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Operator
Welcome to the CPSI third-quarter 2014 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 today, Friday, October 31, 2014.
I would now like to turn the conference over to Boyd Douglas, President and Chief Executive Officer of CPSI.
Please go ahead, sir.
- President and CEO
Thank you, Mladin.
Good morning, everyone, and thank you for joining us.
During this conference call, we may make statements regarding future operating plans, expectations, and performance that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
We caution you that any such forward-looking statements 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 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 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 third quarter, we installed our Financial and Patient Accounting system in nine hospitals and our core clinical departmental applications at six facilities.
Additionally, three hospitals implemented Nursing Point-of-Care and 57 customers went live with Physicians Applications which consist of ChartLink, CPOE, and Physician Documentation.
Add-on sales to existing clients were $14.6 million or 27% of total revenue for the quarter.
At this time, we expect to install our Financial and Patient Accounting system in three facilities in the fourth quarter.
We anticipate six new installations over four clinical departmental modules, seven Nursing Point-of-Care implementations, 23 installations of Physicians Applications and four ED implementations.
With the start of the 2015 meaningful use attestation period on October 1 for eligible hospitals, I wanted to recap our performance in 2014.
In the last call, I touched on the fact that achieving Stage 2 attestation is considerably more difficult than was Stage 1.
The reporting by CMS has certainly borne this fact out.
According to the latest information released by CMS on September 30, only 200 hospitals have successfully attested to Stage 2 under the complete EHR Hospital Inpatient Designation.
That is compared to roughly 3,000 hospitals that have attested to Stage 1 to date.
I'm very pleased to say that of those 200 hospitals, 38 of those are CPSI clients, which puts us behind only Epic as far Stage 2 hospital attestations by vendor.
I also think it is worth noting that we're looking at vendors who are our traditional competitors in the rural and critical access hospital space.
The total for those five vendors is only 16, and three of those vendors do not have a single hospital who has successfully attested for Stage 2.
As a side note, we had a number of customers in addition to the 38 reported by CMS who meet the Stage 2 objectives and could have attested prior to September 30 but the CMS attestation website was down for several weeks at the end of the third quarter reporting period, which prevented them from doing so.
Looking ahead, based on direct feedback from our customers, there are another 54 of our client hospitals who have already attested to Stage 2 after the September 30 report was released.
In addition to those 54, there are over 140 of our customers who met the Stage 2 objectives in the fourth quarter and have indicated to us that they plan to complete their attestation period prior to the November 30 deadline.
Adding up the numbers, that means well over 200 CPS client hospitals will attest to achieving Stage 2 meaningful use in federal fiscal year 2014.
And we don't want to forget that in addition to the approximately 100 of our hospitals who attested to Stage 1 year one or year two in 2014.
At the risk of repeating myself, because I know I've said this, but there's no other better way to say it, the numbers speak for themselves.
There's nothing I can add that more clearly defines the disparity and success between CPSI and our competitors in enabling our clients to achieve meaningful use.
The job our customers and staff have done here is nothing short of remarkable and I'd be remiss if I didn't recognize them for their efforts.
I would like to spend a few moments with regard to development in areas that we haven't talked about to date.
One is the CommonWell Health Alliance.
As a family member, we've been committed to the CommonWell mission of healthcare interoperability for the common good.
We participated with the other founding members in a successful pilot project earlier this year and are now moving ahead with plans for full implementation and deployment of Commonwealth services.
Our product team has done great work in getting us this far in a relatively short period of time and continue to push forward with building in the native functionality necessary for a successful deployment.
If you're not familiar with CommonWell, I'd encourage you to visit the Alliance's website at www.commonwellalliance.org to learn more about our alliance.
The other development project that I wanted to speak to is our Predictive Analytics project through the use of Big Data.
We briefly mentioned this on the call in the last quarter's call.
We believe the possibilities for both CPSI and TruBridge are significant, whether it's building in the analytics as part of the CPSI EHR solution or TruBridge consultants providing guidance on addressing identified risks and opportunities.
There's no doubt that the potential is there.
We expect to have an announcement with more detailed information in the next few weeks.
With that, I'd like to turn the call over to David for his comments.
- CFO
Thanks, Boyd.
Good morning, everyone.
Employee headcount as of September 30 was 1,386, up 23 over last quarter and down 34 year over year.
CapEx for the quarter was $500,000 compared with $600,000 for the same quarter last year.
As stated in the earnings release, we had $1.4 million remaining in unrecognized revenue from Gen 1 contracts.
