TruBridge Inc (TBRG) 2014 Q2 法說會逐字稿

Welcome to the CPSI second-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Friday, August 1, 2014.

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

Please go ahead, sir.

Thank you, Susie.

Good morning, everyone, and thank you for joining us on the call.

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 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 this morning 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 five hospitals and our core clinical departmental applications at 11 facilities.

Additionally, seven hospitals implemented nursing point of care, and 66 customers went live with the physician's applications which consist of ChartLink, CPOE, and physician documentation.

Add-on sales to existing clients were $16.5 million, or 31% of total revenue for the quarter.

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

We anticipate 10 new installations of our core clinical departmental modules, 4 nursing point of care implementations, and 59 installations of physician's applications.

On the new development front, we are pleased to announce that we have completed three successful implementations of our new emergency department information systems with two additional sites scheduled for the third quarter.

Given the success, we have moved forward with this application with it now being generally available to our client base.

Our sales team is already taking orders, and we remain confident in the substantial potential of this product

We are also excited about the advancements we continue to make with our new ambulatory platform, medical practice EHR five.

We are now live in 10 provider practices, and we expect to implement 7 more practices during the third quarter.

The feedback we've received to date from physicians and other clinicians regarding these applications has been overwhelmingly positive.

These two products could not have come to market at a better time as we now have viable solutions for two areas that are critical to building a complete electronic health record across all settings of care.

I'd like to spend just a moment on meaningful use, specifically Stage 2. If you're following any of the industry reports or numbers coming out of CMS, then you know that Stage 2 attestation is considerably more challenging than Stage 1. In our opinion, it is even more so for rural and critical access hospitals with regard to certain objectives such as patient engagement.

With that being said, I want to pass along that we now have had 10 hospitals successfully complete their Stage 2 attestation, and another 13 who have met all of the Stage 2 objectives in the quarter ending June 30 and are in the process of submitting their attestation to CMS.

I'd like to offer our congratulations to these hospitals and their staff members on this significant achievement.

Now, I'd like to update you on the progress from our services subsidiary, TruBridge.

During the quarter, TruBridge executed 15 new accounts receivable management contracts, 6 of which were for full services, and 9 for private pay and insurance follow-up services.

We continue to be excited about the long-term growth opportunities for TruBridge.

With that, I'm going to turn the call over to David for his comments.

Thank you, Boyd.

Good morning, everyone.

Before I get to my traditional prepared comments, there have been some questions around the newly presented net income attributable to participating securities unvested restricted stock on the earnings release so I'd like to take a moment to explain the new presentation.

The newly presented net income attributable to participating securities unvested restricted stock is our attempt to increase transparency into our EPS calculations given our recent increased usage of share-based payment arrangements along with the introduction of performance share awards as part of our compensation package for executive officers and certain key employees beginning in 2014.

This new presentation does not impact any of our previously reported EPS amounts, and is therefore largely cosmetic.

The accounting rules governing the calculation of EPS have always indicated that unvested shares of restricted stock should be excluded from the calculation of basic EPS.

Because these shares participate fully in dividends, GAAP requires us to not only carve out the unvested shares from the number of shares used in the EPS calculation, but also to carve out on a pro rata share of the period's earnings from that calculation as well.

EPS has been calculated by dividing the income allocated to the fully vested shares by the weighted average fully vested shares outstanding for the period.

[Cap calls] this carving out of unvested shares in the allocated income from the EPS calculation the two-class method.

Because our unvested restricted stock participates in dividends on a one-to-one basis with vested shares, the EPS calculation under this method for all prior periods and this quarter is essentially the same as if we simply took net income and divided by the weighted average of all shares outstanding.

Historically, we've presented only net income, and the weighted average shares outstanding we presented have always included both vested and unvested shares.

Allowing for easy calculation of basic and diluted EPS on the face of the income statement.

We haven't historically disclosed this allocation of shares and income to the unvested restricted stock because it was clearly immaterial both in pure quantitative terms and in its impact on the final EPS amount which has always been zero.

For the record, under the prior presentation methodology, our second-quarter 2014 weighted average share count would have been 11,186,803 and, our 2014 year to date 11,174,839.

So, why the presentation change now?

Because the introduction of the performance share awards this year could make our diluted EPS calculation a bit more complicated in the future which would necessitate some expanded disclosures around basic and diluted EPS calculations.

Instead of waiting until that added complexity becomes a reality, we have decide to go ahead and increase the transparency, now so that when that complexity does become a reality, the transparency will already be there.

