time, I would like to turn it over to David for a few comments on the financials.

Thanks Boyd, good morning everyone.

I have just a few comments and then we'll turn the call to your questions.

DSOs as of year end were 45 days, just flat sequentially and down 8 days year over year.

Free cash flow was $9 million for the quarter, compared to $5.2 million for the fourth quarter of 2010.

For the full year 2011 free cash flow was $32.2 million, compared with $14.5 million for 2010.

CapEx was $9.84 million for the quarter and $10.85 million for the year, compared with $522,000 and $5.09 million for the prior year periods.

As we reported via 8-K, in mid-December the Company paid $9.5 million to acquire our corporate headquarters which the Company has leased since 1992.

This campus consists of 16.5 acres and 13 buildings totaling 135,500 square feet of office space.

We felt this purchase made sense, given our strong long-term outlook and the fact that the property was appraised at a significantly lower amount that it had been previously due to the recession and corresponding decline in real estate values.

We expect to realize a $0.06 per share increase in earnings per share in 2012 as a result of reduced rent expense.

Depreciation for the fourth quarter was $733,000, compared to $343,000 for the prior year period.

Depreciation expense for 2011 was $2.5 million, compared with $1.8 million for 2010.

We expect depreciation expense for 2012 to be approximately $750,000 per quarter.

Cash collections for the fourth quarter and full year 2011 were $44.3 million and $179.3 million respectively, compared with $42 million and $147.4 million for 2010.

We recognized FASB 123(R) expense of it $305,000 in the quarter.

Our employee headcount as of December 31 was 1,265, up 14 sequentially and 94 for the year.

We expect this number to increase by approximately 45 employees during the first quarter and 25 each quarter thereafter in 2012.

I'm sure most of you noticed in reading our earnings release that we have changed from our previous policy of quarterly guidance to annual guidance.

Our plan is to provide this guidance in conjunction with the fourth quarter and full year's earnings release each year.

We do not plan to update the annual guidance during the year and thus we feel those are definitive reason to do so.

Our reasons for this change are twofold.

First and most importantly, we do not run our business on a quarterly basis and therefore annual guidance better reflects our internal profits and strategies.

And second, given CPSI's conservative revenue recognition practices and the volatile environment surrounding meaningful use, timing of sales cycles and client installations on a quarterly basis are unpredictable making it more accurate and more sensible for us to predict our performance on an annual basis.

As stated in the release, in 2012, we anticipate gross revenues of $187 million to $199 million, and net income of approximately $2.59 to $2.75 per share.

We currently have 19 new client installations scheduled in 2012.

And our full-year guidance is based on approximately 32 total new customer installs during the year.

60% of these 19 new client customers have executed contracts that include payment terms allowing for monthly payments beginning at contract execution and remaining in place until meaningful use funds are received.

At that point, the hospital is contractually obligated to pay the remaining balance on the contract and CPSI will then recognize the remaining revenue.

We expect the majority of the hospitals currently scheduled for installation in the first half of 2012 to achieve meaningful use and receive funds this year.

Finally, we have increased our quarterly dividend from $0.36 to $0.46 per share per quarter or $1.84 per share per year.

Traditionally, our annual free cash flow meets or exceeds our net income and we expect that trend to continue.

Accordingly, we believe that the best use of our excess cash is to continue to reward our long-term shareholders via the dividend and we are pleased that our recent performance and strong outlook afford us the opportunity for this increase.

And with that, Chris, please open the call for questions.

(Operator Instructions)

Jamie Stockton, Morgan Keegan.

Good morning.

Thanks for taking my questions.

David, the first one just along the lines of expecting some of the hospitals that are signing SAS deals to have to buy them out in the second half, have you had any hospitals that have bought out their contracts at this point?

We have.

It hasn't been material at this point.

We expect that to change in the first half of this year and then exchange more significantly in the second half of next year -- excuse me second half of 2012, this year.

Okay.

And I guess David or Boyd whoever wants to take this one, in 2011 you saw this big first half seasonal impact, as far as a lot of add-on licenses or site expansions or whatever you want to call it.