This amount is comprised primarily from one customer.
This customer has recently successfully attested for both Medicaid and Medicare meaningful use and we expect to recognize this revenue in the fourth quarter.
We had a solid quarter from a cash collection standpoint with significant sequential and year over year increases in both collections and cash flow.
This is despite the fact that collections were negatively affected by the CMS of attestation system problems in the second half of the quarter that Boyd mentioned in his comments, as several of our Gen 2 contract customers experience payment delays.
The trend has reversed in October as we have collected over $3 million on Gen 2 contracts so far this month.
We expect our fourth quarter cash collections to be very strong due to continued meaningful use Gen 2 contract payments.
Our TruBridge subsidiary had another solid quarter, growing 14% over the same period last year and 15% year-to-date.
We are seeing growth in virtually all the TruBridge offerings.
We're particularly excited about the potential of medical records coding and critical documentation improvement, or CDI.
Our coding service has been operational for over a year now and demand has been steadily increasing.
A looming ICD-10 deadline has recently generated a substantial surge in our pipeline.
Regarding CDI, the results from our initial CDI engagements have been remarkable.
By working with our customers to ensure that the clinical care provided is completely and properly documented, TruBridge can play a major role in improving both our customers' compliance and payer reimbursement.
Mladin, if you could please open the call for questions?
Operator
Thank you very much.
(Operator Instructions)
Mohan Naidu, Stephens Inc.
- Analyst
Boyd, David, congrats on the [traction] in Stage 2. Maybe I'll start there.
What percentage of your customers have already bought the software and implemented the necessary work for [I think it was] Stage 2. I know you said you were going to have about 200 of them at [the end] of FY14.
- CFO
Good morning, Mohan.
About 65%.
- Analyst
Okay, great.
And extending on that Stage 2, so the attestation reporting period is going to be about a year and stuff to 90 days.
Is that a concern for your customers or how are you guys tracking that?
- President and CEO
Certainly that's -- makes the hurdle even higher to get over, so it is a concern.
Obviously, there's a push out there to shorten that to 90 days, but we feel like, at least competitively with our system, we're giving our customers the best chances for success with our EMR platform.
So, if it is a year, we're -- it's certainly not something that we're afraid of.
In fact, that would probably bolster our position in the market because we feel like we've got the best tool to allow them to achieve that.
- Analyst
Great.
One last question.
Ambulatory HER.
Is it GA yet, or am I reading that wrong?
Is it supposed to be next year?
- President and CEO
I'm sorry.
(multiple speakers) The ED package?
- Analyst
The Ambulatory Electronic Health Record.
- President and CEO
Yes, yes.
It is generally available, it is.
- Analyst
Okay.
Thank you.
Operator
Ryan Daniels, William Blair.
- Analyst
Let me start with one just on the implementations during the quarter.
Looked like the core clinicals was a little bit lower than your expectations and I'm surprised, given that you did nine financials, that the clinicals weren't bundled there.
Is that just a timing issue or any color you have there?
- President and CEO
It was a timing issue and it was actually three hospital groups, I guess, if you will, that were scheduled and saw clinicals and they pushed that back.
- Analyst
Is that part of the Q4 implementation then?
- President and CEO
It is -- actually, it's not on the schedule as of this point.
So, no, it's not.
- Analyst
Okay.
And then, maybe a couple more questions on the population health in your analytics comments.
I know there was an announcement out of CMS about advance payment programs to kind of help fund some of the critical access and rural hospitals to start shared-savings programs.
Is that something that's kind of accelerated your interest or client interest in having these type of solutions more rapidly in the market?
- President and CEO
I wouldn't say that it accelerated, only because we were -- this has been our number one priority, as we mentioned last time, and continue to do.
For a while, it certainly gets us more excited about it and it serves us and makes us feel better that we are moving in the right direction.
And so, we're happy to see that, but I don't think it accelerated our interest any because it was already our top priority.
- Analyst
Okay, perfect.
And then, last one, just on TruBridge.
Maybe a twofold question.
Number one, I think you typically give us kind of the new contracts signed, so if we could get that, that would be great for our models.
And then, number two, do you have any data about the CDI engagements?
It sounds like those are off to a very strong start.
Kind of what are you seeing there?
Is it better revenue capture?
Is it helping with audits?
What kind of value proposition are you seeing for your client base?
Thanks.
- CFO
Yes, at this point on the CDI, Ryan, we've done less than a handful, but it's been significant increase in revenue capture and, obviously, we feel a bolstered compliance in the event of an audit.
