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Operator
Please stand by for realtime transcript. The Computer Programs and Systems conference call will begin momentarily. Ladies and gentlemen, thank you for standing by. Welcome to the Computer Programs and Systems first quarter 2012 conference earnings call. During the presentation, all participants will be in the listen-only mode.
(Operator Instructions.)
I would now like to turn the conference over to Mr. Boyd Douglas, President and Chief Executive Officer with Computer Programs and Systems. Please go ahead, sir.
Boyd Douglas - President, CEO
Thank you, Daisy. Good morning, 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 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 risk, uncertainties, and other factors,including those described in our public releases and reports filed with the Securities and Exchange Commission and including, but not limited to, our most recent annual report on Form 10K. 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 in David Dye, our Chief Financial Officer. David 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 nine hospitals and our core clinical departmental applications at 15 facilities. Additionally, 21 hospitals implemented nursing point-of-care, 27 customers went live with CPOE, and 4 facilities implemented physician documentation. Add-on sales to existing clients were $9.5 million or 21.4% of total revenue for the quarter.
At this time, we expect to install our financial and patient accounting system in 11 facilities in the second quarter. We anticipate 16 new installations of our core clinical departmental modules, 21 nursing point-of-care implementations, installation of 24 CPOE sites, and 14 physician documentation installations. In business management solutions during the first quarter, we executed 12 new accounts receivable management contracts, 6 of which were for full services and 6 for private pay services. We could not be more pleased with our performance in all segments of our business during the first quarter. The execution of our sales, software, IT services and business service teams continues to be outstanding. Their performance has enabled us to not only take advantage of opportunities within our existing system and service areas but expand our client base and service offerings as well.
I would like to take a moment to recognize the efforts of our product development services group. They deserve a tremendous amount of credit for the work they have done in a number of areas crucial to our success, from meeting objectives for meaningful use to new product development such as physician documentation to the development of the new technology platform and user interface for our system. There is no doubt that the result of these efforts gives us a distinct advantage over our competition in the marketplace, as evidenced by the 20 new client installations that we are expecting through the first half of the year, which already exceeds our new client installations for all of 2011.
In addition to extending our competitive advantage and competing for new clients, the new platform gives our customers additional tools to further expand the utilization of the CPSI system. For example, the SQL-compliant database structure gives our customers the ability to use multiple tools, both CPSI and off-the-shelf to extract, analyze, and report the massive clinical information being captured by the EMR system which will become even more crucial in the next few years when we progress to the latter stages of meaningful use.
Finally, I would like to bring everyone current with our regard to clients performance with regard to successful attesting to meeting the Stage One meaningful use criteria utilizing the CPSI EMR system and the resulting payments for that achievement. Our dominance over our competition continues in this area, as we now have 150 clients who have received stimulus funds for a total amount of $147 million.
To reiterate from our last call, the dominance indicated by these numbersshould leave no doubt as to CPSI's position as the leading supplier of EMR systems to rural and community hospitals. At this time, I would like to turn the call over to David for a few comments on the financials.
David Dye - CFO
Thanks, Boyd. Good morning, everyone.
I'll quickly run through the financial metrics, add a few comments, and then we'll take your questions. DSOs as of March 31 were 45 days, flat sequentially, and down 6 days year over year. Free cash flow was $8 million for at quarter compared with $14 million for the first quarter 2011. Cap Ex was $550,000 for a quarter compared with $300,000 for the prior year period. Depreciation expense for the first quarter was $819,000 compared to the $609,000 for the first quarter last year. Cash collections were $43.9 million for the quarter compared with $45 million a year ago. We recognized FASBE 123R expense of $305,000. Our employee head count as of March 31 was 1,330. Up 65 sequentially, and 132 year over year.
Based on the backlog growth the last 6 months, and continued positive future outlook, we're hiring at a slightly greater pace than we earlier projected. At this time, we expect to add approximately 45 employees in the second quarter, and 25 in the third and fourth quarters. As mentioned in the press release, during the first quarter, we installed systems under contracts providing for an aggragate consideration of $5 million for which a substantial of the majority of the consideration will be received and recognize in subsequent periods upon hospitals successfully achieving meaningful use designation.
Based on the successful history of our hospital customers reaching meaningful use, we expect to recognize revenue from these installations approximately 6 to 12 months from now. At this time, we are shceduled to install 26 new client hospitals in 2012. As Boyd mentioned in his comments, we have 11 implementations scheduled for the second quarter. Of those 11, 6 are contracted under similar meaningful use installment base payment plans.