As it relates to prior periods, we've elected to increase the transparency in the comparative disclosures.

However, because we are pulling both income off the numerator and shares off the denominator in the EPS calculations, it ends up being a wash for all periods so you won't see any of our previously reported EPS numbers changing and therefore no restatements.

So, with that out-of-the-way, I'll get back to my regular commentary.

Our employee headcount as of June 30 was 1,363, down 21 sequentially and 47 year over year.

CapEx for the quarter was $177,000 compared with $1.1 million in the second quarter last year.

As is evident from the projected third-quarter implementation numbers Boyd mentioned, add-on sales to existing CPSI customers continues to be strong.

Not surprisingly, we believe this is primarily the result of the demand for our certified clinical software applications necessary for successful Stage 2 meaningful use attestation.

CPSI is the only community healthcare IT vendor that has demonstrated any measurable success with hospital customers' Stage 2 meaningful use attestations.

Importantly, as a result of this success, we are experiencing an increased demand in corresponding competitive success rate within our new client hospital business.

On the TruBridge front, we remain pleased with our sales efforts, both within and outside the traditional CPSI EHR customer base.

In particular, we are seeing positive results with clinical consulting and clinical documentation improvement engagements and with medical record coding services.

Looking toward future growth, we remain heavily focused within the TruBridge sales group on increasing private pay collections and full business office outsourcing engagements as those services provide significant long-term growth opportunities.

Additionally, we continue to invest in the creation of new, yet-to-be-announced services, particularly those involving population health and data analytics.

And, Susie, if you could please open the call for questions.

(Operator Instructions)

Our first question comes from the line of Mohan Naidu with Stephens.

Please proceed with your question.

Boyd, David, thanks for taking my questions.

Quickly on the new installs in the third quarter ticked up so I'm just wondering are you seeing more flow into your customer base in new wins because of replacements from other vendors?

Or, is this greenfield opportunities who don't have any EHRs right now?

No, it's pretty much everybody's got an EHR now so these are for the most part replacements.

Every now and then, you'll sprinkle in maybe a new facility, but pretty much everybody -- any existing facility has some sort of EHR.

Got it.

And, on the Stage 2, how are your customers reacting to the possible delay and deadline?

Are they on track, continuing [to] ignoring that?

Or, are you seeing any delays at all?

Mohan, if we're seeing any delays, it's only minor.

I think in particular because it really wasn't a one-year delay, it was more of a three-month delay.

If you choose to claim a hardship, and not attest to Stage 2 meaningful use in 2014, and therefore attest in 2015, it's noteworthy that to attest in 2015 you have to attest for the full-year instead of just a 90-day-attestation period.

Which means you have to begin with the requirements on October 1 of 2014.

So really, for anybody that was looking to push back an implementation of some of the products that are necessary for Stage 2, at most it would have been a three-month delay.

Okay.

All right.

Quickly on ambulatory product -- the physician product that you're talking about.

I guess targeting this product to go directly to the physicians, or are you going through the community hospitals and then reaching the physicians?

No, we do it the way we've always done it which is through the hospitals.

The hospitals are buying these products for the physicians essentially?

Correct.

Typically, these hospitals either own or manage these physician practices where we are doing this install.

Got it.

Sounds good.

Thank you very much for my questions.

You're welcome.

Thanks, Mohan.

Thank you.

Our next question coming from the line of David Larsen with Leerink Partners.

Please proceed with your question

Yes, thanks.

This is Chris Abbott in for David today.

Your system margins were flat sequentially, and it's obviously nice to see some stabilization relative to the volatility we saw last year.

That being said, this quarter, it did have a little more of the high-margin previously unrecognized revenue relative to 1Q, and then it looks like the add-on sales were also up a bit which are typically more profitable.

I guess I'm just wondering was there anything else unusual?

Or, what maybe offset some of the additional upside I might have expected to see?

And then, is it just a mid 40% margin range what we should look for going forward?

The one thing that was a bit different this year then every year for at least the past decade was that our national users conference occurred in the second quarter where we had it in Sandestin in April of this year.

And for at least the last 10 years, probably more, we've had it in third quarter.

It has usually been in September traditionally which is about a $500,000 hit -- from an expense standpoint.

I do think it's worth noting that on the comp quarter year-over-year, G&A is down 9%.

But yes, we do have that.

It's a little bit -- traditionally hasn't been in the second quarter and has been in the third quarter so about a $0.5 million shift.