We haven't experienced an audit improvement yet, but definitely significant increase in revenue capture.
And I think Boyd's looking up the numbers for TruBridge.
I don't know if he's got them yet.
- President and CEO
Yes, I've got them right here.
For the TruBridge, for the third quarter, we signed 1 full business office and 10 private pay and follow-ups.
- Analyst
Okay.
Great.
Thanks a lot, guys, I appreciate it.
Operator
Jamie Stockton, Wells Fargo.
- Analyst
I guess maybe just a couple, Boyd or David, I don't know who wants to take it but, on Stage 2, your numbers are very good.
A lot of your competitors don't have good numbers.
Have you seen a benefit from that, as far as your win rate is concerned, with incremental decisions that are occurring, yet?
Or is that more of a, hey, we're going to have to wait until 2015 when these numbers are a little more fully baked and the market is more aware of the differentiation?
- CFO
Actually, great question, Jamie.
Actually what we've seen at this point is some folks just put on the brakes.
For the deals that have happened, we've actually seen our win rate go up.
But I think because of the actual and perceived difficulty with Stage 2, the market kind of had -- in the rural market hospital place has just stalled.
We are, of course -- the quality of our prospects, I would say is -- I don't want to over-exaggerate, but something close to an all-time high, because the ones that are there are, generally speaking, there because they're unhappy with where their vendor is with regard to Stage 2. We are hopeful that, that would -- that trend would increase based on the numbers that Boyd mentioned.
We don't really see anything happening that indicates that the vendors that are struggling are going to get significantly better in a short period of time, especially, as Mohan mentioned, with the fact that it's a full-year attestation period for Stage 2 beginning in Medicare FY2015.
So, what we can control is the support and the products that we provide to our current customers, and to be as aggressive as possible as we can in the new hospital marketplace.
We can't force people to make decisions, but we obviously want to be their choice when they do.
We think that there's potential that the amount of decisions will increase because of the fact that we've got a proven Stage 2 solution and some of our competitors are clearly struggling.
But that remains to be seen.
- Analyst
Okay, that's great.
And, maybe just along those same lines, as far as the pace of decisions, do you have any initial feel for what ICD-10 is going to do as far as causing people to wait and not do something in 2015, or causing them to go ahead and do something if they could get it done far enough ahead of the deadline in October of next year?
- CFO
I know from communicating with our sales folks at both on the CPSI side and the TruBridge, I don't know of one case where someone's verbalized the fact that they are or are not going to make a decision based on the ICD-10 timeline.
I do think, more so than we did over a year ago when this thing -- when ICD-10 was delayed, I do think that the ICD-10 implementation has a chance to have a somewhat meaningful impact on TruBridge for us in a good way, obviously.
But I don't see it, at this point, as a negative or a positive with regard to system sales with CPSI.
- Analyst
Okay.
That's great.
Thanks, guys.
Operator
David Larsen, Leerink.
- Analyst
Hi, Dave, can you just touch on the guidance expectations for 2014?
It obviously implies a bit of a ramp in 4Q.
Thanks.
- President and CEO
I got it.
As I think we've said many times before, our policy is not to reiterate or update our guidance up or down unless we feel like there's a financially meaningful upside or downside.
So, that's our statement.
- Analyst
Okay.
So you'll have, I think $1.4 million following through from gen 1 contracts in the fourth quarter.
Those typically are at higher margin because all the costs tied to that have already been incurred in previous periods, so that will probably benefit your P&L in the fourth quarter, on a sequential basis at least.
Is that fair?
- President and CEO
That is fair.
- Analyst
Okay.
Great.
And then, I think you used the term, pause, Dave, for Stage 2. Can you give any maybe a little -- any more color around that?
It seems like there's a bit of a -- in terms of your fourth-quarter expected installs, a bit of a decline, like three for patient accounting and financial compared to nine this quarter.
Would you expect that to ramp back up in 2015?
Just any general thoughts around that?
- CFO
Certainly that -- we think the numbers for the fourth quarter, the decline from third quarter, is mainly attributable to what we've seen several years now with meaningful use timing, with people getting things done and then kind of pausing it in the fourth quarter.
So, I think it's realistic to think that things can return to more normal levels.
Absolutely.
- Analyst
Okay.
And then, your G&A, I mean $7.5 million in the quarter, was there a -- did you guys have a conference again in the second quarter because I had thought that, that would have declined a little bit on a sequential basis.
