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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the CPSI third-quarter 2015 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 reminder, this call is being recorded Thursday, October 29, 2015.
I would now like to turn the call over to Boyd Douglas, President and Chief Executive Officer, Computer Programs and Systems.
Please go ahead.
Boyd Douglas - President, CEO, and Director
Thank you, Ash.
Good afternoon, everyone, and thank you for joining us on the call today.
During this conference call, we may make statements regarding future operating plans, expectations, and performance that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
We caution you that any such forward-looking statements only reflect management expectations and predictions based upon currently available information, and are not guarantees of future results or performance.
Actual results might differ materially from those expressed or implied by such forward-looking statements as a result of known and unknown risks, uncertainties, and other factors including those described in our public releases and reports filed with the Securities and Exchange Commission, including, but not limited to, 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 afternoon 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.
There is no doubt that the marketplace that we compete in today is much different than it was five years ago.
The American Recovery and Reinvestment Act, or ARRA, has had a drastic effect on our market.
As intended, the Meaningful Use program contained in the ARRA greatly accelerated EHR adoption.
In our estimation, a process that would have probably take anywhere from 10 to 15 years to happen organically was compressed into 3 to 4 years, due to the financial stimulus that was applied by the ARRA.
For our Company specifically, our customers excelled in the MU program, which we attribute in no small degree to our Thrive EHR solution and our LikeMind implementation and support model.
As a result of our success, the revenues and profits associated with that growth were accelerated as well.
However, as an end result of the MU program, the EHR market for rural and community hospitals is fully penetrated.
With the exception of investor-owned specialty hospitals, virtually every hospital in our market now has a core EHR system.
I do want to point out, as I've mentioned before, we are very confident that there are hundreds of community hospitals whose EHR is not a viable long-term solution.
We believe these hospitals will be purchasing fully integrated systems in the next 12 to 36 months, especially with MU Stage 3 now on the horizon.
From an operational perspective, in 2009 we decided to increase staff substantially to accommodate the demand for implementations from both current and new clients.
We were also aware that once implementation demand decreased, we would have to adjust our staffing to be reflective of a different market status.
As you know, we began reducing staff through normal attrition and a hiring freeze, on the Evident side of our business, two years ago.
More recently, we have taken additional steps to reduce staff and expenses, as we noted in our earnings release.
Although the system sales revenue dropped, resulting from a fully penetrated market, occurred earlier than we anticipated, it certainly did not come as a surprise.
Beginning in 1998, we started planning for the day that system sales would no longer solely propel CPSI's growth by starting a services business.
We believed then, and even more strongly so now, that CPSI would need to become a services and system company to continue to grow and succeed.
That transition has gone according to plan.
We have expanded from the initial services of segment processing and electronic claims submission to a full business management services solution, new services for IT and helpdesk support, cloud offerings, and consulting.
Beyond these services, new opportunities are presenting themselves routinely.
Because we believed that a market for our services business would exist outside those customers who use Thrive, we formed TruBridge to get our services businesses its own brand identity, with the sole purpose of expanding outside our existing Evident client base.
TruBridge's execution outside the Evident base has been beyond expectations.
But with that being said, it is just scratching the surface of the potential that exists.
The rural community market is underserved for services such as those offered by TruBridge, and we intend to take full advantage of that opportunity.
Today we believe CPSI, with our TruBridge subsidiary, has transitioned to being every bit as much of a services company as an EHR company.
And while it is understandable why we believe the focus of the investment community remains primarily on the Evident side of our business, and has undervalued TruBridge and its impact on our growth and the future of our Company.
Today, TruBridge makes up over one-third of our revenue and is now the fastest-growing part of our business.
Before I turn the call over to David, I have a few other quick updates I would like to share.
On the sales side, TruBridge sales continue to outperform.
As an example, we mentioned in the press release that the coding services alone added 24 new clients during the last quarter.
Longer-term for TruBridge, we are currently reviewing locations for a call center in the western half of the country, as evidence has shown that having a local presence has a positive impact on sales in that particular area.
Evident sales, while still down significantly, have shown signs of improvement with an uptick in contracts last quarter, and the largest number of prospects in the pipeline in the last two years.
As I mentioned earlier, we do expect there to be increased vendor churn in the next 12 to 36 months, due to several factors that are in the vendor community.
We feel very good about our position to capitalize when this does occur, as our win rate on new system sales deals continues to track at historical highs.