That's helpful.

And so, I think as far as generation 1 meaningful use customers are concerned -- I think you're now down to only two.

Should we -- any expectations around the roll-off for those guys?

Are we looking at the back half of this year?

Or, is there any other holdups or concerns with that coming through?

No, we don't expect any holdups, and we do expect it to roll off by the end of the year.

Okay, thank you.

You bet, Chris.

Thank you.

Our next question coming from the line of Ryan Daniels with William Blair.

Good morning.

Thanks for taking the questions.

Let me ask a follow-up to Mohan's on the ambulatory platform.

Can you talk a little bit -- number one, about the average deal size you're seeing for those solutions?

And then, number two, is that typically a greenfield sale for the employed physicians who haven't been using EHRs?

And also, more of a replacement opportunity?

In most cases, again, it is a replacement.

Most physicians have some sort of automation though they may not have the full EMR.

But certainly, it's a replacement more than it is a greenfield.

Again, like I said earlier, with the hospitals you do have new practices opening.

The hospital is able to get a new specialist in town that might open a new practice so you do that.

In general for a decent-size practice, with installation, training, and conversion things like that -- you're looking around $100,000.

Okay.

And then, you mentioned increased success rate that you're seeing in the pipeline given some of your continued meaningful use success.

Is that actually a win rate versus your competitors on a head-to-head basis starting to tick up?

Or, is it just that you're seeing more novel opportunities enter your pipeline for replacement opportunities?

Yes, Ryan, at least in the last few months, it has been a little bit of both.

Now, of course we always like to put parentheses around comments that we make that are just a quarter in duration.

But, whenever something significant enough that we think it's meaningful we share it on this call.

We have -- it also, Ryan, has to do with what customers and prospective customers in particular are saying to us as we go through this process.

And, it's notable that our -- the fact that we've had success with Stage 2 and had a certified product much earlier than many of our competition especially those who specialize in the small hospital space.

And, we have actually been able to demonstrate successful attestations whereas others have not.

That's eye-opening to some people, and they're sharing that with us.

Good.

On TruBridge, pretty nice quarter there with 15 new accounts.

Can you talk a little bit, maybe number one, just about how many of those were inside the core base and outside the core base?

And then, number two, in regards to outside the core bases, you've had more success and people are more aware of that.

I'm curious if you've seen any of your competitors launch similar offerings as they worry about losing some of their customer base?

We are no longer going to give individual numbers on what we have inside and outside the EHR space.

I will say that we continue to see significant and probably better-than-hoped progress outside of the space -- outside of the traditional CPSI customer base.

In terms of the second part of your question, I think specifically within the last six months or so -- I think NexGen has been more vocal about trying to get into the hospital space with their back-office solutions but other than that, no.

We haven't heard of any of our traditional competitors being more active in the outsourcing space.

Okay, perfect.

Thanks a lot.

You bet, Ryan.

Thank you.

Thank you.

Our next question coming from the line of Donald Hooker with KeyBanc.

Please proceed with your question.

Great, good morning.

It looks like you have some nice install activity in the third quarter.

Some replacements, some competitors.

Just curious, maybe for Boyd or David, that's the installation.

At what point were those -- what visibility do you have to those numbers looking ahead?

Are you seeing installs going out into the fourth quarter and then to early 2015?

Or, how quick do these conversations accelerate to an installation?

They're usually -- from contract signing to actual installation is typically at a minimum 90 days -- 90 to 150 days I think is a good range with 120 days being basically the norm.

So, pretty much have good visibility obviously for third quarter, and then we are still filling in fourth quarter now so we've got an idea what we're going to do fourth quarter.

But, we certainly have time to sign contracts and schedule installs before the end of the year.

Given that it's only August 1 today.

Got you.

That's fair.

And then, the other thing, and maybe I'm getting focusing on these numbers and seeing patterns.

But for business management services revenue, I guess, TruBridge.

Is there a third-quarter typical seasonal sequential downturn for some reason?

I guess there's a lot of businesses in that revenue line that might be -- have different patterns.

I'm just curious if there's a cadence around seasonality that we should be aware of?

Not that -- we certainly do not think so.

The second quarter of 2013, we had a huge clinical consulting quarter which was the reason for the pump up there.

Made for a tough comp, and then it went down sequentially last year.

So, we don't think that there's any seasonality whatsoever.

I'll just ask one last one and I'll hop off.