It came in a little bit higher than expected.
Anything -- any comments around your cost structure, or is that pretty much as expected?
- President and CEO
Yes, our health insurance costs were high, over $800,000, up on a sequential basis, as we -- again, as we've talked about before, we're primarily self-insured.
We'd have hit all our deductibles now in the third quarter, so we expect that number to go down in the fourth quarter.
- Analyst
Okay.
Thank you.
Operator
Donald Hooker, KeyBanc.
- Analyst
Congrats on the Stage 2 achievements.
I wanted to actually ask you about -- the maintenance fee revenue dipped a little bit in the third quarter sequentially, which I think is somewhat unusual.
I know you're selling a lot of these software modules on top of your core systems over the past number of quarters.
Can you talk about maybe how that's affecting maintenance fees and how we should think about that going forward, or what the structure of that is?
- President and CEO
Well, we should see it go back to its normalized quarter-over-quarter growth going into the fourth quarter.
We had a bit of a bump in the second quarter due to GAAP policies with recognition of Stage 1 meaningful use contracts and when they flow through with when they're paid out in the second quarter.
And then, we also had a minor hit in the third quarter of about -- a little bit over $100,000 on a reclassification of some electronic interface stuff that had previously been recognized as support maintenance that we moved into system sales.
So, we absolutely expect the quarter-over-quarter growth to resume in the fourth quarter with support and maintenance.
- Analyst
Got you.
I'm not sure I understand the GAAP.
What would the GAAP policy -- how much was that impact?
- President and CEO
I don't have that in front of me, but it was several hundred thousand dollars.
I think somewhere around $0.5 million.
- Analyst
Okay, that's a big hit.
Okay.
And then, maybe also -- I'll ask just one more and let others ask.
But I know you had this TruBridge business that's growing mid-teens, very, very interesting, and you're putting a lot of resources into that in anticipation of more demand, so gross margins are down.
How do we think about gross margins going forward?
I know you're intentionally keeping them low.
Should -- are you going to be releasing some of that hires or is your hiring still going to continue?
- CFO
I'm hesitant to say at this point.
At some point, I do think it's -- feel strongly it's going to creep back up.
We're still excited about what's going on there with regard to the coding and then some of the -- as I mentioned, the CDI, clinical consulting.
And so we are -- I think I've used this term before, but, in terms of hiring folks when we have the opportunity good folks with those skills, we're kind of throwing caution to the wind because the way the pipeline looks, that seems like the smart thing to do at this point.
So I'm hesitant to give you a timeframe when I think they'll start to creep back up again.
But I do think -- I don't think this is a normalized gross margin.
But I don't know when I think we'll start heading more towards that normalized gross margins as long as we continue to see the growth that we see.
- Analyst
Okay, that all makes sense.
I'm just trying to sort of set expectations.
So, I guess maybe the message is sort of for investors to keep that a little bit lower as you're preparing for demand going for the next few quarters.
Is that summarizing?
- CFO
I think so, Donald.
- Analyst
Okay.
Good luck.
Thanks.
Operator
Sean Wieland, Piper Jaffray.
- Analyst
Your guidance for the fourth quarter on the implementations are all down year over year, and, in particular, patient accounting of the new sales of, I think, did you say three?
So my question is, what's going on there?
- President and CEO
As I've said earlier, I think some of it has to do with just meaningful use timing.
As David mentioned, Stage 2, some of these hospitals have seemed to take a pause and look back, so I don't know that there's much more to add than that.
- CFO
Yes, I think the important thing, Sean, is, as I said, I think there's been a bit of a pause that we didn't necessarily expect, to be honest.
I think our competitors are not winning deals in our space, so it's not like their numbers are up.
We care about what we control, which is the percentage of the deals that we win.
Our customer retention rate is extremely high, something close to an all-time high right now because of our success with MU 1 and now 2. And I think, at this point, everybody who's made a decision to spend significant funds to have the CPSI system to be able to achieve meaningful use is set as long as we perform, which we're doing.
So, we feel good about the factors that we control.
We're obviously hopeful that those numbers will get back up again in 2015 and beyond, but we can't control the marketplace.
We can only control our position within the marketplace, so that remains to be seen.
- Analyst
All right.
So of your either recent deals that you've done or maybe forecasted in your pipeline, what's the mix of net new business versus customer -- is there any greenfield left?
What are -- what's the customer -- competitive conversion versus add-on?
- CFO
There's no greenfield left.
- Analyst
Okay.
All right.