Also, based on our preliminary review of Stage 3 Meaningful Use requirements, we are estimating a potential revenue opportunity of approximately $150,000 per eligible client, in additional application purchases related to Stage 3 compliance.
In Canada, we continue to meet with and interview prospective partners as we carry on with our preliminary work to build a solid foundation to enter the Canadian market.
Finally, the first stage of our commercialization of our data analytics project is underway.
Last quarter, we signed five agreements for business intelligent offerings, and are excited about the prospects for this area of our business as we enter 2016.
At this point, I would like to turn the call over to David Dye.
David Dye - Chairman, CFO, and Director
Thanks, Boyd, and good afternoon, everyone.
In the third quarter, we installed the Thrive financial and patient accounting system in four hospitals, and our core clinical departmental applications at four facilities.
Additionally, four hospitals implemented Thrive point-of-care documentation; 12 installed our Thrive emergency department information system; and eight customers went live with physician applications.
Thrive provider EHR was installed at 14 facilities.
Two of the four new client system installs for the quarter, or approximately $2.1 million in normalized installation revenue, were implemented in our cloud model, under which the payments will occur and the revenue will be recognized on a recurring monthly basis in future periods.
At this time, we expect to install Thrive financial and patient accounting systems in five new client facilities in the fourth quarter, two of which we will implement in the cloud environment.
We anticipate three installations of our core clinical departmental modules, four point-of-care documentation implementations, 10 installations of physician applications, and seven ED implementations.
Additionally, we expect to install Thrive provider EHR in 15 facilities.
Our employee headcount as of September 30 was 1,422, an increase of 57 over the previous quarter-end.
This increase is 100% attributable to personnel investment in current and future TruBridge growth.
Our third-quarter G&A expense includes approximately $1.1 million in bad debt expense resulting from two customers, one of which ceased operations during the quarter, and one which declared bankruptcy.
G&A expense also includes $2 million in severance expense resulting from a voluntary retirement program, as a result of staff reductions achieved via managed turnover, attrition, and voluntary retirement.
Along with employee benefit plan changes that begin in 2016, we anticipate a reduction in our normalized annual fixed expense structure of more than $6 million for 2016.
The breakdown of this expected year-over-year decrease is as follows: $1.9 million in cost of system sales, $2.1 million in cost of support maintenance, $0.5 million in cost of sales and marketing, and $1.5 million in G&A.
The Company is free cash flow positive for the third quarter and year-to-date, both before and after dividend payouts.
And we expect that trend to continue.
Year-to-date, we have paid $21.7 million in dividends to our shareholders while increasing our total cash and investments balance by $4 million to its current total of $38.5 million.
As Boyd mentioned, our TruBridge business continues to grow impressively.
Based on recent sales results, prospects in the pipeline, and an underpenetrated market, we believe this growth will continue for the next several years.
TruBridge's sales results for the quarter included four new contracts for full business office management services, 11 new customer agreements for private pay collection services, and 24 contracts for coding services.
Finally, as stated in the press release, we are lowering our 2015 full-year revenue guidance to a range of $184 million to $186 million, and net income guidance to $20 million to $20.4 million.
And Ash, if you would please open the call for questions?
Operator
(Operator Instructions).
Mohan Naidu, Oppenheimer.
Mohan Naidu - Analyst
Maybe quickly on the cloud and SaaS model, can you remind us, what is the key difference between your offering on the license versus the cloud model?
Is it just the payment model that is different?
Or do you actually install it on your premises, and give access to the clients?
David Dye - Chairman, CFO, and Director
It's both.
The payment model is generally different.
The customer pays for it on a permanent subscription basis, as opposed to the license model, where there is the initial deposit and then the rest of it is paid upon successful installation.
So we get 100% of the cash within a month or two of the initial implementation; whereas the cloud is paid, again, over time, on a payment plan by the customer.
In addition, in the license model, generally speaking, the server is on-site.
And in the cloud environment, all the processing is done at one of our cloud-based locations off-site.
Mohan Naidu - Analyst
Okay.
Got it, got it.
But for each one of those SaaS or cloud installs, do you have a separate product install done on one of the data centers, correct?
David Dye - Chairman, CFO, and Director
I'm not 100% sure I understand the question.
But, yes, both their storage and their applications that they are running are being run from one of several off-site locations, and not on-site, in the cloud environment.