But in terms of -- there's been a lot of changes in the hospital space with obviously healthcare reform and Medicaid expansion and whatnot.

I was curious if you had any view to your customers and prospects?

How they are doing in the rural hospital space?

I guess it's a market that Wall Street doesn't get good view into in terms of their economics and health.

Yes, Donald, in a nutshell, they are struggling.

But, I can hardly think of any time in the 25 years that I have been here that I wouldn't have said the exact same thing.

There are certainly -- it's cyclical like anything else.

I would say at this point in terms of their purchasing power for IT largely irrelevant because every decision that's made and has been made really since 2010 has been centered around meaningful use.

We are not seeing a prevalence of hospitals shutting down or selling out or at that type of thing, but I don't want to paint a rosy picture and say that they're -- (multiple speakers).

I was just thinking Medicaid might help them -- like some of the expansions, but I'm not sure.

Yes, it's certainly something that when we saw it, we all e-mailed around to each other and thought it was good news.

But, as to how significant, it remains to be seen.

Thank you.

You bet.

Thanks, Donald.

Thank you.

Our next question coming from the line of Jamie Stockton with Wells Fargo.

Please proceed with your question.

Good morning.

Thanks for taking my questions.

I guess on Stage 2, you have seen a little pickup in the activity of hospitals and testing with you.

Do you have any sense -- and I think maybe, David, you commented on this.

But, do you have any sense whether there's been any pickup at all with your primary competitors?

This is Boyd.

We don't know -- I don't know of any because the only way we'd probably really ever know is if they press released or something along those lines.

And, we certainly haven't seen anything and have not heard anything.

CMS actually released those that had attested for the first quarter for March 31, and there were -- I think there were six hospitals, and we had two of them.

I think Epic, Cerner and Meditech were the other ones.

So certainly, it's debatable whether you would count Meditech as a primary competitor.

Certainly, they've had success with some Stage 2 meaningful use as well.

Okay, do you -- I think the instinct for everyone is to say -- well, we're going to try to get all of our hospitals across the finish line for Stage 2 which is totally understandable.

Do you have any sense -- maybe not even specific to your own customer base, but just the hospital market in general that you sell into.

Are we going to ultimately see about half of hospitals dropping out of the program because stuff like patient engagement is just too high of a hurdle for them to get over?

Any color on that would be great.

Yes, I think that remains to be seen.

I will say that in conversations with customers, and in a few cases prospects, unlike several years ago with Stage 1, I haven't heard and I haven't heard of any of our people hearing customers say -- you know what, we are just not going to do it.

We did hear that occasionally probably back in 2010, 2011 with Stage 1 when it seemed so overwhelming at that point time for the hospital that maybe only was automated in the financial and patient accounting areas and hadn't really installed any of the clinical applications yet.

So, I do think, as you know and as you alluded to and as Boyd mentioned in his comments, the patient engagement piece has proven to be challenging.

More challenging than hitting the numbers on, for example, the CPOE utilization.

So, is that going to prove to be a hurdle that's impossible for some hospitals to get over?

We don't think so at that point, but that remains to be seen.

Okay, and maybe my last question.

You had a snippet in the prepared remarks about looking at other solutions over time like population health.

Specifically on population health, do you have an inclination as to whether that's something that you would want to try to develop your own solution, or maybe look to partner with one of these third-party vendors that is EMR-agnostic and seems to have a good solution?

Right now, we are evaluating both options, Jamie.

Certainly, very interested in partnering.

There's a lot of people that have made a lot of headway with that.

Third parties that we definitely would be interested in and certainly having discussions with them.

But, at the same time, I think like we've always done for the history of the Company, look at doing it ourselves as well.

So, we have not made that decision yet, but all options are out there and on the table.

Okay.

That's great, thanks.

Sure.

Thank you.

Our next question coming from the line of Dave Francis with RBC Capital Markets.

Good morning.

First on the ED products, it appears as though you are back to the original timeline having gone GA and already implemented a couple of sites.

Can you talk about the dynamics around what happened there from a development and rollout perspective?

And, what your expectations might be as you look out a little bit beyond Q3 in terms of the installation that you have got planned and what the demand environment looks like for the rest of this year?

The demand environment looks great.

As far as on the development front, I'm not sure a whole lot changed.

Certainly, like we always do, cautious rolling it out and conservative in doing that and conservative with what we put out there for people like yourselves to make sure.

But, the installations that we have done have gone extremely well.

The ones that are coming up, all the preparations have been done and they're looking good as well.