- President and CEO
Pretty much everybody has attested to Stage 1, so everybody's got something that got them to Stage 1. So -- I want to be careful here because we definitely -- the definition of greenfield.
Everybody's got some kind of EMR system that has gotten them to Stage 1 -- therefore we say there's no greenfield left.
But there's certainly plenty, we think, of opportunities of hospitals that are in a position where they got Stage 1, but maybe barely, or they really struggled.
But Stage 2 is now looming, and that's where we feel like our position in the marketplace is going to be beneficial to us.
- Analyst
Okay.
And was there any gen 1 revenue recognized in the third quarter?
- CFO
$200,000.
- Analyst
$200,000, I missed that.
Okay, thank you very much.
Operator
Dave Francis, RBC Capital Markets.
- Analyst
First, David, you may be the first person I've ever heard say that they were excited about coding, so congratulations on that.
I guess I wanted to kind of go further down this line of the demand curve.
I don't know if you mentioned it as you were blowing through the numbers in the front half of the call, but did you mention how many new system sales were made in the quarter on the CPSI side?
- CFO
We don't give that number out, Dave.
We provide the implementation numbers for the previous quarter and the next quarter, but we don't -- we haven't, for a long time, given out the number of contracts that we've won in a quarter.
- Analyst
Okay.
- CFO
If that's what you're asking.
I may have misunderstood your question.
- Analyst
No.
That's where I was going.
I guess I thought that you had done that in the past.
As it relates to the competitive landscape then, too, I mean there's been a lot of noise from some of the larger players in the market trying to move down into your sandbox and what have you.
Can you talk about what you've been seeing in that regard, not so much from the established folks at the lower end, but the newer guys coming down to your neck of the woods?
- CFO
We continue to try and classify that on the call, sort of on a field basis, quarter over quarter.
If you recall, I think it was about a year ago.
We said that we had -- in a given period of time, that we had seen more Cerner.
But, for the last several quarters and we'll continue this quarter by saying that the activity by the traditional large players in our market was minimal to extremely low in the quarter.
We did not see any increased activity.
- Analyst
Okay.
And, last, did you mention -- again, if I missed it, I apologize.
Were there any emergency department installations in the third quarter?
- CFO
Yes, there were.
I don't have the exact number.
I think it was three --
- Analyst
Great.
- CFO
-- in the third quarter.
- Analyst
I'll turn it over to somebody else.
Thank you.
Operator
George Hill, Deutsche Bank.
- Analyst
I guess I want to come back to where I think Sean was going, which is, we've seen that meaningful use Stage 2 is very difficult to attest and you're helping clients get there.
But we're seeing a slowdown in new implementations.
And I kind of want to take it to a higher level and ask, what's driving customer churn right now or what's kind of driving the purchasing decision?
Is meaningful use still a driver of the purchasing decision in your segment of the market, or is it something kind of more basic, just like the need to collect and bill better.
What's the right way to think about this?
- CFO
Yes, I'd say meaningful use is still a driver in that anybody who's out looking right now is out looking because they are unhappy with where their current provider is with regards to meaningful use.
There are always going to be a deal here or there that -- hospitals looking because they're not happy with the way that their vendor is providing them revenue-cycle management tools, or they're not happy with -- the doctors aren't happy with the way CPOE works or that kind of thing.
But, for the most part right now, it's -- the ones that are out there are out there because they are concerned about their ability to get to Stage 2. I think that answers your question.
- Analyst
Yes.
And then, I'll keep going down this road a little bit, which is, I remember, Boyd, you've said it a bunch of times and we've talked about how you guys feel like you get about 60 to 80 looks a year, 60 to 80 RFPs a year.
I guess, if we look at the last couple months and if we look at it the next six months, is that still the right number?
Or when we hear you guys talk about clients putting on the brakes a little bit, is the entire kind of RFP volume environment decreasing?
- CFO
It's down a little.
Certainly over the last three months, it's down a little.
And what we -- what I'd -- it's impossible, I think, to articulate, but we don't know at this point if that's a trend or if that's just because of -- I mean, you've heard it all.
This immense amount of chatter around -- it even got to the congressional level about Stage 2 and the difficulty to attest and whether it was going to be 90 days or whether it was going to be a year, whether was going to be pushed back, Stage 3 getting pushed back.
So, we don't know what's -- if it's in general because it's -- that has sort of given some people that -- an opportunity to say, hey, I'm going to hang onto what I got, see if they can get their Stage 2 stuff figured out and I can get there on this system and then maybe look down the road prior to Stage 3, or -- it remains to be seen.