Mohan Naidu - Analyst
Okay, all right.
Just as a quick one on the bad debt expense, can you remind us -- the two clients that closed out, what kind of revenue was that that was in your receivables?
And are there any more of that in your receivables?
Boyd Douglas - President, CEO, and Director
Yes.
Well, it was $1.1 million bad debt expense for the quarter.
There's always that possibility.
We've had, I would say, a remarkably good bad debt experience over the last three years.
And we just happened to have two large ones occur within the same quarter.
So while there is no guarantees that there won't be similar experiences in the future, based on prior history, this was definitely a one-off event.
Mohan Naidu - Analyst
Okay.
One last one on ICD-10 and your TruBridge, what are you seeing as your initial customer reactions at ICD-10?
Obviously, it is helping you guys a lot in according new clients on the coding side.
But the clients who are not using your coding right now -- how are they reacting?
Is that helping in your pipeline, at this point?
Boyd Douglas - President, CEO, and Director
I don't know as I can tell you it helps in our pipeline, but we certainly had a great ICD-10 experience.
We've had relatively no problems at all.
As you would imagine, out of all of our customer base, certainly if you had problems, they probably weren't prepared as well as they should have been, up front.
But as far as from a software perspective and a billing perspective, everything is going very well.
Mohan Naidu - Analyst
All right.
Thanks a lot, Boyd and David.
Operator
Jamie Stockton, Wells Fargo.
Jamie Stockton - Analyst
I guess maybe the first one -- Boyd, I think it was in your comment that you said that you thought there were some vendors that didn't have viable platforms for MU-3, or that at least maybe there were some hospitals that were on platforms that aren't viable for Stage 3.
Can you give us any sense for the number of hospitals that you think fall into that category?
And then maybe at the same time, is this a situation where we are talking like MEDITECH MAGIC hospitals that probably need to transition to something else?
Or maybe legacy health plan hospitals, and those vendors have another product that will actually get to MU-3, and so you are going to duke it out with them?
If you could give us some more color there, that would be great.
Boyd Douglas - President, CEO, and Director
Sure.
First of all, to your first question, we are estimating 200 to 300 hospitals out there that are on a platform that probably isn't suitable for Meaningful Use 3.
And the second part of your question, without getting into vendor specifics, I would just categorize it as certainly there are some platforms out there that are being sunset.
Some have already announced; some we anticipate being announced.
And then there's other vendors that appear to no longer be in the market.
So it is a little bit of both.
But I don't want to get specific on what vendors are doing what.
Jamie Stockton - Analyst
Okay.
Sure.
And then maybe just sticking with MU-3, I think you said $150,000 or so of opportunity with a typical facility.
Can you talk about some of the functionality that you think would incrementally be needed from a module standpoint?
Boyd Douglas - President, CEO, and Director
Yes.
It's more on the analytical side, not to be confused with the big data and population health and all.
But getting the data out of the system and reporting to various agencies and things probably is the biggest chunk of that.
I would categorize it as there's not one specific function like there was for Stage 2 with physician documentation, whereas there's a lot of functions throughout the system where new applications will be needed.
Jamie Stockton - Analyst
Okay.
And then maybe just one more for me -- the retirement activity that you had during the quarter -- maybe, David, this is more of a question for you; I don't know.
But should we expect more of that to come?
Or was this kind of the effort to make sure that, from an expense standpoint, you guys were doing everything you can to keep things tight?
David Dye - Chairman, CFO, and Director
Yes; at this time there should be no expectation that there's more to come.
Obviously, as we look into 2016 and beyond, as we both alluded to in the prepared comments, we expect TruBridge to continue growing.
Obviously, support and maintenance is there for the long haul.
And then we get Evident growing again in 2016.
We feel like we are staffed appropriately for that.
So at this point, we feel, with the $6 million-plus, that we will begin 2016 in a better position than we began 2015, that we are positioned where we need to be to -- with the right resources, too, because we definitely -- we still have 650 hospitals to support.
And we definitely anticipate some increased demand for new system installs; and then, when Stage 3 comes around, for some add-on stuff around interoperability and patient portal that we will need to meet that demand for Stage 3, so we need to be adequately staffed for that.
So we feel good about where we are right now.
So that's a long answer.
The short answer is that there's no expectations right now for any more of that.
