TruBridge Inc (TBRG) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CPSI Third Quarter 2016 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 call is being recorded Thursday, November 3, 2016.

I would now like to turn the call over to Boyd Douglas, President and Chief Executive Officer of CPSI. Please go ahead, sir.

Thank you, Ash. Good afternoon, 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 Reformat 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 today will be Matt Chambless, our Chief Financial Officer; Chris Fowler, our Chief Operating Officer; and David Dye, Chief Growth Officer. At the conclusion of our prepared comments, we will be available to take any questions that you may have.

As stated in our press release, our revenue is down this quarter for reasons that I will outline in these opening remarks, but I want to first provide you with some background regarding the market in general to add important context to my comments.

The healthcare IT industry is in the midst of some very interesting times. While this has created frustration for some vendors, we see plenty of reason to be excited about the future and the associated opportunity.

The government stimulus is no longer driving the same level of demand that we have enjoyed over the last five to six years. The majority of HCIT vendors are experiencing that flux in their business as well. We have felt that impact across our entire business, most significantly in our add-on sales, but we firmly believe this soon shall pass with MU3 and population health on the horizon.

Preventative healthcare, treatment of chronic illness, and the overall management of population health is where healthcare providers across the country are beginning to focus their efforts. Obviously, hand in hand with this shift in care delivery is the reimbursement factor that rewards providers for the outcomes and quality of care provided. As we expected, these changes are taking effect in rural communities slower than their urban counterparts.

With more than 30 years of experience in community healthcare behind us, we are not surprised by this pace of change and are choosing to leverage it to our advantage and ultimately for the benefit of our customers.

The CPSI family of healthcare IT companies is poised to help communities across the country transition successfully from a fee-for-service world to that of a value-based reimbursement and population health.

From our vantage point, with the acquisition of Healthland and its affiliates almost a year behind us now, we have seen very positive and tangible results in our efforts to integrate our post-acute EHR solution with our acute EHRs, which puts us well underway to our vision. The outcome of this type of integration is a seamless solution which allows a patient's information to follow them between the physician's clinic, hospital, and skilled nursing care setting in a meaningful way. With this type of information sharing that comes with our broad solution set, we are eager to enable efficient and quality care across the continuum like no other vendor in this market.

We know that many community hospitals across the country are looking to replace their current EHR vendor for one that is proven and experienced in delivering the right fitting solutions and support. With that in mind, we had six new system sales this quarter and we not only continue to be very confident in our strong pipeline of net new sales activity, but also with our customer retention efforts.

Having just come off of a very well attended and successful user conference this past month and the high-touch approach that we took to connect with our customers this summer, I'm encouraged by having heard this same sentiment firsthand and very consistently.

Almost four years ago we launched TruBridge as a subsidiary of CPSI, not only because we saw an opportunity to fulfill an unmet need for IT and business services and consulting in communities across the US, but also to supplement our software revenue stream during times of market fluctuation that come with this business. It is rewarding for many involved in the success of the TruBridge business to see this business model come to fruition and deliver on our expectations, with 25% of CPSI revenue to-date in 2016 being made up of TruBridge sales.

To that end, our newly expanded customer base has responded very favorably to the TruBridge solution offerings that we have been able to bring them so quickly. Once again, we experienced substantial growth of 216% or $840,000 quarter-over-quarter with our Rycan RCM product that is now sold as part of the TruBridge back office offerings. The Rycan RCM product continues to exceed our customers' expectations. Chris will provide more details about these and other TruBridge services and sales in a few minutes.

As the mix of our revenue continues to shift toward a larger percentage of subscription-based purchases, our revenue recognition process is elongating. And while revenue from subscription sales is recognized over time, we incur all of the conversion and installation costs at the time of implementation. This obviously has a short-term negative impact on our income statement, but it improves the long-term financial health of our business as each sale adds to our already strong recurring revenue stream.

It should be noted that 60% of the new system implementations that we performed during the third quarter were sold on a subscription basis. In fact, at this time nearly 80% of our total revenue is recurring revenue, giving us great visibility and financial stability well into the future.

The subscription payment model is what we offer through our interest package, and it is truly a win-win for CPSI and our customers. We have opened the door of replacement opportunity for community hospitals that don't have the capital necessary for a traditional EHR purchase by offering them a no upfront cash option. At the same time, the interest offering allows us to make real inroads to improving the cash collections and other critical revenue cycle operations for these hospitals. With this model we are helping our customers improve their financial operations and contributing to their future health and strength.