It's certainly the fact that we've got some of our traditional competitors are as -- are where they are with regard to Stage 2 at their stations.
I mean, that -- we feel like that's for a reason.
I mean, clearly, they -- they're all -- what's the word, certified, for meaningful use, but to have zero to just a handful that have actually attested, there's a reason.
So we're encouraged by that.
How that shakes out remains to be seen.
So, an honest answer to your question is, we don't know.
We don't know if what we've seen over the last quarter is more of a trend or it was just a pause.
- Analyst
Okay, that's very helpful.
And then, maybe just my last point on that would then be -- so, if I look at things like the class scores for you guys have kind of been hit or miss.
Are you guys seeing any increase in client churn, or do you feel like client retention is pretty stable?
- CFO
Our class scores have been hit or miss now for 25 years.
- Analyst
(laughter)
- CFO
We don't have a particularly good relationship there.
But I'll put our performance up against anybody else who's been ahead of us over that timeframe.
Our customer churn rate -- I think I kind of mentioned this earlier -- it's at an all-time high.
And I think that -- I -- we've -- or close to it, I guess that's a bit strong, but we're virtually losing no one.
And I think there's a logical reason for that, and that is anybody -- as long as we can get the job done, clearly we can with the Stage 2 numbers that we bragged about here today.
At this point, with everything else that's going on, why would anybody switch vendors.
And that's why we feel like we are where we are there.
- Analyst
Okay.
Just to be clear, so nobody on the call misheard that, I think, from our perspective, that means customer churn is at an all-time low --
- CFO
Correct, sorry.
- Analyst
Not an all-time high.
(multiple speakers)
- President and CEO
Thank you for correcting that one.
- Analyst
You got it.
I didn't want anybody to go the wrong way with that.
Operator
Nicholas Jansen, Raymond James.
- Analyst
Thanks for all the color today.
Regarding the predictive analytics, I know you guys are going to be announcing something shortly, but just trying to get a sense of, do you need to make an investment on the expense side before you roll something out along those lines?
Just trying to get a sense of your employee count today and how we should think about that headcount going forward.
- CFO
At this point, from an employee standpoint, I don't think there will be a significant investment.
And also, from a product standpoint, certainly there has been some spend and that will ramp up a little bit.
I don't, at this point, think it will be a number that we think of as meaningful from an accounting perspective at this point, but certainly something over the next several months and to the tune of $0.5 million or so in investment in product and people is realistic.
- Analyst
Okay, that's helpful.
And then looking -- turning to the balance sheet, obviously very strong cash collections.
You're going to be ending the year with significant kind of cash.
How should we think about your historical capital allocation philosophy and kind of pulling that into 2015 and 2016?
Is M&A an opportunity, or is this more kind of just Steady Eddie like you usually do?
Just any color on capital allocation would be great.
Thanks.
- President and CEO
Certainly more likely Steady Eddie.
You never say never with M&A.
But, as you know, traditionally in our history, we've never done any acquisitions.
And, as we have done, I think, since 2003, the Board will look at the dividend in the first quarter.
Operator
Richard Close, Avondale Partners.
- Analyst
Yes, David, I'd like to follow up with you after the call.
We got into the call late for some reason.
But, with respect to the growth in the TruBridge, I was wondering if you could break that down?
I think in your 10-Qs, you do break down some of the growth metrics in the various buckets, I guess IT-managed services and the medical coding and private pay.
Do you guys have that information handy with you?
- CFO
We do not, unfortunately.
Certainly we'll have it in the Q. I will say -- and you may have missed this part of the call -- we're particularly strong right now in increasing a little bit in everything, but particularly excited about coding, and most of the clinical stuff -- clinical consulting, CDI, and that type of thing.
- Analyst
And is all the revenue in that recognized -- more recurring in nature, if you could just go over how you guys recognize revenue in all those different areas?
- CFO
Well, the vast majority of it's recurring.
The consulting pieces are not so much.
They generally get recognized over the period of about two quarters, based on the average length of those engagements.
That's true of CDI, as well.
So, obviously, the majority of the revenue-cycle stuff, like full business office, private-pay collections, claims eligibility -- all of that, we consider very much recurring.
- Analyst
Okay.
With the new implementations that occurred in the third quarter, how many of those were financed?
I think, through the six months, about -- or less than half of the 2014 were financed and that compares to like, I think almost 100% in 2013.
- CFO
Yes.