Are you seeing indications that same dynamic is going to exist in 2012 where a lot of hospitals that are going to try to start their attestation window by July 1 are going to be expanding their user licenses in the first half of the year?

Yes we are, Jamie.

Particularly in the second quarter, but yes we are.

Okay.

And then maybe my last question, as far as a leads are concerned, you guys talked about how they were really accelerating in the fourth quarter.

Are you seeing that acceleration continue or does it feel like it has kind of leveled off?

And I will leave it at that.

Well I think we have realized some of that acceleration.

If you heard my comment that we have 19 installs already scheduled for 2012, given that we only installed 17 systems in the full year of 2011.

I would characterize it as we haven't seen that acceleration continue to accelerate, but it's remained steady.

And we also anticipating that, based on our feelers, that there are some hospitals that are out there that aren't looking yet that will begin that process sometime in 2012.

So, we feel good about where that stands overall.

Thank you.

You bet, Jamie.

Ryan Daniels, William Blair and Company.

Thanks it's Jeremy for Ryan.

I appreciate the color, Boyd and David, regarding the end market.

Just curious, a couple of points of clarification.

David, did you say 16 of your prospective clients have executed subscription-based or the least-owned model?

Was that the number you gave?

I actually said 60% -- approximately 60% of the 19 hospitals that are scheduled for implementation in 2012 have a contract that includes monthly payment terms until they achieve meaningful use funds.

Great.

What would you say -- and as it relates to that 19 and the 32 you expect in the plan as you talk to -- your sales guys talk to the field, what is the catalyst you're seeing most commonly come up for the inflexion point there -- the improvement.

Is it the factor that Boyd talked about, the Stage II delay?

Is it the just overall success that your clients are seeing -- your existing clients are seeing in terms of getting the stimulus money?

I'm just curious what you're seeing as the catalyst.

I think you hit the head right on.

It's both really.

The success that our clients are seeing, certainly we're publicizing that as much as we can amongst our existing client space and to our prospects and showing them the value that you can get from our systems.

So, that certainly is a big piece of it.

So, both of those things.

And then one more, if I could.

In terms of the guidance, David, I appreciate the thought process that went behind the change.

I know you are specifically trying to get away from this, but I'm curious.

Without giving specifics, in terms of the linearity of the system sales as 2012 rolls out, I'm curious if you expect anything unusual, in terms of your thinking about how we should think about modeling that for the year?

And then, curious also if there is any -- what your expected contribution is from that lease conversion in the 2012 guidance?

Thanks.

I think the only additional color I can give you I've already touched on, and that's that we expect a similar trend in the second quarter to what we experienced in 2011 for the same reason that we experienced in 2011.

With regard to the last half of the year and the conversions from the monthly payments to paying out the contracts, I've certainly applied a portion of that to our guidance, and did it as accurately as we can, given the information that we have in our typical relatively conservative fashion.

Okay.

Thanks, guys.

Appreciate it and congratulations on the uptick there in the business.

Thanks, Jeremy.

George Hill, Citigroup.

Hi, Boyd and David, good morning.

I guess maybe just on the annual guidance, it's good to see that management feels comfortable with more visibility in the business.

Can you talk to us about what led to the change in the guidance perspective?

And I don't know if you want to provide any comments around first quarter expectations?

I don't want to provide any guidance around first quarter expectations, because that's what we're trying to get away from.

I think what led us to actually making this change, to be completely honest, this is something we've talked about for years.

I don't exactly know what the catalyst was that led us to actually make a change this time, other than the fact that -- I suppose would the increased -- we've always volatile, I think you know that.

With the increased volatility because of meaningful use and then the increased volatility now because of revenue recognition with the way we're doing these contracts because of meaningful use, now just seemed like a better time than ever to make the change.

And as I alluded to, we run our business that way.

That's how we discuss things internally with our board, and it just makes sense.

Okay, that color, I appreciate that.

And with respect to the new technology that you guys have launched, it was my understanding that a lot of the clients out in the field were already running a Linux SQL product.