For the reasons I've just outlined, we are confident in and excited about the future opportunity for CPSI and our family of companies. From an operational perspective, we believe we are exercising the right balance of cost and expense management across the business, while also making the right investments for our future.

As we have consistently stated, we continue to exceed the cost synergies expected from the acquisition, and we have also managed planned spend outside of these synergies to account for the temporary market flux and purchasing sluggishness that has impacted our top line. To that end, CPSI remains profitable, with our net income this quarter at $1.6 million and our adjusted EBITDA at $11.8 million.

An important area of investment has included R&D. With the addition of two development teams in Minneapolis and key development resources in Jackson, Mississippi, where the majority of the team from our American HealthTech company resides, we are aggressively pursuing the advantages of having integrated acute, post-acute, and ambulatory solutions that span the continuum of care.

In addition, we have made recent announcements of new complementary solutions that will ultimately improve population health in our communities, including data analytics and dashboards, a senior living solution, and a soon to be announced telepharmacy solution. Across our companies, provider adoption will continue to guide our development efforts and therefore, we have also brought a second medical director on board.

Our newest medical director, Dr. Bill Hayes, along with Dr. Ron Louks, both bring to our team a good mix of experience and technology and patient care that allows them to engage providers across our base and ensure that our development efforts address critical ease-of-use and workflow dependencies that are unique to community healthcare.

With that, I would like to turn the call over to Matt.

Thanks, Boyd, and good afternoon, everyone. As Boyd hinted at during his opening remarks, our topline and profitability measures all experienced sequential declines from the second quarter that aren't exactly reflective of our operational metrics. Instead, the sequential declines are largely the result of a significant shift in sales mix for our Thrive EHR solution towards cloud-based entrust arrangements, as all five of our new Thrive installations during the third quarter were under cloud arrangements, whereas all five of the Thrive installations during the second quarter fell more in line with our historical perpetual license offerings.

Despite the decrease in revenues and the associated margin impacts, the third quarter marked an important milestone for post-acquisition CPSI, as our balance sheet is stabilized and operating cash flows have returned to the positive. With strong operating cash flows expected to remain for the rest of the year, we plan to execute on the [intentions] announced last quarter to aggressively de-lever our balance sheet, and have already taken the first step by making an initial $2 million prepayment against our revolver earlier this week.

Now onto some non-financial metrics. In the third quarter, we installed the Thrive financial and patient accounting system in five hospitals, three of which were installed in a cloud environment. We installed our core clinical departmental applications at five facilities, five hospitals implemented Thrive point-of-care, four installed our Thrive Emergency Department Information System, and seven customers went live with the physician applications. Thrive Provider EHR was installed in 10 facilities.

At this time, we expect to install Thrive financial and patient accounting systems in five new client facilities in the fourth quarter of 2016, one of which is expected to be installed in a cloud environment. We anticipate two installations of our core clinical departmental applications, two installations of Thrive point-of-care, two installations of our Thrive Emergency Department Information System, and three installations of physician applications. Thrive Provider EHR is expected to be installed in seven facilities.

On the Healthland front, we had one net new install and one migration from Classic to Centriq in the third quarter, with no net new installs and two migrations expected for the fourth quarter.

Our employee head count as of September 30 was roughly 1,990, an increase of 30 from the end of the second quarter that is mostly related to head count expansion at TruBridge.

Speaking now to system sales and support revenues; revenue from the Healthland entities decreased $1.6 million, from $22.2 million in the second quarter to $20.6 million in the third quarter, mostly driven by the decreased migration activity. This sequential decline in Healthland revenues was furthered by the aforementioned shift in sales mix for Thrive EHR and new system installs towards the more cloud-based entrust agreements, which drove an additional $1.6 million or 6% sequential decline from the second quarter's $28.4 million for CPSI legacy to $26.8 million in the third quarter.

Year-over-year CPSI legacy system sales and support are down $1.3 million or 5%, due to the challenging market for add-on sales has been a significant focus of discussions in both this and the second quarter earnings call.

On the cost side, the realization in the planned synergies and improvements in other fulfillment costs such as travel resulted in total system sales and support margins of 54%, that were relatively flat with the second quarter despite the declining revenues. Year-over-year CPSI legacy margins improved from 54% to 56% due to these decreased fulfillment costs coupled with decreased payroll costs as a result of the measures that we've taken over the trailing 12 months to right-size the CPSI cost structure.