Physicians are on board so we are excited about it.

Where the challenge -- I guess if you will, and that's probably too strong of a word.

But, the installation teams that we have to install those are the ones that are installing the physician documentation in the CPOE.

All of our physician installation teams so that will all go hand-in-hand installing ED and MPM along with the CPOE and physician documentation.

So, we've got to work out all the scheduling things and a matter of resources and making sure we've got enough.

And, we do presently.

But, we are excited about where we are and looking forward to doing it through the rest of the year.

Doing lots of installations -- not that I have a specific number, but we are ready to roll with it.

Boyd, that's a good segue into my follow-up.

You have always managed headcount very tightly, and with the headcount going down closer to 1,350 rather than 1,400, with these new products coming out in emergency department and the medical practice EHR rollout, do you feel as though you're staffed appropriately to meet demand?

Is there going to be a need to start moving headcount back in a positive direction?

Or, where are you in that whole process?

We are very comfortable with where we are headcount-wise.

Ultimately where we end up, I'm not sure either one of us could tell you right this second.

But, I don't expect any significant changes in the headcount.

What we are doing a considerable amount of -- and you've seen it over the last several quarters where we're doing less of the clinical applications, less of the point of care applications.

We are transitioning those people over and training them on the physicians' applications, which really works out well, because they've got all that experienced that they did of installing the point of care in the clinicals, and now they're working with the physician.

So, it is working out quite well, and we expect to continue to do that.

So, that's why you hadn't necessarily seen significant increase in the headcount, or that we're have to hire a lot of physician-type application people.

A lot of these people are transitioning over, and we feel like we are doing a great job of that.

Last question, I'll get out of the box.

A follow-up on Jamie's question.

This is the first time that you have started talking about population health relative to your customer base, and I guess I'm curious given the multiple definitions and ways people look at population health and care coordination.

What is, in your mind, population health as it relates to your customer base specifically?

And, what are some of the specific things that you might be looking at to roll into that group?

Thanks.

Well, first of all, Dave, we don't have all the answers either.

But, we do know that we think we are in a unique position competitively and a unique position to benefit rural and community hospitals.

Both our existing EHR customers and all community hospitals because of our potential access to -- more than any other vendor that's out there -- to clinical data within rural communities.

Both within the hospital, but also within the physician clinics, the home health agencies, the nursing homes, et cetera.

So, if we can figure out a way to pull all that together to help with predictive patient care and outcomes, et cetera.

We've really got something that can help benefit them obviously from a patient care perspective and help us as a Company as well.

We've spent a great deal of time around this in the last six months or so.

It is going to be one of our core focuses going forward so we are in the process of figuring out what that means for us and our customers.

And obviously, we are including engagement with our customer base in that in those discussions.

So, it's going to be a moving target, but work down the road.

Our next question coming from the line of Richard Close with Avondale Partners.

Please proceed with your question.

Yes, follow-up on the headcount.

With that decreasing, can you talk a little bit about it decreasing in terms of, is that just normal attrition?

Yes.

That's 100% normal attrition.

Okay, and talk a little bit about with respect to TruBridge.

I would think that, that would be actually as you're growing that business that would actually lead to additional headcount and maybe walk us through that?

I don't have the specific numbers, but the headcount in TruBridge has been going up.

And, the headcount in terms of software implementation folks has been trending down which is what we've been saying was going to happen really since really since 2009, 2010 is that we would hire aggressively into meaningful use and then let the numbers stagnate a little bit.

There is a possibility that within the next 6 to 12 months that we will need to hire some software classes to make up for the normal attrition.

That remains to be seen.

Okay.

With respect to the success rate or win rate that you were talking about in the competitive environment, are you seeing Cerner dip in a little bit?

They highlighted some sizable gains I guess and expectations for the remainder of the year of their community works offering.

Are you running into Cerner at all?

Well, to say we're not running into them at all would be incorrect.

We do continue to see them occasionally.

But no, in any significant way, we have not noticed them, their presence increasing in the last quarter.

We were very open -- I think it was about either three or four quarters ago when we did feel like we have seen an uptick from them in a given period of time and then that sort of decreased.

So, we will certainly share that with you again, if and when we do see that in the future, but the answer at this point is no.

Okay.

Just to refresh me I guess on the emergency department system, have you talked about price points there?

Or, what the market opportunity is within your base, the total addressable market?

Average price of about $125,000, and we feel the addressable market is about half of our client base so somewhere between 300 and 350 community hospitals.