Jamie Stockton - Analyst
Okay, that's great.
Thanks, guys.
Operator
David Larsen, Leerink Partners.
David Larsen - Analyst
Can you talk about TruBridge a bit?
And do you plan to invest more dollars into that division?
It sounds to me like you are migrating towards becoming more of a service company with more recurring revenue.
Can you just give a little more color on that process?
Thanks.
David Dye - Chairman, CFO, and Director
Yes.
We definitely did a lot of investment in personnel, as I mentioned in our prepared comments, in the third quarter.
That was based, in large part, on the coding business and our success there, and then our continued success with business offers in private pay outsourcing, primarily.
We also continue to do a good deal of clinical and revenue cycle consulting as well.
And by looking at our pipeline, the number of hospitals that we are talking to, particularly non-Evident hospitals, we want to have the scale so that as we bring on large projects, as we sign new, for example, midsized hospitals to run their entire business office, that we are staffed adequately to begin those projects within 60 to 90 days of signing.
So we do plan to continue to invest, mostly in personnel.
And as Boyd mentioned, we are planning to open a West Coast call center.
But the majority of the stuff, if not all, will be incremental.
In other words, I do not expect to take another prolonged dip like we did last year in terms of gross margins.
We have got the scale now, we think, that on any sort of six- to-12-month time frame, that number should always be somewhere between 35% and 40%.
David Larsen - Analyst
Great, thanks very much.
Operator
Donald Hooker, KeyBanc.
Donald Hooker - Analyst
When we think about the revenue guidance, if you don't mind, we are just trying to level-set, as we're all thinking about 2016, to make sure we have expectations lined up.
For the guidance, how should we think about that breaking out across system sales for maintenance and business management services in Q4?
Boyd Douglas - President, CEO, and Director
In Q4?
Donald Hooker - Analyst
Obviously, we can get back (multiple speakers) revenue.
Boyd Douglas - President, CEO, and Director
I don't have the specifics of Q4 in front of me.
But there's the typical 3% to 4% growth in support maintenance year-over-year, and the 15% to 17% growth in TruBridge.
And I think you ought to be able to a plug system sales number from there, I believe.
Donald Hooker - Analyst
Okay.
And for one last one for me.
So it looks like the business intelligence opportunity could be big as we get into this new world of analytics and population health.
And it sounds like that's starting to grow for you.
Is there any way you can help us think about what that might look like for you economically over time?
You have been somewhat transparent in terms of giving us a sense of what revenue per hospital for different types of modules, roughly.
But is there a way to think about what some of these analytic tools might look like as you start the process of building that out, granted we are very early?
Boyd Douglas - President, CEO, and Director
Yes.
The best way to look at it, at this point, is we are going to charge a base license fee just for analytics in general, which is going to be a pretty wide swath of products.
But just to get into that arena, the base fee for that is $50,000.
And that's the one that we -- we have announced all five of those.
So that gets you started.
And then from there, we anticipate having different applications or products, I guess, if you will, under that umbrella that you can buy the pieces that you want for your particular hospital.
And then obviously, on top of that, as well -- or in addition to that, as well -- there will be TruBridge services tied that can be purchased as well from there.
But that's really as far as we've gotten right now.
But the $50,000 base license for analytics is probably what you're asking for now.
Donald Hooker - Analyst
Yes, as a starting point.
Great, thank you.
Operator
Garen Sarafian, Citi Research.
Garen Sarafian - Analyst
I appreciate all the candor.
But as I look back, when we were talking about earnings and guidance a few quarters ago, we were talking about how there's a shift in the market that took a turn quite quickly, and how your guidance was reflecting more of the reality then.
So now to give a step back and looking in the rearview mirror, what do you think you underestimated this prior quarter that's now more accurately reflected?
David Dye - Chairman, CFO, and Director
Yes, that's certainly fair.
And we certainly blew it.
We definitely were not aware when we gave the guidance -- at that time, we had not made a definitive decision on this voluntary retirement program, and that we would be expensing that entire amount in a given quarter.
We also certainly were not aware of the bad debt expense that we would undertake.
If you are going back a couple quarters, we mentioned on the last call that we had about $500,000, $600,000 in one-time legal and accounting.
And then on the revenue side, we've had more cloud than we anticipated, mobile license fee installs, which is good for the long-term but very bad for the short term.