I guess can you talk about how many clients have been migrated to the Version 18 product?

What's the financial impact of trying to move clients to Version 18, and how do you feel like that product positions you competitively?

We've got -- approximately 75% of our clients are now on Version 18.

As far as the Linux, certainly we've been rolling that out for years, but as of the end of the year all of our clients are now over on the Linux platform, and then with Version 18 finish the rollout of the SQL stuff, and like I said, 75% of our clients are now on that.

Okay.

All right, thank you.

Thanks, George.

Sebastian Paquette, Goldman Sachs.

Good morning.

Thanks for taking the questions.

Just first off on your implementation capacity, how has that been ramping?

And if you just wanted to give us some metrics -- I know you give us financial, accounting, core clinical, CPOE, nursing point-of-care, but is there any chance you can run down those criteria and what your monthly implementation or quarterly implementation capacity is for those metrics?

Thanks.

We haven't changed significantly our implementation capacity in those areas.

In the financial and in patient accounting, I would say our maximum capacity is probably around six per month.

The clinical capacities are around seven -- between seven or eight per month.

Point-of-care is eight per month.

CPOE is around 16 per month.

Okay.

So then if I think about -- in the second quarter of 2011 when you were turning away some CPOE installs, about 43 CPOE, it sounds like maybe implementation did kick up a little bit since then.

Yes.

Okay, great.

Then in terms of your dividend, you increased it to a $1.84 per year, but I was wondering if going forward, is it still your intent to pass through net income fully to dividends?

And then what does this portend for future dividend increases?

The honest answer to that question is we don't know what we'll do in the future.

We certainly aren't passing through anywhere near 100% -- or we don't believe we are -- 100% of net income to the dividend.

Our previous policy, which is borderline irrelevant at this point, from 2002 through 2006 was to dividend out the previous year's cash flow.

And because the reimbursement cycles and then us ramping up to get ready for meaningful use, we haven't changed that dividend since 2006.

I think it's accurate to say that we plan to dividend a percentage of our cash flow conservatively that allows us to continue to fund our growth.

As that potential increases in future years, we would look to increase the dividend correspondingly.

Great.

And then just last question here.

Just so I'm clear, the 60% of your scheduled client installations that are designed to the monthly fee.

I'm wondering is this going to in effect actually stabilize or make -- basically smooth out the first half to the second half, as stimulus funds are received and then you recognize more revenues in the second half?

I'm wondering is it a stabilizer effect or should it not have that effect?

I think to some degree of certainly will be, not that we necessarily care.

We just want to get the business, put the stuff in, and do a good job getting the meaningful use, but I think logically it will stabilize it to some degree.

So, just to be clear, you don't expect the same kind of volatility first half to second half as you did see in 2011.

I think given -- I don't want to pin myself down here.

I think given the -- what goes on in the second quarter, what went on last year and what we're seeing this year, I think there will certainly be some amount, but I would estimate at this point that it won't be to the same degree, yes.

Great, thanks guys.

Thank you, Sebastian.

Richard Close, Avondale Partners.

Thank you for the questions.

Really quick, on the 19 new clients scheduled to install so far in 2012, that being 60% under the subscription-based, the 17 -- how that compares to the 17 for last year, what was the percentage last year that did the monthly payments?

Good question.

I don't have it, but it was less than 50%.

Okay.

And then when we think about the monthly payment and then the line item on the income statement, where they exactly hit, can you just guide us to where we would -- is that in the system sales or just exactly where on the P&L?

It goes under system sales.

Okay.

And then when we think about the schedule for, I guess it was eight patient, or financial and patient accounting systems in the first quarter, are all of those new clients, is that eight included in the 19?

Yes.

Those are new clients, and that is counted in the 19.

Okay.

And then, with respect to be 32 clients that your guidance contemplates for the entire year, so the delta between the 19 and the 32, that's what you still have to go out and sign?

I just want to be clear on that.

That's correct.

Okay.

Great, thank you.

Thanks, Richard.

Brad Hoover, Sidoti and Company.

Hi, good morning.

Thanks for taking my questions.