In the future, we plan to report quarterly both the dollar value of system sales implemented each quarter that will be recognized in future periods as meaningful use is achieved, and additionally, any amounts recognized in the most recent quarter as a result of meaningful use designation from implementations that occurred in prior periods.
Before we turn the call over to your questions, I'm thrilled to announce that earlier this month, CPSI entered into a long-term lease for 45,000 square feet of office space in Fairhope, Alabama. Fairhope is located approximately 35 miles across Mobile Bay from our corporate headquarters in Mobile. We anticipate approximately $2 million in Cap Ex to build out the location to suit our needs, and we plan to occupy the space beginning with 70 to 100 employees by the end of 2012. The location will be utilized primarily by our software services division, and over the next several years, will be home to 200 to 250 employees.
Daisy, please open the call for questions.
Operator
Thank you. (Operator Instructions.)One moment please.
Our first question comes from the line of George Hill from Citigroup. Please proceed with your question.
George Hill - Analyst
Good morning, Boyd and David, I hope you guys are well.
Boyd Douglas - President, CEO
Hi George. Good morning.
George Hill - Analyst
Quick question. From a macro perspective, itseems like we're seeing real accelerating strength in the demand for new core installs coming off the back half of 2011. Given that it seems like nothing has changed in the meaningful use landscape, can you talk about what is driving, in your opinion, the accelerated demand as we look at the new core installs and how sustainable do you feel like that is?
Boyd Douglas - President, CEO
I think what's driving it is, certainly, we're getting closer and closer to the end of Stage One of meaningful use -- being able to receive all your funds. As we've said many times before, in general, our market seems to be procrastinators. We certainly had our early adopters early on, and I guess in the middle you could almost label it a lull, and now all of a sudden it's all the rest of the hospitals that are waking up and realizing that this meaningful use thing is for real, and they need to go out and install systems so they can be eligible for receive stimulus funds.
George Hill - Analyst
Do you feel the MU tide payment structure is faciilitating the sales process?Is it still facilitating the sales process with respect to getting new people to sign up, or is that just something that's done for the convenience given historical financial position of your customer base?
David Dye - CFO
Well, I think it's the primary driver for everyone, especially in the under 100 bedspace. I would say the majority under 300 which, as you know, is our marketplace. I think meaningful use and the potential to receive those funds is the number one primary driver for the reason that anyone is looking for a system right now, period.
George Hill - Analyst
Okay. I'm sorry, I don't know if you have you wanted to add something there, Boyd.
Boyd Douglas - President, CEO
No, that's it.
George Hill - Analyst
A housekeeping item. Can you give us the ImageLink adds for the quarter?
Boyd Douglas - President, CEO
We've got it right here. Hold on. We don't have it.
David Dye - CFO
Actually, we do. It's three, George. We did three.
George Hill - Analyst
Okay. I'll sneak in with one more housekeeping question. Can you give us kind of what we should use as a pricing assumption for the physician documentation piece?
David Dye - CFO
$90,000.
George Hill - Analyst
Perfect. Thanks a lot for the call, guys.
David Dye - CFO
Thanks, George.
Operator
Thank you. Our next question comes from Mohan Naidu with Piper Jaffrey. Please proceed with your question.
Mohan Naidu - Analyst
Congratulations, Boyd and Dave, for getting all of your customers for meaningful use so fast. Can you comment on how many of these 150-160 customers are in the fast right now, which is the license model?
David Dye - CFO
We do not have that number exactly. Anecdotally, I can tell you that the vast majority are on the license model, but I'm going to guess 75% to 80% are on the license model, but I don't have that number exactly.
Mohan Naidu - Analyst
Okay. And in the quarter you do not give us (inaudible) revenue, material number for the quarter, did you?
David Dye - CFO
We did not, but that number was proximately $450,000 for the quarter.
Mohan Naidu - Analyst
Okay. On additional hiring that you're doing, is there a specific focus area that you guys are hiring on?
David Dye - CFO
Yeah, the vast majority is software, implementation, and support personnel. That's because of meaningful use and everything that we're doing there, that's the fastest growing division of our company right now.
Mohan Naidu - Analyst
Okay. And the last question, if I can take it here. Any change in the competition you're seeing there? We keep hearing that the larger players are trying to get in the smaller segment, reselling to bigger hospitals in the area, and getting into the smaller hospital segments. Any comments on the competition?
Boyd Douglas - President, CEO
No, there's really been no change at all. The main competition -- the same ones they've always been. Healthline, HMS, and MEDITECH, and us. Certainly the big four in the small, rural community hospital marketplace.