And I would say, in addition to that, which is one thing that we haven't mentioned on this call, the whole potential shift from a 365- to 90-day attestation period that we talked about being in 2015 did not materialize officially until the beginning of October, which meant that that basically any of our customers didn't have the opportunity to take advantage of it.
We anticipated a several-million-dollar positive hit from that, if it were to have occurred in a more timely manner, anywhere from the first quarter through the middle of, say, by the end of the second quarter of 2015, which is what we initially anticipated.
Garen Sarafian - Analyst
Got it.
So you mentioned a point right there about the -- more mix in cloud versus not than expected.
So just curious -- as a percent of the revised guidance, how much of that would you ballpark is attributable to that mix shift alone?
David Dye - Chairman, CFO, and Director
Roughly $2.5 million, $3 million.
Garen Sarafian - Analyst
Okay, that's useful.
And how about from a competitive front?
Can you discuss what you are seeing?
In prior quarters, you sort of have.
But anything you could call out this quarter, as to any sort of change in behavior from the larger inpatient vendors?
Or maybe even as new outpatient vendors develop cloud-based offerings, if that is creating a pause in some client base?
Anything you can elaborate there?
David Dye - Chairman, CFO, and Director
No, the latter thing, absolutely not.
Definitely -- and we've mentioned, I think, on the last maybe three calls, Cerner being down more.
And we continue to see that.
There's definitely some noise around athena/Razor, but nothing concrete yet.
We anticipate that coming, at some point in the future.
I'll think any of us know exactly when.
Other than that, it's the traditional competitors -- MEDITECH, MEDHOST, Healthland, McKesson; occasionally Allscripts, very occasionally -- that we have been competing with for the last 10 to 30 years, depending on who you are talking about.
Garen Sarafian - Analyst
Got it.
And then my last question -- it was sort of touched on, on bad debt expense.
Can you elaborate a little bit more as to -- I'm assuming that there are other buckets, obviously, before taking on that -- taking it on as a bad debt expense.
Is there any sort of deterioration in terms of past due 30 days, 60 days, 90 days?
Is there any shift that's deteriorating?
David Dye - Chairman, CFO, and Director
Yes.
Actually, our over-90 day AR is at an all-time low as a percentage of total AR right now.
Now, part of that is due to the fact that we just had these two bad debts.
But yes, it's at an all-time low as a percentage of AR at the moment.
Again, as I answered in the previous question, there's no guarantees.
In terms of the quality of our accounts receivable right now, we feel very good, as good as we've ever felt about it.
Garen Sarafian - Analyst
Got it, great.
Thank you very much.
Operator
George Hill, Deutsche Bank.
George Hill - Analyst
Boyd, you talked a little bit about the opportunity for 300 hospitals that could essentially convert, and don't have this Meaningful Use Stage 3-ready platform.
Is there anything that you guys can do to accelerate the decision-making process, or ensure that you capture a disproportionate share of that opportunity?
Boyd Douglas - President, CEO, and Director
I don't know that there's too much we can do to accelerate it.
Again, to repeat from previous calls, I think a lot of hospitals are still in somewhat of a hangover from so much IT spend and implementations over the last three or four years that they are just taking a break.
So I think it's not really that feasible that we can accelerate it.
But as far as being in a position to capitalize on it, like I said in my prepared comments, our win rate at this point is really, really good.
In fact, it's at -- I hate to always say all-time highs, because that goes back a long time -- but any time in the relatively distant past, our win rate is exceptional.
So we will stay on top of that.
I think that's mostly a function of our Meaningful Use success.
So we will still talk about that, and talk about all the things that we can do to make that a feasible goal to achieve Meaningful Use.
We have done that very well.
So I think that's really the main thing we can point at to do that.
Obviously, our cloud hosting is really something that a lot of people are interested in.
So our ability to offer that also, I think, is a benefit to going with CPSI.
David Dye - Chairman, CFO, and Director
And I'll add to that just a little bit, George, in that the hospitals that are in this situation with vendors that probably won't be in a situation to have them prepared for Stage 3 are -- in many cases, they are on those vendors because they didn't want to spend the money to get on one of the ones that's the more reputable vendors in this space, that have done a good job getting their customers to Stage 1 and 2. So inherently -- inherent in that is that most of those hospitals will wait until the last minute to make a change.
George Hill - Analyst
Okay.