Just with respect to the cost side, I know typically in the fourth quarter you typically get the greatest operating leverage, but it seemed like some of the operating expenses were a bit lower than even normally.

Was there anything that didn't occur that normally would, as far sales and marketing or G&A expense?

Nothing in particular didn't occur.

We did -- our self insurance came in lower than we expected.

I think that would be the most significant item.

Okay.

And the 41, the stock quarters, are those fairly spread out through the year, or do you expect those, the installs, to be more heavily-weighted to the first half of 2012?

They're more weighted to the second half.

Second half.

Okay, thanks Boyd.

And just lastly, what tax rate does your guidance assume?

About 38%, Brad.

Okay, thanks guys.

Thank you.

Bret Jones, Oppenheimer.

Thank you.

I just wanted to go back to the trend and how you would expect revenue to be recognized throughout 2012.

You were talking about how SAS will smooth things out a little bit.

I almost was a was wondering if it doesn't reverse the trend we saw in 2011 where, because you're delaying the revenue recognition as you receive the payments over time, and then you're booking the bulk of it in the back half, doesn't that reverse with the trend where first half should be weaker and then second half would be stronger?

To some degree it will, but keep in mind only 60% of those 19 are under that, so that has an effect on it, as well.

And then I guess there would also be the catch up on the ones that were deferred from last year -- would probably be recognized in the first half of 2012 maybe?

There will be some of that, but not to the degree that -- we have definitely ramped up the new strategy for new system customers.

The reason for this is that -- the primary reason the vast number of these hospitals that are signing contracts now, to sign a contract with CPSI or one of our main competitors is essentially to get to meaningful use.

And as we've alluded to before, a lot of the hospitals that have yet to contract with a company like a CPSI haven't done so for financial reasons.

The great position that we're in competitively is that we've done a fantastic job in our opinion of proving that we are the vendor that can get you to meaningful use successfully and quickly.

So that's the catalyst for these kind of contracts.

So they have certainly -- the number of them or the percentage that are choosing that methodology has gone up significantly even over the last quarter, and I wouldn't be surprised if the percentage that continue to sign contracts under that payment methodology will actually continue to increase.

I was wondering if you could talk about -- when you talked about the percentage are deferring are using the leased methodology, are most of those critical access hospitals?

Certainly more than half, yes.

Okay.

Just wanted to also go back to the cost question that you talked about just a second ago.

You talked about self insurance being a little bit lower, but I was wondering if you could quantify that, and just kind of looking at it, there was a pretty significant sequential decline in your operating expenses.

It really wasn't anything more than that, or how did you do such a good job in controlling the costs to offset the revenue miss?

The primary catalyst was the insurance.

I don't have the exact amount, but it was about $0.5 million less than we expected.

Okay, but nothing unusual outside of that, no layoffs or anything like that?

Gracious no.

Just wanted to make sure.

And then just lastly, in terms of the systems that you installed in the quarters, the financial clinical and nurse point-of-care were all down by one.

Was that one hospital that delayed and slipped into the first quarter?

Yes it was.

Thank you.

Thank you.

Sean Wieland, Piper Jaffray.

Good morning, thanks.

I just want to go back and revisit a couple of things that have already been talked about.

Clarification on Version 18, is that the SQL version?

Yes, that's the fully SQL version.

That's correct, yes.

So 75% of your hospitals -- customers have already gone through the conversion.

So there's no conversion risk out there anymore?

That is correct.

Okay, great.

And I just want to take another -- get a better understanding of how to model this.

If I'm doing the math right, is it right to think about 18 hospitals -- 18 of your customers are on the subscription contract today?

Does that sound about right?

Well if you go back -- it's going to be more than that if you go back to the traditional ASP.

We've still got 20 or so customers that we signed five, six, seven years ago under the ASB model that are still ASB customers.

So I would think it would be more than that.

So help me understand how to model the impact in the second half of 2012 of the conversion from ASB customers to license customers because I'm not really quite sure how to do that yet.

Well I can give you some perhaps general guidance, but of course we don't have all the answers either and we work here.