Okay.

And then, just a follow-up on the ambulatory, trying to size that up as well.

I think Boyd had said something like $100,000 for a decent-size practice if I'm not mistaken.

Within your base there, what is a decent-size practice and addressable market on the ambulatory side?

As far as a decent-size practice, I would say three or four physicians in that practice seeing patients on a daily basis.

And then, as far as the addressable market, certainly the vast majority of hospitals -- of our hospitals -- either earn or manage most of the clinics in town or at least half of the clinics in their little town or community.

So, we feel like those are all an opportunity really because of the integration between the systems.

You truly end up with one electronic medical record for each patient, and clearly that is superior to trying to maintain an interface with whatever practice system that you installed previously.

How penetrated are you currently within the 700 or so hospitals that you have?

In terms of on the ambulatory side.

On the ambulatory side -- on the clinical side and everything around 100.

Okay.

100 clinics.

Okay, great.

And then, just my final question is in and around the patient engagement, and you're talking about meaningful use Stage 2 and struggles on the patient engagement side for hospitals.

How have you addressed this?

Obviously, you have been successful so far in the early parts of Stage 2, but how are you helping your customers deal with the patient engagement hurdles?

For one thing, we are keeping up -- helping them keep up with their statistics on really a daily basis during their attestation period and pointing it out.

And, helping them with ways that we've seen -- our successful hospitals, with ways that they've discussed this and presented it to their patients upon discharge and sharing those positive experiences.

Either by having hospitals talk to other hospitals that have been successful or by us being the middleman and sharing those successful experiences with the hospitals that are trying to accomplish this task.

To help them get over the hurdle.

But, for the most part, it is just us in some cases probably overdoing -- berating them with -- hey, you're falling below the line here and you're one-third of the way through the attestation period and here are some ways that we think you can increase that number.

As we have been with Stage 1 and as we continue to be and probably even more so with Stage 2, and I think it's one of the reasons why we have been more successful than the competition with meaningful use success is that we are actively involved with every site as they are in -- prior to and as they are in their attestation period.

Thanks, congratulations.

Thanks, Richard.

Thank you.

Our next question coming from the line of Sandy Draper with SunTrust.

Please proceed with your question.

Thanks.

This is Sari Newman in for Sandy.

I also had a quick follow-up to your comments regarding offering new population health tools?

In your initial discussions with your customer base, what seems to be their level of interest and ability to adopt these types of tools in the near- versus the long-term?

It's across the board.

Some are so knee-deep focused on whatever stage that they're working on for meaningful use and some, this is their main initiative.

And certainly, it was a topic of discussion at the national users conference, we had in Sandestin in April.

There was a group of customers that were very interested in discussing with us and us with them know how that initiative should move forward.

So, I think the honest answer to your question is it's across the board.

I think like everything else it will increase over time so that at some point in the future that's undetermined it will be at the forefront on everybody's mind.

But, we are working towards that.

Thanks.

You bet.

Thank you.

Our next question coming from the line of Sean Wieland with Piper Jaffray.

Please proceed with your question.

Thank you.

Good morning.

Can you educate us on the impact that bundled payments are going to have within the critical access hospital market?

Is there anything worth calling out there that is unique?

From our perspective, I'm not sure that there is anything unique about that.

Obviously, the impact just like really every other change that comes down from CMS remains to be seen.

But no, I can't really give you more color than that.

I think with the critical access hospitals that have installed our system recently, they've all been under some sort of meaningful use-type of contract where the payment was tied to meaningful use.

And then, beyond that, their payments are monthly support payments.

So, I think the overall question with the bundled payments is how is it going to affect their overall financial health and their ability to invest in IT going forward.

And, that remains to be seen.

Yes, I was thinking about it more from the lines of it's more of a cost-plus reimbursement scenario in that market.

But, are they -- is it under this bundled payment are they under the same reimbursement program as the rest of the hospital market?

We are no expert on it at this point, but it seems to us that it's more leaning towards the traditional reimbursement, from the Prospective Payment System for other hospitals.

But, it again remains to be seen.

Okay.

Thank you very much.

Thanks, Sean.

Thank you.

Our next question coming from the line of Gene Mannheimer with Topeka.

Please proceed with your question.

Thank you, and good morning.

Most of my questions have been answered.

Notably, the one about the timing of client readiness to embrace the population health tools.

Let me ask this, what is your best guess on the timing of your rolling out that solution?