Maybe, then, just a quick follow-up -- we've got pretty good visibility, at least we think, what performance will look like over the next couple years.
At what point do you guys start to think about something more radical as a way to drive shareholder value, maybe in strategic M&A, maybe acquisition, maybe something else, maybe just how you think about that?
Thanks.
David Dye - Chairman, CFO, and Director
Yes.
I'm sure you know our history; everybody does.
It's that we've always grown organically.
And we've always looked that type of strategy that other vendors have used in the industry as one that -- if you wanted to do something strategically, it would be to get a product that you don't already have.
And we have always chosen to write it ourselves.
Or it would be to add to your customer base, and we've always chosen to go out and compete for that.
And now that we've reached a point where there is 100% penetration, we are always open to ideas.
And certainly it's a different time than it has been for the last 35 years in our Company.
As Boyd talked about a lot in his comments, I think our main answer to that has been, and continues to be, TruBridge.
And as that becomes more and more a part of our business, and if we can keep up or even accelerate the growth rate there, that gives us a great opportunity in the future.
We think Stage 3 is going to provide Evident with the growth opportunity to the beginning and middle of 2018.
And then we feel like we will be in a situation similar to what we've been in 2015 with regard to system sales.
So we are always -- we have looked at things in the past, and we will always be open to continue to look at things.
So, who knows?
George Hill - Analyst
Okay.
Thanks, guys.
I appreciate the color.
Operator
Jeff Garro, William Blair.
Jeff Garro - Analyst
Maybe a little follow-on to George's question there, thinking about demand for Evident.
Is there anything that will spur demand, ahead of Meaningful Use Stage 3?
And if demand is going to be primarily Meaningful Use-driven, any help with how we should think about timing, given that there is some flexibility with Stage 3 in 2017.
And just when we might see an inflection point of more decisions in the marketplace being made?
Boyd Douglas - President, CEO, and Director
Yes, Jeff.
This is Boyd.
I do think that there will be some demand.
And we are already seeing it.
And I talked about in the prepared comments, that the pipeline is up, and we signed a few more deals than we have in the last several quarters.
So we feel good about that.
And some of that has to do with mostly physician satisfaction or dissatisfaction, depending on how you want to look at it.
Again, to reiterate what David said, a lot of the hospitals that are struggling now with their EMR, basically did whatever they could do to get by, just to meet Meaningful Use and put disparate systems together.
And at the end of the day, if they look back, their hospital is not being run efficiently.
There's a high level of dissatisfaction with the end users, especially physicians and nurses.
And so that's already starting to drive some demand.
And we certainly expect that to continue, and even pick up.
As we head into Meaningful Use 3, you bring up a good point; there's at least some talk of Meaningful Use 3 being delayed a year.
But I think if that ends up being the case, I think that at least the demand will continue somewhat because of this dissatisfaction with end users, specifically physicians.
Jeff Garro - Analyst
Great, that's very helpful.
Moving to TruBridge, curious to hear your commentary on what the drivers for that business are going to be, beyond ICD-10, both on a micro basis and Company specifics that are going to continue to drive all-time high pipeline for that part of the business.
David Dye - Chairman, CFO, and Director
Yes.
There's a trend right now in inpatient healthcare, and certainly among community hospitals, to outsource more and more.
I think that's undeniable.
With TruBridge, it's similar to system sales.
And it's very hard to -- going back to an earlier question -- it's very hard to convince people that they need to buy what you have.
And pretty much, you have to just make people aware that you are present, and that you have a good core business.
And so that when they are ready to pull the trigger, whether it's to buy a new system or it's to outsource their business office, that you are the first person that they call.
And so we are seeing more and more of that.
It's just becoming more prevalent in the industry to outsource nonclinical functions.
Certainly, as the industry and hospitals move towards quality-based reimbursement over the next, say, 2 to 5 years, they are going to want to put their entire focus on clinical quality of care, and not worry about anything else.
And that's where we feel like we step in perfectly with a combined Evidence/TruBridge offering.
Here's your EHR, and here's your -- we will do your coding; we will do your implementation and consulting for you.
And of course, we will run your business office for you, as well, so that you can concentrate on taking care of your patients.
And it remains to be seen.
I do think that there is some point in the future -- I don't know when it is; somewhere between five and 10 years, probably -- where virtually 100% of the hospitals out there outsource their business office.
And that's what we want to be prepared for, and we feel like we are.