Take how many hospitals you think are going to install in the first of the year and approximately 60% are -- have contracts under the payment terms that we have described on this call and previously, nd then, apply some percentage that you think will achieve -- receive meaningful use money in the second half of the year given our experience and track record we think certainly more than half of them will and that's a conservative approach and that's how we're approaching it.

And just to add a little bit of color to that, certainly the majority of the customers under that will be installing in 2012, but we certainly did some of that type of arrangements for installs during 2011, but the significant number of them will be 2012 installations.

So, in your model what is the revenue impact of the conversion from SAS to license conversions in the second half of the year?

I'm not going to give that number out.

Is it bigger than a bread box?

I don't know what a bread box is.

Thank you very much.

You bet.

Thank you, Sean.

David Larsen, Leerink Swann.

Hi, with the physician documentation module, the 41 orders that you have now, that could ramp up through the course of the year for 12 installs.

Is that correct?

Absolutely.

Absolutely, okay.

And remind me the number of hospitals that will need to buy that in order to meet the Stage Two requirements?

Every hospital, you know we've got around 650 clients -- ultimately -- and if you assume 90% of our clients are eligible for stimulus funds, so 90% of 650, 600 or so.

Great.

In terms of buying the real estate for your headquarters, could you say what the EPS impact benefit would be in 2012?

I'm sorry if I missed that.

Approximately $0.06 per share.

Okay, that's great.

Those are all my questions.

Thanks.

David Windley, Jefferies.

Hi, good morning.

Thanks for taking the questions.

As I think about your target market segmentation, if I understand correctly you're today mostly focused at 100 and lower beds, but talk about pushing up into the 100 to 300 beds?

I was hoping you could broadly speak to what development steps or projects you need to embark upon and put in place to be able to effectively compete in that larger bed market?

And if you could put some bookends around the cost to do that?

Certainly our system is fully scalable and we've got approximately 10% of our clients that are over 100 beds.

We're comfortable doing that.

It just has to be the right -- nothing has really changed there.

It has to be the right set of circumstances for us to be a good fit.

If the hospital is of the mindset that they want the best-of-breed approach, and then clearly we are not the solution for them, and we're not going to convince them otherwise.

But if the hospital is looking for a fully integrated system that's very efficient to run, very decentralized and easy to use, then we're a good fit and we'll compete with MEDITECH for that size hospital.

So, we don't have anything significant underway any more than we ever have to penetrate into that size hospital.

Clearly our bread-and-butter in the majority of our business is the under 100-bed hospital place, and we feel like there's plenty more hospitals that are under 100 beds that need a fully integrated system in order to reach meaningful use.

So, we're certainly concentrating our efforts on under 100 beds.

So you may have answered the follow on there, but if you were to stack the under 100-bed push up against the push up into the north of 100 beds, is the under 100 beds still the highest priority?

Absolutely.

Okay.

In terms of income statement leverage earnings are growing a little faster than topline, is the facility cost that's been touched on a couple of times, is that the primary driver and conversely are there other margin lines in the income statement that are moving the other direction?

No, that is not the primary driver.

We just purchased the facility this last quarter, so that had very little impact this past year.

Sorry excuse me, I was talking about in your guidance.

We certainly factored in the $0.06 per share that we know about.

I think too, we're seeing some efficiencies based on the fact that we ramped up so aggressively in 2009 to get ready for this.

We're reaping some of the benefits of all the cost that we absorbed at that time.

And just to kind of say it another way, just utilization.

The people that we hired in 2009 largely are still here, but they've got two full years under their belt and they're experienced, and a lot of times it doesn't take as many bodies if you've got some experienced bodies doing the training.

For some of these clinical applications it doesn't necessarily take as many bodies if you've got people that are -- and we've always said it takes around two years -- or I've always said, I feel like it takes like two years to really have a great installation and support employee, and the vast majority of our employees are at that level at this point.

Okay.

And on that employee count, I think, to an earlier question, it sounded like you really weren't adding there are despite the increased sales coming into the new year.

Just wanted you to confirm that for me if you would?