Mohan Naidu - Analyst
Thanks a lot for taking questions.
Boyd Douglas - President, CEO
Certainly.
Operator
Thank you. Our next question comes from the line of David Larsen with Leerink Swann. Please proceed with your question.
David Larsen - Analyst
Hey, guys. As far as annual guidance for '12, EPS $2.59 to $2.75; revenue $187,000 to $199,000. Any change there or not?
David Dye - CFO
As we said on the last call, Dave, we're not going to sort of play the game or reaffirming or adjusting the guidance on a quarterly basis. We will, of course, as we're obligated to, update it if we feel like there's any material change in either direction.
David Larsen - Analyst
Okay. And then as far as the $5 million bucks in revenue, were there costs incurred associated with that $5 million bucks? If you install these systems, were their cost of goods incurred for those systems this quarter?
David Dye - CFO
Yeah, absolutely. And we booked all of the travel cost, all the commissions associated with that. The only thing that we didn't was -- we capitalized on some of the hardware associated with it, but in every case that's less than 10% of the dollar value.
David Larsen - Analyst
Okay. Wow. So all of the travel, you know, the SG&A and the actual cost of the product itself, those were incurred in the quarter, you just haven't recognized the $5 million in revenue? Right?
David Dye - CFO
That's correct, Dave.
David Larsen - Analyst
So you can't really take like -- if I wanted to say normalized EPS, it's not really fair to take that $5 million and put a -- whatever your EBIT margin is, 22.5%tax it and have that for EPS because you incured a lot of cost in that so that would have to be accounted for. Okay.
Sandy Draper - Analyst
We incurred the vast majority of the cost, yes.
David Dye - CFO
Okay. I will stop asking my question. Great. Thanks. I'm all set. Thank you.
David Larsen - Analyst
Thanks, Dave.
Operator
Thank you, our next question from the line of Sandy Draper with Raymond James. Please proceed with your question.
Sandy Draper - Analyst
Thanks, my question was just asked so I'll just say congratulations on seeing the business pick up. I'm looking forward to watching things progress through the year, but I'm all set, guys.
David Dye - CFO
Thanks, Sandy.
Operator
(Operator Instructions). Our next question comes from the line of Sebastian Paquette with Goldman Sachs. Please proceed with your question.
Sebastian Paquette - Analyst
Good morning. I apologize if I missed this. But in terms of bookings, could you walk us through the percentage of systems bookings that are based on the subscription agreements?
David Dye - CFO
We don't provide bookings or calculate bookings. That's something you guys have always figured out a way to back into. However, of our new system sales for 2012, the number of implementations that are utilizing the contract methodology where they pay us a nominal monthly fee until they achieve meaningful use, and we're calling those meaningful use installment plans from a terminology standpoint.
It's running somewhere between 50% to 60% of the new implementations. And I did say on the call that of the 11 implementations that were new system implementations that we're doing in the second quarter, six of those are under meaningful use installation payment plans.
Sebastian Paquette - Analyst
Gotcha. And then would you then just remind us in terms of the gross margins on the payments that are coming through from the prescription plans as well as growth margins and overall EBITDA margins?
David Dye - CFO
Yeah, I don't have those numbers, but as we're paid; and therefore, recognize the revenue on these meaningful use implementation plans, other than our hardware costs that we capitalize, everything else, all the other expenses we book is incurred. For example, this $5 million that has been pushed into future periods from the first quarter, when that revenue is recognized, it will -- most of it -- 90% will fall directly to the bottom line.
Sebastian Paquette - Analyst
Gotcha. But the payments are still roughly $25,000 a month still?
Boyd Douglas - President, CEO
I think those kind of vary just from deal to deal. Everyone's different. I don't -- I don't know that I have an average and wouldn't want to pick an average.
David Dye - CFO
It's less than that.
Boyd Douglas - President, CEO
Probably a little less than that.
Sebastian Paquette - Analyst
Okay. Okay. And then implementation capacity. Do you have an idea of kind of in terms of the percentage growth, I mean, do you think you're probably 10% to 15% higher in terms of implementation capacity this time than where you were last year?
David Dye - CFO
I would say we're definitely 10% to 15% higher in terms of capacity than were this time -- especially in the high-end clinical stuff, nursing point-of-care, CPOE, and physician documentation.
Sebastian Paquette - Analyst
Would it be north of that or pretty much in that ballpark?
David Dye - CFO
I'd say 15% is accurate.
Sebastian Paquette - Analyst
And then final question. Just on RFP activities sequentially -- thinking about kind of the early indicators, are you seeing RFP activity accelerating from fourth quarter or remaining pretty much consistent?