Our business management, consulting, and managed IT services revenues experienced a 3% sequential decline and 5% increase year-over-year, mostly as September cash collections for our private pay and accounts receivable management services were abnormally low, driving an overall sequential decline in these combined service lines and putting a damper on what had, as of the end of the second quarter, been a double-digit revenue growth year for TruBridge. This hiccup in private pay and accounts receivable management services appears to be a temporary issue, and we fully expect these service lines to return to their normal growth patterns in the fourth quarter.

Although certainly not the norm, it's not completely out of the question for TruBridge to see temporary sequential declines in revenue, as we saw during the fourth quarter of 2015 when TruBridge revenues dropped nearly $700,000 or 4% from the third quarter of last year, only to rebound nicely in the first quarter of 2016. Despite the hiccup this quarter, our business management, consulting and managed IT services revenues are still up 9% year-to-date versus last year.

The associated margins decreased sequentially from 44.5% during the second quarter to 42.5% in the third quarter as declining revenues were met with relatively flat costs. Year-over-year margins are down from 45% in 2015 as the dampened revenues for the third quarter of 2016 were outpaced by capacity-driven investments over the trailing 12 months. Same as with the related revenues, we see these compressed margins as temporary issues that should turn around going forward.

Our product development costs increased sequentially by roughly $200,000 or 3% as we've expanded our consolidated development team to ensure we leverage our unique position in the market with increased integration between our acute and post-acute care EHR solutions. Year-over-year product development costs are up $4.8 million, an increase that's mostly attributable to the incremental cost associated with the Healthland technologies.

Our sales and marketing costs increased roughly $200,000 or 3% due mostly to increased commission expense as the new system installations for the third quarter had higher assigned contract values than those at the second quarter. Year-over-year these costs are up $2.3 million or 51% with Healthland entities contributing $1.8 million, while CPSI legacy operations saw a nearly $600,000 or 12% increase, as the expanded pipeline has resulted in increased travel costs and an expansion of our sales and marketing team.

General and administrative costs decreased $1.5 million sequentially, primarily due to decreased 401 (k) employer match costs driven by the front-loaded nature of our employer match, decreased transaction-related costs as we get further and further from day zero post-acquisition, and increased vacation utilization in the summer months.

Year over year, costs have increased nearly $500,000 or 4.5%, as the incremental impact of the Healthland acquisition, including the addition of our fall national user conference in Chicago to supplement our standard spring national user conference, eclipsed the $2.1 million decrease in severance costs from the voluntary early retirement program we made available to certain employees during the third quarter of 2015.

Amortization expense associated with our acquisition-related intangible assets, which were new to the Company beginning in the first quarter of 2016, remained relatively flat from the second quarter. Interest expense, which was also new to the Company beginning in the first quarter of this year, increased $76,000 from the second quarter, mostly due to the $10 million revolver pull-down during the second quarter to fund necessary investments in working capital for the Healthland entities.

On the tax front, our effective tax rate improved to 38% from the second quarter's 46%, as the second quarter was more negatively impacted by non-deductible transaction facilitative costs. Year over year, our effective tax rate increased from 20% in the third quarter of 2015, with 2015's rate being abnormally low due to beneficial provision-to-return adjustments and favorable IRS determinations regarding past years' R&D credits.

And with that, I'll now turn things over to Chris Fowler, our Chief Operating Officer.

Thanks, Matt and good afternoon to everyone. I wanted to take a few minutes to talk through what is going on at TruBridge and how we see the business today and into the futures. As Boyd pointed out, the growth we have experienced in the TruBridge business over the last three years has helped CPSI to weather market dynamics that have impacted software and hardware sales.

Over the last four years, TruBridge has experienced strong double-digit growth, primarily due to accounts receivable management services, private pay services, medical coding, and cloud hosting. Of these, private pay and cloud hosting are the two most profitable offerings, with margins of 43% and 49% respectively. These margins have also shown a steady increase due to efficiencies of scale and greater skill and experience across our teams.

Our cloud hosting services is an example of the benefits we've been able to deliver quickly to the Healthland client base as a tangible outcome of the acquisition. Year-to-date for 2016 we have sold 36 cloud back up packages and in 2015 we sold 24, which puts us at a 50% increase year-to-date.

Overall, TruBridge Q3 revenue was relatively flat over Q2, primarily due to poor collections, as Matt made reference to, and a downshift in our consulting services sales. The consulting dip in the TruBridge revenue stream is primarily tied to the fact that ICD-10 and MU2 have for the most part run their course and the need for project management services around these government-driven initiatives has decelerated. We see a clear line of opportunity to replace that decline by continued cross-selling into our expanded customer base across the CPSI family with existing offerings, as well as with some new offerings.