When should we look for GA on some of these applications?

I think, one, because we don't really know, and two, because for competitive reasons, we are not prepared to give you a timeline at this point.

Okay.

Fair enough.

Let me ask just switching gears to TruBridge, David, how big can those margins get over time as the business scales?

We would certainly like to see the gross margin get back into the low 40%.

I think as I've said on a previous call or two, I don't want to say that at this point we don't care.

We do always care, but more so than normal we are sort of throwing caution to the wind and are investing in both the personnel resources and the technology resources and everything else to grow that business.

Because as we have very publicly stated, we think that's a big growth vehicle, and we are excited about its future.

So, we are not as cautious as we might normally be in the decisions that we make around that business right now.

But, the specific answer to your question is that eventually we feel like it will get back to where it was before in the low 40%.

Thanks a lot.

Thanks, Gene.

Thank you.

Our next question is from Bret Jones from Oppenheimer.

Please proceed with your question.

Good morning.

Thanks for taking the questions.

I wanted to drill down on system sales a little bit.

They're flat sequentially, yet add-on sales were about $3 million higher.

The add mixture approximately $1 million of the generation 1 meaningful use recognition.

I'm just trying to figure out obviously core systems were down [four], but I wouldn't see that offsetting $4 million of additional revenue through add-on in the meaningful use.

So, is it just a matter of lower hardware, or am I missing something?

Our average sale price to a new client is $1 million.

For the entire system though, right?

Not just for the core?

I'm just looking at core installs being down four.

When we report a new install, that's essentially everything now because generally speaking when somebody goes in, they go in with everything upfront because the reason they're buying our system in the first place is to get to meaningful use.

Yes, but you don't -- you're not seeing the nurse point of care down [four] and the physician -- the CPOE -- sorry, I'm just trying to think of the individual modules.

They weren't all down [four].

It was the core financial that was significantly down.

So, it was just the core systems, that was the only answer?

The core systems, but typically what happens if we don't install as many core systems, we can do more add-ons of the point of care or the clinical or whatever because we have got more teams available.

Okay, and then I just wanted to also ask in terms of TruBridge, and it's being touched on this in terms of the margin.

You've talked about adding more clinical-type of personnel -- nurse practitioners, physician assistants, and that does have a impact on the margin.

But, what I was wondering is, I assume those, that labor pool is being added really to address more on the coding side obviously then the outsourcing of AR and things like that.

Are you assuming any liability when you take over medical coding?

Great question.

I think you're assuming liability when you take over anything, and we certainly that is a question that we thought of when we do it.

But, essentially no more so than normal because you're just coding what the doctor presents to you.

Okay, great.

That's helpful.

Thank you.

You bet.

Thanks Brett.

(Operator Instructions)

Our next question coming from the line of George Hill with Deutsche Bank.

Please proceed with your question.

Good morning, Boyd and David.

Just some of the trade research groups have recently highlighted an increased level of churn amongst the CPSI core customer base.

Maybe if you could tell us either over the last 6 or 12 months, what does client retention look like?

And, what's the expectation for that going forward?

Or, maybe just some comments on what you're seeing there?

I would say that it has been insignificant over the last six months or so, and the churn rate is actually down somewhat significantly from what it was in the 2010, 2011 into 2012 years for a good reason.

It is because at this point, anybody that's decided to invest $1 million-plus or what have you in CPSI has already successfully achieved Stage 1 meaningful use.

We're certified for Stage 2. At this point, why would there be churn, and we are seeing that.

Whereas before, us along with everybody else, all the traditional folks in the space were having to play a lot of defense.

Because back in the 2011 timeframe when you had several hundred hospitals that were faced with spending $0.5 million-plus in order to invest in the clinical applications to get ready to attest to Stage 1 meaningful use, their Boards asked them to take a look at the entire market and see what else was out there before they outlaid that type of cash.

So, those were obviously good times for us because we had that situation where hospitals needed the [per stage] applications for meaningful use, and you had a lot of greenfield opportunity that was pressed forward because of meaningful use.

That was also a time we had to play a lot of defense so we are playing a heck of a lot less defense now than we were then.

Okay, that's helpful.

Thank you.

Thanks, George.

Our next question coming from the line of Garen Sarafian with Citigroup.

Please proceed with your question.

Good morning.

Thanks for taking the questions.

A couple loose ends at this point.

One, similar to the prior questions, there has also been a little bit of chatter on perhaps CPSI not being as successful on the displacement opportunities as before?