I guided to, let's see, 110 -- no, I think it's 120 new employees in 2012, 45 in the first quarter and 25 each additional quarter thereafter.

That's a sizable amount of new implementation folks in our view.

Okay, I'm sorry I missed that.

Thank you for clarifying.

You bed.

Thank you, David.

Thanks a lot.

Frank Sparacino, First Analysis.

Thanks, guys.

Just one quick question.

I wanted to go back to the comments around him ambulatory market.

I'm just curious, just trying to get a sense of what the incremental opportunities there if it's significant?

I don't know to date if the hospitals have been buying the ambulatory product in conjunction, or if it's something they're coming back later to -- just any thoughts around that?

It's kind of a mixture.

Obviously, every deal stands on its own.

Certainly it benefits us greatly a lot of times when we're talking to a hospital and they either own or manage these physicians and want to put it all in at once.

We certainly, like I mentioned, one of the very few vendors that have developed all that internally ourselves, and it's fully integrated and there's one EMR per se for each patient.

So, that's a huge advantage for us.

But certainly with the customer base of 650 or so hospitals, there's lots and lots of phsyicians' offices out there, so we see that as an opportunity.

The trend certainly is to own or manage these physicians' clinics, and when that happens that does give us an opportunity to go in and make a sale on the physician side.

Do you have a sense, Boyd, is that 500 docs, is it 1,000 doc, or you just maybe don't have a good sense of that?

Don't have a real good sense of that at all.

Okay.

David --

We've got around, I think the number -- David, correct me if I'm wrong -- around 700 or so clinics now that run our financial, the practice management system that runs the billing piece.

And if I had to guess, 100 or so probably run the EMR piece.

So, certainly we think we've got quite an opportunity there just with the ones that are running the billing piece.

Good, thank you.

And David, I think the annual guidance is a good thing.

Thanks, guys.

Thanks, Frank.

Sandy Draper, Raymond James.

Thanks, good morning.

Most of my questions have been covered, but maybe just one thing, Boyd, around the new version.

One of the comments, it's been out there a long time for your competitors and more recently with some newer entrants who talk a lot about newer technology and they've got a leg up on you guys because of newer technology, and I know you guys have really focused more on what you're actually delivering to the customer, as opposed to just whiz bang technology.

But I'm wondering, have you, one, seen an increase of people trying to sell against you by saying we've got a newer better technology, CPSI is on old legacy technology?

Is that more of a trend in the past 12 to 18 months?

And then two, now that you're getting the install base on this newer version, do you think you've got a better answer.

Are customers responding more positively to the new product because it addresses that issue of technology?

Thanks.

Sandy, we certainly over the last 12 to 18 months have seen in particular a couple newer entrants to the market who, one of their main sales pushes was to, as you alluded to, and not just going to CPSI but a couple of other long-term players in the marketplace, was just to focus on technology.

And that's something that we've seen happen a lot historically in our 30 years of doing this.

And we're now seeing a trend that has also happened in those previous cases, where you can talk the talk, but then you got to back it up and actually install the stuff and it has to work well.

And I think that you combine that with our successful meaningful use and we're getting a bit of a push in the new sales marketplace because of the fact that a few things are coming together for us at one time.

Some struggles with some others that have been talking the talk, our success with meaningful use, and then the new platform that Boyd talked about.

Great.

That's really helpful commentary.

Appreciate it.

Thank you, Sandy.

Gene Mannheimer, Auriga.

Thanks, and good morning.

Just a couple of follow-ons.

With respect to your new version, the Linux that is, is there a revenue opportunity here on that upgrade or is included in they customers' support agreement.

And what about maybe some interface work or some customization related to that?

Thanks.

I appreciate that question, because it gives me a chance to really highlight what we think is one of the biggest benefits of purchasing CPSI and being CPSI customer is our perpetual license.

So, there is no incremental cost to move to Version 18 to get all the benefits of SQL.

Certainly there was a cost associated with actual licensing of the Linux operating system, but as far as the application fees and license fees and things like that, there is no cost to our current customers at all for that and that's a huge competitive advantage for us, in that we don't have multiple versions of the system.