We're well underway in our efforts to create and offer services that will support our acute and post-acute customer base in their efforts to successfully manage population health. We have already begun to deliver our chronic care management package to a handful of customers. And by all indications, our services delivered value and this is something that can easily be replicated.

As you may have seen yesterday, we announced our selection of the Logi Analytics platform to deliver a business intelligence and dashboard solution. We expect this embedded software and services solution to be available in the first half of 2017. Next week we will also formally announce a new services offering to address a common business issue of managing scarce pharmaceutical resources in small community hospitals via a telepharmacy solution.

From a more immediate perspective, the turnover rate for CFOs, CIOs, and revenue cycle managers in the community hospital space continues to be high and has driven a real demand over the last three quarters for our interim replacement offering. We believe this demand will remain consistent and likely increase for the foreseeable future.

Interest in our medical coding services continues to be strong, particularly in smaller staged engagements over the last nine months. We have signed 22 of these smaller supplemental service engagements to date, compared to zero in 2015, and that has helped build stronger margins, and a new pipeline for the traditional long-term medical coding service.

Finally, I'd like to emphasize one of the very tangible and positive outcomes we have realized within TruBridge as a result of the Healthland acquisition. We are seeing constant sales of the Rycan RCM products into the Healthland and AHT customer base.

With an emerging need in our acute and post-acute customer base to manage a new payer mix that has become more heavily weighted in private pay and commercial HMOs. This macro market trend, in addition to our historical experience in selling the clearinghouse service into the Evident base, leads us to believe that we will achieve at least a 70% to 80% penetration of this offering into the Healthland and AHT base over the next five years. With [50%] of the clearinghouse revenue being recurring and a constant margin of 75%, we like the positive impact these sales will have on the growth and continued financial strength and visibility for CPSI.

Additionally, the rate in which the Rycan PLE contract management and denial management product have driven interest into the Evident customer base has been very exciting. In just nine months following the acquisition we have very quickly brought to our Evident customer base these three new solutions that address the current business needs. The Rycan pipeline value is north of $8 million today with close to 50% of it attributed to the opportunities in the Evident customer base. We estimate at least $4 million of that total pipeline to be associated with Q4. With a healthy pipeline of opportunities and an average booking value of $30,000, we believe it is likely to hit a total bookings value over $2 million over the next three months to six months.

With that I'll turn it over to our CGO, David Dye.

Thanks, Chris. We were disappointed that our total bookings across all of our companies declined quarter-over-quarter from $24.2 million in the second quarter to $20.9 million in the third. On a positive note, AHT bookings were $2.5 million in the quarter. And as Boyd mentioned, Rycan bookings were up 216% sequentially to a record $1.2 million. We believe both of these companies are positioned for steady long-term growth.

AHT has significant opportunities for both new customer sales and add-on sales to existing clients as the post-acute market moves toward electronic health record automation, much like the acute care market earlier in this decade. The automation is being spurred by Medicare's accelerating move to bundled payments for episodes of care and the corresponding need for analytics and population health solutions.

Rycan's potential seems almost boundless at this point. As we continue to increase the rate of product demonstrations of the Rycan products to the Evident, Healthland and AHT customer bases, the reviews and customer feedback is overwhelmingly positive, and the result is a dramatic increase in orders. We are currently investing in increasing our sales efforts so that we can more fully realize the potential for Rycan growth in healthcare facilities of all types and sizes in the future.

Add-on sales to our existing acute care customers continue to be difficult, post meaningful use. We don't expect this trend to improve significantly until the second half of 2017, at which point both our analytics solutions and MU3 software bundle will be in heavy demand within our customer base.

And as Boyd mentioned, on the acute care new business front, in the second quarter we executed six new hospital EHR contracts and one Healthland Classic to Centriq migration agreement. Our new business pipeline is at a five-year high in terms of total number of prospects and total potential bookings. We continue to experience an elongated sales cycle, but our competitive win rate remains high, and we believe several significant deals are near closure. Therefore, we are hopeful that we will experience meaningful bookings growth in the fourth quarter.

Most importantly, our customer retention rate remains high, as we are tracking 93% customer retention for the year of the Healthland base, and above 97% for the Evident base.

Ash, if you could please open the call for questions.

Certainly. (Operator Instructions) Mohan Naidu, Oppenheimer.

Thanks for taking my questions. David, did you tell us what the number of new sales that went in the quarter came in under subscription?

I did not. I believe that number is four of the six, though, are under subscription.