Less than half, again, in the third quarter, and of the three in the fourth quarter, I think only one is financed.
- Analyst
And then, just my final question, in talking about Stage 2 and attestation, obviously, you guys are doing well there, but is it your thought that this pause may be extensive -- or extended, I should say, that these guys that are having trouble getting to meaningful use Stage 2 ultimately just stick it out and -- with their current vendors and so this might go for a year or so?
- CFO
That's a great question, one that I don't think Boyd or I know the answer to.
Is it our thought that it might be extended?
Yes, it might be extended.
That remains to be seen.
Try and put ourselves in a position if we had hundreds of customers and none of them had achieved Stage 2 meaningful use right now, I'm sure it's difficult to come to work.
So there's -- I'm sure there's some unhappy customers there.
Of course, we're aware of some.
You can't get away with that forever.
So, honestly, it remains to be seen.
- President and CEO
And I think I'll just add to that.
A lot of times what drives -- what we've seen what drives these things and these customers that are looking is physician satisfaction and doing it -- having the success we've had, really starting back to the CPOE, with the length of time that we've had it out there, and the maturity of that product, and now with physician documentation.
That's where we really see a differentiator, is with the physician satisfaction.
It's kind of hard to judge when the physicians at a hospital of one of our competitors say just have finally had enough and basically demand a system change, because that certainly can happen, and that really is kind of outside the -- meaningful use is involved because they're having to move to, say, physician documentation to get to Stage 2.
But, that might not be the catalyst.
The catalyst is the actual physicians finally saying enough's enough, we're ready for a new system.
So, that's where we think that puts us in a great position.
- Analyst
Do you think that whatever announcement you have on the analytic side in a couple weeks, do you think ultimately that could be an icebreaker from the standpoint of push people to maybe make a switch or --?
- President and CEO
We're certainly hopeful that it will.
- Analyst
All right.
Thank you.
Operator
Bret Jones, Oppenheimer.
- Analyst
I just wanted to touch on the TruBridge margins again.
If we look at kind of the cost of goods sold within that line, it was flat sequentially, you had a nice revenue lift in the quarter.
And I'm just trying to figure out where you -- how far ahead do you forward hire, as in how much capacity do you have right now?
So, if we continue to see revenues increase, would you be able to hold your COGS flat or should we expect that to pick back up?
- CFO
I'm not sure I completely -- we're hiring, right now, these professionals both from a coding and a clinical standpoint, and we're thinking about the second half of 2015.
(multiple speakers)
- Analyst
No, I was just looking at it sequentially.
We didn't see the cost move up in the quarter, yet revenue went up, and I was just wondering if you guys had forward hired in the second quarter or the first quarter.
And that's why we didn't see a significant hire in the third, and do you have excess capacity now?
- President and CEO
If we have excess capacity, it's only minimal.
I'm not sure I actually -- I have in my head right now the level of detail that you're asking.
- Analyst
I got you.
Okay, thank you.
I just wanted to also then touch back on some of the -- since we're in a fully replacement cycle market right now, can you kind of contrast the difference in the sales cycle and also implementation times when you go to convert somebody off their existing HER system?
- CFO
I think the implementation time frames are -- from when we get a contract signed to when they implement are relatively traditional.
I would say they may have stretched out a little bit, averaging between 120 to 150 days, as opposed to maybe sometimes in the past, maybe 90 to 120.
In terms of the decision timeframe that has traditionally been 9 to 12 months from the time they've made a prospect to the time they signed a contract, I don't think we've seen any significant shifts there yet.
We certainly saw some folks that we thought were going to make a decision in the third quarter not make a decision, that are still prospects.
So maybe we'll see that trend up a little bit depending on their uncertainty about their current vendor in Stage 2, et cetera.
But we may have more meaningful information there on the sales cycle on the next call.
- Analyst
Okay, great.
And then, the last thing I had --and I think we've touched on this before, but when you talk about medical coding, are you assuming any liability when you take over that responsibility?
- CFO
Oh, I think we're assuming liability with a lot of things we do.
So, sure.
Operator
Garen Sarafian, Citigroup.
- Analyst
Just a couple questions here.
First question, on your activities with CommonWell Health Alliance, we've heard similar comments from your partners.
So I'm just wondering -- it sounds nice, and it makes complete sense, but what type of opportunities is it really opening up in the workplace when you mention it to clients and potential prospects?
- CFO
I don't think much.
It's probably a bit cheesy to say that we all did this out of the goodness of our hearts, but I think it's closer to that than thinking that it's going to help us with new business.