Jeff Garro - Analyst
Very interesting.
And one last quick one, if I can squeeze it in -- curious on the implementation timeline for those five business intelligence contracts that you've signed.
Are any of them live now?
And if not, when will the first get into action?
Boyd Douglas - President, CEO, and Director
They are in action now.
We are gathering data and working with them on the things that they want to see.
So we are already in action with those.
We're looking for a few more, as a pilot/beta type environment.
And we would like to get that to 10.
But as soon after that, right around the first of the year, that piece of it will be open for general availability.
Jeff Garro - Analyst
Great.
Thanks for taking the questions, guys.
Operator
Nicholas Jansen, Raymond James.
Nicholas Jansen - Analyst
A lot has been asked thus far, but I just wanted to get a better sense of the evident rebranding that you did at HIMSS.
I think part of it was to perhaps attack a bigger addressable market.
You historically have been in the small community hospital.
And I think you were trying to perhaps move up, a little bit upstream, relative to your historical footprint.
So I wanted to know if there was any success thus far, as you went after, let's call it, 100-bed-plus hospitals versus a sub-50.
Boyd Douglas - President, CEO, and Director
Sure.
As far as -- we haven't signed any contracts yet with 100-plus beds, but we're certainly talking to some.
Again, we did that in anticipation of -- there are several products in that size hospital that we expect to be sunset.
And so that's the ones that we've got our eyes on.
Nicholas Jansen - Analyst
Okay, great.
And secondly, on the $6 million benefit heading into next year associated with some strategic actions on your fixed expense structure, is anything going to be offset with that with regards to perhaps more investment in TruBridge?
I know you added a bunch of staff in the third quarter, based on your commentary.
But wanted to think about the potential offsets to that $6 million reduction program.
Thank you.
David Dye - Chairman, CFO, and Director
No, we netted out that offset.
Nicholas Jansen - Analyst
Great, thanks for the color.
Operator
Frank Sparacino, First Analysis.
Frank Sparacino - Analyst
Just real quick, following up on that question, David, for hiring specifically, should we expect the 1,422 to stay relatively flat?
Or will you continue to hire on the TruBridge side?
David Dye - Chairman, CFO, and Director
We'll continue to hire on the TruBridge side.
That was a particularly heavy quarter.
We do -- and there will continue to be attrition on the other side of the business, at least for the next couple quarters.
I would anticipate now closing the year at a flat quarter-over-quarter rate, and then flat to up maybe 10 to 20 by the first quarter of next year.
That's a very educated guess, depending on attrition and so forth; but relatively flattish for the next six months.
Frank Sparacino - Analyst
Great.
And lastly for me, when you look at TruBridge, just from a high level, very approximate perspective, can you give us a sense of the major services, the revenue breakdown?
David Dye - Chairman, CFO, and Director
Yes.
I don't have it in front of me right now.
But approximately 70% of the revenue comes from full business office and private pay outsourcing.
So that's obviously a big chunk of it; by far, the fastest growing segment right now is medical record coding.
Frank Sparacino - Analyst
Great.
Thank you, David.
Operator
Steve Rubis, SunTrust.
Steve Rubis - Analyst
This is Steve Rubis with Stifel.
In your prepared remarks, you highlighted the Meaningful Use 2 spending lull is driving weakness.
What gives you solace that problems are related to this Meaningful Use 2 lull and not a more deflationary environment, driven by CMS reimbursement reform?
David Dye - Chairman, CFO, and Director
I'm not sure I understand the second part of your question.
(multiple speakers) We are not seeing a core financial weakness among our hospitals right now.
Certainly, the climate has been much worse at many points in our history.
A reluctance to buy systems right now, generally speaking, isn't because they want to, and they don't have the money.
It's because everybody has invested anywhere from a couple hundred to a couple million dollars in their EHR within the last 3 to 5 years.
And there's a weariness to continue to spend on IT at this point, unless there's severe physician satisfaction, as Boyd alluded to in his earlier comments.
So I think that's more of it right now.
Certainly, there's -- where I thought you were going, is our solace really is in the fact that we are not seeing deals out there that we are losing, or that we are not involved in at all that are going to other people.
Certainly, there are some occasionally.
But of the deals that are going down out there, our win percentages at are normalized or even higher than normalized rate -- and that's what really gives us solace.