And, Gene, to expand on now to a little bit, we do see an opportunity that at this point we won't quantify, but I think it will be quantifiable in the future, because we're seeing more sales of and a lot more interest in our cloud-based computing which includes running 100% in the cloud, or having a virtual server in the cloud, or even to a lesser degree just doing the backup of your data in the cloud.

And the interest of that has picked up significantly over the last three to six months, and we expect that to continue and at some point in the future that will be something that we'll probably quantify on a quarterly basis.

Great, that's excellent.

Thanks.

And then just one more.

The percent of sales from new customers certainly moving in the right direction, 31%.

Can you remind us how that compares with the last several quarters?

Thanks.

Just to clarify, that was -- I believe you're talking about the add-on sales percentage, so 30% of all revenue was sold through add-on sales.

And our definition of add-on sales are sales to someone that's been a customer at least a year.

And as far as trending, I've got the number right here.

As far as the percent, 27% at the end of 2010 and it was 28% in 2009.

So, it really hasn't changed significantly.

Keeping in mind one thing you may -- a lot of people -- I kind of had to look it as well, you may think given, especially over the last quarter when we only did one new financial install, that you would think that number would be higher.

I think there's two factors there.

One, increase in support and maintenance, because we've been selling all this dilutes that a little bit.

And secondly, a lot of the people that are installing the clinical applications in the point-of-care things are customers.

Again I think it's key to note that that's sales to customers that have been a customer over a year.

A lot of times a customer may put in Phase I and Phase II and maybe even Phase III up front through nursing point-of-care, and then they will come back six months later and do CPOE install.

And that, under our definition, is not an add-on sale because it occurred within the first calendar year of the actual initial install.

Interesting.

Okay, thank you.

Jamie Stockton, Morgan Keegan.

Thanks for taking the follow-ups.

Just a few quick ones.

Boyd, do you know roughly how many hospitals are under the new subscription plan where there's a clause in the contract where they have to buy it out, how many you've got that are already implemented today or maybe as of the December quarter?

You know if I had to guess I would say 15 or so.

Okay.

And then as we think about the second half of 2012, obviously there are a lot of hospitals that are going to kind of see the door shutting on the government program around the middle of 2013, but if they implement in the second half of 2012 they can't really get paid in 2012.

How are the conversations going with hospitals around trying to convince them that they don't all need to wait until the first half of 2013 or for those that are trying to procrastinate as long as they can?

How are those conversations going around getting --?

Go ahead.

I didn't mean to cut you off.

I think it's probably because we're now aware of the trend and we were not as much so at this point last year, that it seems to us that it's going better.

However, I think we're all concerned that too many will wait until the first half or even in particular the second quarter of 2013, so that they can be eligible for 100% of the money that's available to them and therefore they have to attest by October 1, 2013.

So it's a vague answer to your question, because that's all the information that we have, but we're certainly focused on it, and the response that we're getting from the prospects in the marketplace is -- I don't think it's going to be as bad as you might think given what happened in 2012, but it's still a concern as far as the timing of these installations.

Okay.

And then maybe two more follow-ups.

One, as far as you guys have had been killing it as far as the number of hospitals that have successfully attested using your system.

Is there anything unique that you feel like you're doing?

Some vendors seem like they're providing a lot more service around the actual attestation than others are.

Is there anything you feel like is above and beyond that you guys are doing that really differentiates you?

Yes, off the top of my head, three things.

One, I think our system's better.

It works better, especially the high-end clinical stuff that you need to be able to attest, and specifically that 30% of your physicians orders have to be entered through a CPOE system, and I think our CPOE system is competitively better than all of the folks we go up against there.

I think number two, I think we have a better, closer relationship with our customers.

We have more support reps per hospital than anybody else in the space.

We send more people to do these implementations than anybody else in the space, and I think therefore we have a better relationship.

And I think number three, I think we have more people dedicated to helping them attest than any other vendor out there.

So, I think in summary, that's how I feel about it.