I will say that we've got some competitors in our space that haven't joined yet, and that we certainly aren't afraid to mention that when we're talking to potential hospital clients.
But to say that we expect it and/or now expect that to benefit us competitively, I think would be a stretch.
- President and CEO
We did it because we felt like it was the right thing to do.
- CFO
Let's put it this way.
We didn't think the government was ever going to do it, so we thought we could do it.
- Analyst
(laughter) Great.
And then, my second question, it's just sort of bigger-picture question.
So, you guys have historically been very focused in terms of really sticking to your knitting, in terms of your strategy.
But now you're doing very well with what's in your control, but we're starting to see things and trends that might or might not bounce back.
So, I guess, how are you thinking about your longer-term strategy evolving?
Are you more willing to consider external opportunities when it comes to M&A?
Maybe exporting your capabilities to international markets?
Just trying to figure out how you guys -- how your thinking is evolving?
As, of course, you hope for things to bounce back, but if they don't, how your thinking is shifting.
- CFO
Yes, I think our thinking definitely is evolving and has been for some time.
I mean, I think that, that's the reason why we did -- began business management services a decade ago and why we sort of ramped that up by doing the TruBridge thing almost two years ago now.
We are -- I think for two reasons, because of the things that you mentioned with the maturity of the marketplace, but then also because of our -- as we become a bigger company and have more scale, we are more open to opportunities.
So I think that's all we can say at this point.
- Analyst
Okay.
Fair enough.
Thank you.
Operator
Sandy Draper, SunTrust.
- Analyst
I think most everything's been asked, but maybe just two really quick ones.
One, going back to the question, David, about the expenses and -- or support, sorry, support and maintenance dropping down.
I want to make sure I understand.
I know you said it's -- you expect it to go back up, but were some of the re-classes and GAAP things a one-time thing and you'll sort of have a big jump-up in build?
Or this is -- 18.2% is sort of a new level that you grow off of?
I'm just trying to make sure I've got that correct.
- CFO
The third quarter number is -- I'd say perhaps down $100,000 to $200,000 over normalized, and I think we would grow off of that adjusted number.
- Analyst
Okay, great.
That's helpful.
And then, second is, also on the expense side, just I think coming into this year and maybe even last year, you guys sort of generally had viewed -- you did a big amount of hiring in 2009 and 2010 for meaningful use.
And things didn't come in quite as quickly, then it came in, and so your general view was, we don't really need to hire, there'll be some natural churn.
I know you're doing some investments and stuff on the TruBridge side, but, in general, do you still feel like essentially a flat headcount, no major hiring is still in the cards for the next year or two?
- CFO
I'd say -- I don't want to say for the next year or two, but for the next year, at this point, we expect the number to hover around 1,400 or slightly below -- total.
- Analyst
Okay, great.
Those are my two follow-ups.
And, thanks.
Operator
(Operator Instructions)
Gene Mannheimer, Topeka.
- Analyst
Congrats on the good numbers, Dave and Boyd.
So my question relates to the emergency department product.
You touched on it earlier.
I guess it's been selling now for about a quarter.
You had some expectations at the outset of, I think, 40% to 50% of your customers potentially purchasing that over time, and I just wanted to try to get a sense, at this early stage, if that's still your view?
- CFO
Yes, it is.
- Analyst
Okay.
Okay, great.
And, you did mention as well in your -- earlier in the call, there was -- in terms of your installation schedule, there was a three-hospital system that pushed, and that sounds like that has not been rescheduled, and I'm just curious as to what you can share about that.
Is it market-driven?
Is it specific to that hospital as to why they didn't -- why they're not on the schedule at this point?
- President and CEO
That was specific to those three -- it's a system and it's three hospitals and it was for clinical implementations.
And they just weren't ready at the time, so it's specific to that hospital, and we certainly expect them to do it.
They just haven't scheduled that yet.
So, given that we're already into the fourth quarter -- I don't see them doing it fourth quarter, but I think first quarter would be probably much likely.
- Analyst
Okay.
All right.
Terrific.
Thanks again.
Operator
Ladies and gentlemen, there are no other questions in the queue at this moment.
I turn the call back over to you.
- President and CEO
We just want to thank everyone for being on the call today and for your interest in CPSI, and hope everyone has a happy Halloween and a great weekend.
Operator
Ladies and gentlemen, this does conclude the conference call for today.
We thank you for your participation.
Have a great rest of the day, everyone.