We are also aware of other vendors that focus on the community hospital marketplace, and where their numbers are shaking out from the system sales standpoint as well.
And our numbers are very similar, if not maybe a little bit better, on our end.
So that is what gives us comfort that it's not a new problem or an us problem, if you will; it's an environment problem.
But I do think that it's -- we never describe the financial conditions of the rural hospital market as strong.
But we certainly don't characterize it as weak right now.
Steve Rubis - Analyst
Perfect.
That sounds wonderful.
Thank you.
Operator
Matthew Gillmor, Robert W. Baird.
Matthew Gillmor - Analyst
Just a couple quick follow-ups.
For the shift to the cloud platform, just curious which of your customers are moving in that direction.
Are you seeing that more on the critical access side, or within some of the larger facilities?
Is there any common theme to call out there in your customer base?
David Dye - Chairman, CFO, and Director
No, it's across all segments.
I would say one of the biggest detriments to implement, at this point, is bandwidth capabilities in rural communities.
Obviously, everybody has got some type of high-speed Internet available to them everywhere.
But to run a VPN, it's necessary to run a complete electronic health record, even in the smallest facilities.
In some of our customer communities, the reliability and bandwidth isn't there yet.
Matthew Gillmor - Analyst
And then just getting an update on the ambulatory activities, it seemed like you have pretty decent momentum over the last couple quarters.
Can you just remind us what the market opportunity is on the ambulatory side, how many physicians you are targeting?
And then also, what's the sales strategy for ambulatory?
Are you working through the hospital relationship, or is this a direct to the physician?
David Dye - Chairman, CFO, and Director
We are still primarily working through the hospital relationship.
The opportunity -- 90% of our hospitals now have direct relationships with their physicians.
The majority have some physician-owned clinics.
And those that don't certainly have formalized relationships that we can, at least through our hospital contacts, have interaction with the physicians in their IT departments.
We have begun an effort, in specific areas, to market our Thrive provider EHR product to stand-alone clinics.
It's a bit of a test case for us.
We are doing it locally; and then we are also doing it, of course, in communities where we already have relationships with the hospitals.
And that initially has gone very well.
We don't expect, at any point in the near future, to be a competitor to Allscripts and Greenway, et cetera.
But it is something that we are looking at in specific instances where we feel like our product does have the functionality that other vendors do in that space.
We put an incredible amount of effort into it.
So we're looking at that strategically, and we will see where it goes.
Matthew Gillmor - Analyst
And one last numbers question -- you might have mentioned this, but the $2 million of severance, and the $1 million of bad debt in the quarter -- were those both included within your G&A line?
David Dye - Chairman, CFO, and Director
Yes.
Matthew Gillmor - Analyst
Thank you.
Operator
Gene Mannheimer, Topeka Capital.
Gene Mannheimer - Analyst
Two-part question here -- David, can you tell us if ICD-10 challenges by your customers weighed on the quarter at all, or did that not play to it?
And number two, just reverting back to an earlier question about M&A, I know in your history, you generally have not been acquisitive.
As you know, one of your competitors recently divested their small business, a small hospital segment.
Just curious if you had to look at it.
And, in general, what is your appetite for buying market share, versus buying things you don't already have?
Thanks.
David Dye - Chairman, CFO, and Director
On the ICD-10 question, that has absolutely no impact on our system sales business at all.
You could make an argument that maybe some hospitals that otherwise would have been more aggressive in the process to buy a new system were concerned about implementing ICD-10 as of October 1. But I know of no specific cases where we were told that.
So I would hate to point to that; I think that would be disingenuous, number one.
Number two, in the specific case that you mentioned, we did not have a look.
And I think our history, in terms of the way we feel about acquiring customers, is well-documented, both in our actions in the past and what we've said about it many times before.
As I said earlier, and I think Boyd said on previous calls, we are definitely entering a new time frame here where there's virtual 100% penetration, other than what we have already talked about on the call.
So, who knows what the future holds?
Gene Mannheimer - Analyst
Thank you.
Operator
There are no further questions at this time.
I will now turn the call back to you, Mr. Douglas.
Boyd Douglas - President, CEO, and Director
Great.
Thank you so much.
Thanks to everyone for being on the call, and thank you for your interest in CPSI.
Operator
Ladies and gentlemen, that does conclude the call for today.
We thank you for your participation, and ask that you please disconnect your lines.
Have a great day, everyone.