David Dye - CFO
Remaining consistent of what was a good level of activity in the fourth quarter, but remaining definitely consistent.
Sebastian Paquette - Analyst
Great. Thanks a lot.
David Dye - CFO
Thank you, Sebastian.
Operator
Thank you. Our next question comes from the line of Bret Jones with Oppenheimer. Please proceed with your question.
Bret Jones - Analyst
How should we think about the SAAS model in terms of Rev Rec. I know you talked about $5 million in the quarter will be recognized at a later point, but if we think about an average deal size -- I'm going to throw out a number of $1 million -- how much would be recognized on a quarterly basis up until meaningful use would be achieved?
David Dye - CFO
A nominal amount.
Bret Jones - Analyst
Nominal. Okay. So if we were thinking of the $5 million that's out there, that would consist of more than 90% to 95% of the total value of those deals?
David Dye - CFO
Correct.
Bret Jones - Analyst
Is that fair?
David Dye - CFO
Yes, it is, definitely.
Bret Jones - Analyst
Okay. Great. I wanted to ask about G&A -- the spike in G&A, I was wondering, were there any bankruptcies within your customers that had to write off those accounts? Or what caused the G&A to spike up this quarter?
David Dye - CFO
Oh, yeah. A good piece of it is in our 401K matching and the way that it's designed. A good bit of the matching occurs in the first quarter because as employees contract, we match up to a certain figure. And with some minor adjustments that we made in the plan, that made it even more aggressive than in prior years.
Bret Jones - Analyst
Okay. Great. One last question. I want to understand, I guess, with the amount of system sales revenue that was deferred, I was a little surprised by strength of system sales. Were there any site license conversions or were there meaningful use milestones achieved where they had to buy out the SAAS-based contracts?
David Dye - CFO
There was nominal conversions to site licenses. That was not significant in the quarter and there were no meaningful use-based conversions. There was one SAAS conversion -- a customer that had an option to buy out a SAAS that was non-meaningful use related that helped us in the tune of $450,000.
Bret Jones - Analyst
Okay. Great. Thank you.
David Dye - CFO
Thank you, Bret.
Operator
Thank you. Our next question comes from line of Ryan Daniels with William Blair.
Andy O'Hare - Analyst
It's Andy O'Hare in for Ryan this morning. With the Stage Two regs relesae in February, have you seen an acceleration in the interest for physician documentation or does that remain relatively stable from earlier in the year?
Boyd Douglas - President, CEO
No, we're essentially seeing acceleration both because of that and because of the early success we're having with it, as you probably noticed. I started giving those numbers -- we installed, I think, it was four in the first quarter, and we're slated to do significantly more than that in the second quarter. Both of those factors together are certainly increasing demand for physician documentation. It's going quite well.
Andy O'Hare - Analyst
Sure. Can you remind us of the actual capacity for this year?I assume most of the spots are pretty much booked for 2012; is that fair?
Boyd Douglas - President, CEO
For physician documentation?
Andy O'Hare - Analyst
Correct.
David Dye - CFO
We're booked out proximately six months, which is about as good as we can be.
Andy O'Hare - Analyst
Sure.
Boyd Douglas - President, CEO
Just one note, the install teams that do physician documentation are also the ones that do CPOE. It's hard to pin an exact number. Because we shuffle between those two.
Wherever the demand is going to be more, we'll either do more CPOEs or physician documentation. We felt like with the experience those personnel had with physicians with installing CPOE, it was just a natural fit to get them to expand their knowledge base so they could install physician documentation.
Andy O'Hare - Analyst
Good. That's really helpful. Then one more. Was there any customer turn during the quarter?
David Dye - CFO
Nothing significant.
Andy O'Hare - Analyst
All right. Great. Thanks, guys.
David Dye - CFO
Thanks, Andy.
Operator
Our next question from Gene Mannheimer of Auriga. Please proceed with your question.
Gene Mannheimer - Analyst
Okay. Thanks. It's Auriga. David and Boyd, nice quarter. I wanted to go back to your comments last quarter. I think when you gave the annual guidance, it was predicated on 32 new customers. Could you just remind us how far along you are to that goal here as of Q1?
David Dye - CFO
Yeah. We, as of today, we're slated for 26 implementations in 2012. And as you know, typically from the time we execute a contract to the time customer implementation occurs, the average is about 150 days -- 120 days to 150 days -- so we certainly have some possibilities to execute and implement more systems in 2012.