Okay. Four of the six. And when we look at the bookings number for the subscription deals, what actually goes into the bookings? I guess with the license deals, it's pretty straightforward, but for the subscription deals, can you walk us through what goes into the bookings number?

Yes. This is Matt, Mohan. The bookings number on a subscription or cloud-based deal is really the value of the system. So it's not an annualized number, but it's essentially -- if we had sold that item as a perpetual license deal, what would it have been, to try to make it to where the sales mix, cloud versus standard license sale, doesn't really throw too much noise into the bookings. So it's a true value number.

Okay. Got it. But when you think about the revenue potential from a subscription deal versus a license deal, how many quarters or years does it take on a subscription deal to recover a similar amount of revenue compared to your license deal? Upon implementation, of course.

Mohan, that varies. But I would say that on average that number tends to breakeven in the -- anywhere from three years to five years.

Okay. Okay. One last question around Healthland. Are you guys still selling Centriq separately? Or is that just the pipeline that you had that you're converting? Or are you guys actually looking at trying to direct customers to Thrive?

Our lead product is definitely Thrive. We are still selling Centriq separately, especially for customers, in particular that are coming off Classic and that have been comfortable with the Healthland platform, and had previously taken a good look at Centriq prior to the acquisition. And a lot of the folks there were excited about the conversion to Centriq. That's typically the case where we're selling the Centriq upgrade. And we'll continue to do so.

Okay. Thank you so much for taking my questions.

Thanks, Mohan.

Rob Munnings, William Blair.

Hey, guys. Thanks for taking the questions. I was hoping you guys could talk about demand activity by customer size, is there any difference from the smallest hospitals you serve to the larger hospitals?

Great question. I would say obviously we all talked about the demand being high right now from a new customer sales standpoint, and it's, I would say, mostly in the under 75 bed category for us. However, in the last one to two quarters, and I know some other vendors have talked about this, but we're seeing some activity sort of more in that 75 to 200 bed range, mostly because of the -- what's going on with McKesson.

Okay. Great. Great. That's helpful. And then I guess what has been the response to the entrust financing option? Do you guys have any deals signed? Or can you quantify the level of interest from prospects so far?

Yeah. We have several deals signed. I don't have an exact number, but I'd say somewhere near a dozen or so. And yes, we've got -- there's a lot of -- a lot of excitement and a lot of activity there. I would guess that a third to 40% of the deals going forward will be under the entrust model.

I think what differentiates us competitively, just to compare to a couple others that are out there is that it's an option. What -- and we truly present it as where you can run your own business office and we'll license your system, or you can run it under a cloud-based environment or we'll do the entrust model, whatever you think best fits your needs.

Okay. Great. Thanks. That's very helpful. That's all from me, guys.

Thanks, Rob.

(Operator Instructions) Sean McBride, Robert W. Baird.

Hi. Thanks for taking the questions. Just a quick follow-up on subscription versus license. Looking forward to 2017, can you give us a projection on the mix and what the trend is towards between those two?

Right now we're guesstimating that it will be somewhere between 50/50 or to 60% license, 40% subscription.

Okay. Great. Thanks. And then just one more. Since the 2Q call, it seems like you guys have been -- had more press releases. And I was wondering if this is part of a broader advertising strategy. And you also mentioned a little bit of extra advertising during the call today. Could you talk about advertising in general and how that approach has changed in recent months?

Yes. Sean, this is Chris. Absolutely we're taking a bigger presence and trying to get a message out there. Obviously, with the integration we have consolidated a corporate marketing department and are trying to take advantage of the wins that we have. Going forward, I think we want to have a bigger presence in the market as we see fit to either be speaking towards from a knowledge standpoint as it relates to community healthcare, to also making sure that people know what we have out there. So as we talk about the telepharmacy and our business analytics, it's a great avenue for us to be able to make sure everybody knows what we've got going on.

I think to expand on that it's just an effort to increase market awareness that we've got something unique and that we have a solution for the acute care market, the long-term care market, the revenue cycle management market, home health, ambulatory, et cetera that no one really else -- no one else out there have, especially in the smaller community hospital market space. Hello. Ash, are you there?

Yes, I am. We appear to have no further questions over the telephone lines at this time. I will now turn the call back to you.

I want to thank everyone for being on the call today. Thanks for your interest in CPSI. And I hope you have a great rest of the day and a great weekend. Thank you.

Ladies and gentlemen, that does conclude the call for today. We thank you for your participation and ask that you please disconnect your lines.