I hopped on late so maybe you had already addressed this, but could you just discuss maybe what your displacement hit rate has been?

If there are any segments where you've done better or worse, and elaborate on that a little bit?

Yes.

Garen, thanks.

We did mention in our prepared comments, that you must have missed, that we have seen an increase there.

We think it's in our competitive replacement success and also among prospects.

We are seeing a positive impact on the fact that we've had -- we are essentially the only vendor that specializes in real hospitals that's had any success with meaningful use Stage 2 at this station.

So, we don't quantify that and never have and probably never will.

We think that we have been very candid on a quarterly basis sharing with you where we are, and we are feeling good about it at this point.

I guess then, did you also address the steps taken to give you more confidence and comfortable that the situation has been remediated?

I don't know that we felt like we had a situation.

(multiple speakers) Fair enough.

I'll go through the prepared remarks.

And, secondly, on the population health commentary that you've made, you said that you were certainly looking at partnerships.

But, I'm just wondering is building in-house a viable option only because it just seems to me that it takes years on years to build a system that people are still building to get to a point of functionality that's of use to your clients.

So, is it just a matter of who you partner is?

Or, is it a buy situation?

Or, are you truly developing in-house as well?

Yes, I think Boyd was very candid in saying we are looking at both.

We have actively been and continue to be in discussions with third parties.

We also have -- we continue to aggressively evaluate what it would take to do it ourselves, and I think as you're probably aware, we've never acquired anybody.

Not to say that we wouldn't in the future, but I doubt it.

And, that every product that we sell we have written ourselves at this point.

So, it would be a bit of an outlay for us to partner with somebody on a significant product.

But, we are open to doing it if it's the right decision.

Certainly there's some complexity to this that would be unique which makes the idea of partnering with somebody that's an expert in the field more palatable than maybe some other things in the past.

I would compared it to the decision to do a PACS system a few years ago.

That was a very difficult decision.

We did ultimately decide to do it ourselves so it remains to be seen what we'll do.

We are -- to be transparent, we are at this point open to both possibilities.

Just a quick follow-up to that.

Curious if you do build it in-house, how long do you think it will take to get to a 1.0 GA?

We had said earlier, we are not really going to discuss timelines there for competitive reasons and everything else.

But, I will say just if you look at it historically, again, what we did with PACS and everything else, we've always been fairly quick to get things like that to market.

And certainly, that will be a factor going into whether we actually do it ourselves.

Can we get it done in time to meet the demand that's clearly is going to be there.

So, I wouldn't would feel comfortable giving you a timeframe.

Right now, we certainly don't know all the ins and outs and what the product would do.

We are confident in our ability to develop things like that should that be the decision we make.

Absolutely fair.

Thank you very much.

Thank you.

Thank you.

Our next question coming from the line of Nicholas Jansen with Raymond James.

Please proceed.

Hello.

Most of my questions been answered, but maybe one final one on guidance.

No discussion here.

I know you don't really like to say anything unless something has necessarily changed.

But, just your views on what the key drivers of the meaningful earnings acceleration that you're expecting in the back half of the year associated to?

Just reached the low end of the range.

I know you have some more higher margin contingent revenue coming in, but just trying to get a sense of some of the key puts and takes as we look at the margin trends year to date.

Thanks.

Well, you're right.

We certainly -- as a practice, we do not comment on our guidance unless we think there's a material change one way or the other, and obviously, we do not at this time.

So, I don't really have much to say about the back half of the year.

Obviously for us, it always revolves around how many installs we are doing and how much stuff we are selling to our current customers.

That's been the case for a long time now and continues to be the case.

Fair enough.

Thanks.

You bet.

Thanks, Nicholas.

Thank you.

And, our last question is a follow-up question coming from the line of Mohan Naidu.

Please proceed with your question.

Thanks for taking my question again.

David, did you split out for the new installs that you're doing in Q3 how many of them were gen 2 and SaaS contracts?

I didn't, but if you give me a second I think I have that.

Thank you.

It's roughly three gen 2. I think one is SaaS, and the others are traditional.

Traditional.

Okay, thank you.

Thanks, Mohan.

Thank you.

Mr. Douglas, I will now turn the call back to you.

Please continue with your presentation and closing remarks.

Great.

Thank you, Susie.

Just want to thank everyone for being on the call this morning.

Thank you for your interest in CPSI, and I hope everyone has a great weekend.

Thank you.

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

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

Have a great day.