Gene Mannheimer - Analyst
All right. That's terrific. And really a question on meaningful use. I think you said you've got 150 clients, and they realized $147 million in stimulus funds, so call it $1 million a client -- isn't the minimum payment $2 million per hospital? Could you help me reconcile that or are there some exceptions in your base?
David Dye - CFO
There are certainly some exceptions. Number one with critical aspect hospitals -- what makes up about a third of our customer base, number one; and then number two -- some of those numbers include Medicaid numbers. The majority of those hospitals have achieved Medicare meaninful use, but some of those hospitals have achieved just, say, Medicaid and have not yet realized their Medicare meaningful use yet. Typically somewhere between $200,000 and $500,000.
Gene Mannheimer - Analyst
Gotcha. Thank you.
Operator
Thank you. (Operator Instructions.)Our next question comes from the line of Frank Sparacino with First Analysis. Please proceed with your question.
Frank Sparacino - Analyst
Hi, guys. Just two questions. First, help me understand, David and Boyd -- in terms of the conversion timeline, I think you said 6 to 12 months recognized in the $5 million which seems faster than I thought given implementation times, and clients actually receiving payment, so has anything changed there, David?
David Dye - CFO
No, Frank. You know the -- I'll stop short of saying all, but the vast majority our new implementations are installing virtually all the applications available to them up front because the goal in installing the system is to get the money from available to them for meaningful use.
And I'd say on average they install everything up through nursing point-of-care and bedside medication verification, and one to three months later install CPOE, and then they're in a position to begin the 90-day process and then they attest, and approximately six weeks the later, they're eligible to receive their funds. Based on what we saw last year with new implementations that achieve meaningful use, we're pretty comfortable saying 6 to 12 months, on average. There will certainly be some that fall outside of the range and some that will be even more aggressive.
Boyd Douglas - President, CEO
And Brian, just to clarify, that 6 to 12 months is from the installation date.
Frank Sparacino - Analyst
Okay.
Boyd Douglas - President, CEO
Not necessarily from the contract signing. We don't resident revenue at contract signing under the traditional model.
Frank Sparacino - Analyst
Okay. That's helpful. And lastly on that, if we looked at the backlog associated with the MU conversion -- the $5 million this quarter -- what's the total right now?
David Dye - CFO
Don't have that figure exactly, but that's the majority of it.
Frank Sparacino - Analyst
Okay. Great. Nice quarter. Thanks, guys.
David Dye - CFO
Thank you.
Boyd Douglas - President, CEO
Thank you.
Operator
Thank you. And our next question from the line of Leo Carpio with Caris & Company.
Leo Carpio - Analyst
Hi, good morning, gentlemen. Sorry for coming in on the call late. Maybe this question was answered already. Did you provide an update to your 2012 guidance?
David Dye - CFO
No, we didn't. Leo, as we stated on the last call, we're not going to play the game of reiterating or slightly adjusting the guidance up or down every quarter. We will, obviously, as we should, if there's a material change either up or down, we'll provide that, and we haven't done that in this case.
Leo Carpio - Analyst
Okay. And then secondly, regarding the competitive environment, has there been any change in terms of competitors who have come in or exited or anything in terms of pricing?
Boyd Douglas - President, CEO
No, there's been no change. It's still the main four vendors in the small, rural hospital marketplace.
Leo Carpio - Analyst
Okay. And in terms of the -- you probably got a chance to look at the meaningful use Stage Two rule as it's proposed. Any opportunity for you in terms of optic or new incremental sales in your space?
Boyd Douglas - President, CEO
Nothing new. Certainly physician documentation will be required on our system in order to chase too, but we've known that really for quite some time now. So nothing new.
Leo Carpio - Analyst
And then in terms of ICD-10, has the delay had any impact or nothing at all?
Boyd Douglas - President, CEO
It really has had no impact. We're virtually ready for it, and we're continuing on with our original timeline so we've got plenty of time, and we'll have all the software out in the field well ahead of when the deadline occurs.
Certainly, I think long-term, there's somewhat of a negative affect because any time there's any kind of government rule, regulation change like that, it typically drives at least a subset of our marketplace to the market because either their vendor hasn't made the changes or sunset that product line or something along those lines. When it does happen, that's usually a good event for us, so certainly that will push that off a little bit.
Leo Carpio - Analyst
Okay. Well, thanks.
Boyd Douglas - President, CEO
Sure.
Operator
Thank you. And there are no further questions at this time. I'll turn the call back over to you.
Boyd Douglas - President, CEO
Just want to thank everyone for their time this morning, and thanks for their interest in CPSI. Hope everyone has 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.