Just to add onto that, I think -- just kind of give a little color to David's comments about -- we're confident that our CPOE is -- we frankly think it's the best out there, certainly amongst the best.

And one reason for that, I think it's important to note, we've been installing CPOE now for almost 10 years.

So that product is a very mature product, and it's been out a long time.

It had a lot of tweaks done to it, lots of improvements done to it.

It certainly doesn't even really resemble the first one we came out with nine years ago.

And that's just something you learn, frankly, through experience.

And I don't think -- we certainly don't have the ability to just write something right off the bat and have it work perfectly and it's what everybody wants, and that's something that we really try to emphasize when we're out selling is, that experience and that nine years of working with physicians and getting CPOE.

The work flow I think is very important.

A lot of these -- back to some of the earlier comments David made, it's pretty easy to write a pretty slick system and demo it and all that, but when you actually have to install it and physicians have to actually use it, that's when the rubber meets the road.

And certainly I think if there's one takeaway from this call, I hope that what we've made clear is, the meaningful use numbers don't lie.

And certainly, I think that we've demonstrated and that's obviously an independent third party Federal Government with these numbers, that's a great judge of what system is easier to use and certainly gets the best results.

I'll leave it at that.

Thanks, guys.

Richard Close, Avondale Partners.

Just wanted to hit back on the 19 new clients already signed and then 32 in the guidance.

With respect to that remaining clients you need to sign, would you expect a similar percentage in terms of the subscription rate at around 60%?

We think 60% or perhaps even a little bit higher.

Okay.

And just to be clear, with respect to the accounting for the subscription product, does that include license, the implementation, services, the entire cost of the whole system, and the implementation?

Yes it does.

Okay.

Great, thank you.

And Chris, we'd like to take one more question please.

Ryan Daniels.

William Blair and Company.

Thanks for letting me circle back one more time guys.

Boyd and David, I'm curious, the $106 million that you've helped your clients achieve in meaningful use, about 100 hospitals or so, $1 million per site.

A lot of that in the first year of the stimulus money will probably go to defray the actual investment they make in your system, but I'm curious if when you talk your customers, they're theoretically going to get quite a bit more money in the next couple of years from this.

I'm curious if you can contextualize for us what this means for those organizations in terms of their ability to impact their communities, maybe expand the hospital services and so on and so forth?

Curious if you've had those discussions now that they're actually starting to receive money?

Yes, we certainly have and you hit the nail on the head.

Certainly expansions are -- and again, I don't think there's any secret, most of those hospitals are really struggling financially anyway, but if anything it might just give them a little cushion that they don't normally have.

I think with all the talks of the Federal Government and talks with Medicare reimbursement cuts anyway, I think it's probably prudent of them to stock some of that away and save it for a rainy day, as well.

So, I think certainly there are some hospitals out there that have some projects that they haven't been able to afford.

This will give them the ability to do so.

But there again, they are looking at Medicare reimbursement cuts in the future and certainly this will help them better weather that, as well.

And just to add a touch to that.

I've had a couple conversations with some hospital CFOs that have specifically mentioned potentially using some of the funds to help them consolidate and buy more of the local physician practices, which is a trend we've already seen.

Great.

And then with relating to the physician documentation module, you mentioned expectation of 40 sites to adopt that.

I'm curious, as you can maybe compare it to the uptake of your CPOE module historically speaking.

Should we expect a similar ramp in terms of the adoption or maybe give us some thoughts there, how you think it might play out in the future years?

That 40 number was the number that have been sold that are set to install at this point in 2012.

I do think we'll see a similar slowly aggressive ramp-up, and I think, obviously, the primary catalyst is going to be those that achieve meaningful use in 2011 are going to have it by 2013 and those that achieved it in 2012 are going to have to have it by 2014.

So, I think that's going to be the primary catalyst, just as CPOE was the last thing that went in for a lot of people prior to Phase I.

Great, thanks guys.

Appreciate you letting me sneak in.

You bet.

Thank you.

We want to thank everyone for their time this morning on the call.

That you for your interest in CPSI.

Have a great weekend.

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

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