TruBridge, Inc. (TBRG) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Computer Programs & Systems First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Friday, April 26, 2013. I would now like to turn the conference over to Boyd Douglas, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Suzie. 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 10-K. We also caution investors that the forward-looking information provided in this call represents our outlook only as of this date and we undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call. Joining me on the call this morning is David Dye, our Chief Financial Officer. David and I have a few minutes of prepared comments, and then we'll be happy to take your questions. In the first quarter, we installed our Financial and Patient Accounting System in 7 hospitals and our core clinical departmental applications at 15 facilities. Additionally, 15 hospitals implemented nursing Point of Care and 39 customers went live with physician's applications, which consist of ChartLink, CPOE and Physician Documentation. Add-on sales to existing clients were $11.9 million or 24% of total revenue for the quarter. At this time, we expect to install our Financial and Patient Accounting System in 10 facilities in the second quarter. We anticipate 14 new installations of core clinical departmental modules, 13 nursing Point of Care implementations and 39 installations of physician's applications. As you will note from the installation numbers I just announced, sales and installation of the Physician Documentation is going extremely well. We are very pleased with our penetration for this application thus far, and we expect this trend to continue as the effective date of the Stage 3 Meaningful Use requirements approaches. While all of you might be tired of hearing this, I'm certainly not tired of telling you that the tremendous success we've had with our client hospitals achieving Stage 1 of Meaningful Use continues. The latest CMS figures as of March 14 show that not only that we continue to dominate in that rural and community hospital segment, but we are among the leaders of all vendors for successful hospital attestations. As you would expect, our performance here continues to have a significant positive impact on new client sales. Now to address our new subsidiary services company, TruBridge. During the quarter, TruBridge executed 11 new accounts receivable management contracts, 4 of which were for full services and 7 for private pay services and insurance follow-up services. Overall, we are pleased with TruBridge's performance this quarter. And it bears noting that one of the full-service AOR management contracts was a hospital who does not utilize CPSI as their EHR vendor. Frankly, the signing of a non-CPSI hospital for TruBridge services came earlier than we had anticipated. We believe this early success is a further indication of the substantial opportunity we are confident exists for TruBridge to provide their services to all rural and community hospitals, not just CPSI EHR clients. With that, I would like to turn the call over to David for his comments.

Thanks, Boyd, and good morning, everyone. I have a few comments regarding our financial metrics and some broader thoughts on the market, and then we'll take questions. CapEx for the quarter was more than we anticipated. This was primarily due to in-house computer equipment upgrades, the final build out cost of the new Fairhope location and the relandscaping of our Mobile corporate headquarters. CapEx should return to normalize levels in the second subsequent quarters of 2013 of $600,000 to $750,000 per quarter. G&A for the first quarter, as is the case every year, was negatively affected by the timing of our employee 401(k) match program. This company 401(k) matching amount will decrease approximately $900,000 from the first quarter to the second quarter. Also, our health insurance costs within our self-insurance program were dramatically high in the quarter due to an unprecedented number of shock loss claims. While the timing of such claims is hard to predict, we certainly do not expect this to be a continuing trend, and we will benefit for the remainder of 2013 as we have already reached our shock loss excess deductible for the year. Our employee headcount as of March 31 was 1,423, down 20 over last quarter and up 93 year-over-year. We continue to expect our total employee headcount, inclusive of TruBridge, to remain below 1,450 employees for the remainder of 2013. The total accumulated unrecognized revenue related to first-generation Meaningful Use contracts as of March 31 was $5.2 million. This $5.2 million is made up of amounts outstanding from 6 hospital implementations. We continue to expect all unrecognized amounts from first-generation Meaningful Use contract to be recognized by the end of the third quarter. 6 of the 7 new customer system implementations in the first quarter were generation 2 Meaningful Use contracts, and the seventh was a traditional SAAS. Recall that in the generation 2 contracts, revenue was recognized for each application that go live. And based on our Meaningful Use collection history and the generation 2 contract terms, we expect to be paid in full for these implementations in an average of 9 months. As stated in the earnings release, current financing receivables, which by definition represents amounts outstanding under payment arrangements less than 12 months, increased $10 million in the quarter due primarily to installations that occurred under generation 2 MU contract terms. All 10 of the second quarter new system implementations are generation 2 contracts. Beginning with this quarter's earnings release a handful of revenue and cost of sales items, including ISP, clinical and revenue cycle consulting and cloud computing fees and corresponding expenses have been reclassed from support and maintenance to Business Management Services on the income statement. This increased TruBridge revenue by $1,470,000 and TruBridge cost of sales by $802,000, and decreased support maintenance revenue and cost of sales by the same amount. And as Boyd stated, although TruBridge is in its infancy, we are encouraged by the response that we have received to last quarter's announcement both from current CPSI EHR customers and in particular from non-CPSI EHR customers, and believe in the years ahead we will capitalize on this significant market opportunity. And finally, the last several months have been encouraging from a new system sales standpoint. Several of our competitors are clearly struggling with failed EHR System implementations. And as a result, the number of new prospects and contracts that our competitor replacement is increasing. This, in combination with our Meaningful Use success, leaves us optimistic regarding new client sales as phase 2 deadlines approach beginning in 2014. Suzie, please open the call for questions.

[Operator Instructions] Our first question coming from the line of David Larsen with Leerink Swann.

Just with the G&A expense, it looks like it increased over $3 million sequentially and about $2 million from 3Q '12 to 1Q '13, and I think you said there's going to be a 900k sequential decline. What's the delta there that other like $1 million or so, please?

Well, I mean, as I said in the prepared comments, a lot of it is health insurance and that's difficult to quantify because that's always fluctuated. But it was -- I can't remember the term I used, but it was phenomenally high. We had 7 shock loss claims in the quarter, and I can't' remember a quarter before where we've ever had more than 3. And as I said, we've already hit our deductible. So I mean, it's impossible to know what's going to happen sequentially with that. I mean, we could -- maybe we'll have 10 shock loss claims next quarter, but certainly, based on our history, certainly I don't think. So that number -- and again, we've hit some deductibles there within our self-insurance program. So I mean, I would expect that number, this is just a guess, to decline somewhere between $500,000 and $1 million quarter-over-quarter from a health insurance standpoint, and that explains the majority of it.

Okay. And when you used the term shock loss, I imagine that just means sort of an outlier or a case like a few individuals maybe injured or something like that so the cost were unusually high, is that correct?

Yes. We're self-insured for each individual claim up to a large sum like a 6-figure number. And then over and above that, we're covered. So we -- as I mentioned, we had 7 of those in the first quarter, which is unprecedented.

Okay. So heading forward the G&A expense, it seems like it should stabilize and into 2014 it should improve, okay. And then just one more question, if I can. In terms of the generation 2, the revenue recognition for those is consistent with sort of a normal revenue recognition process, is that correct? The system gets installed then you recognize the revenue. The difference is the cash flow and the payment timing, is that correct?

That's correct.

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

I'll start off with the support and maintenance revenue down pretty sharply sequentially from Q4 to Q1. I guess, can you talk about what drove that?

Yes. With the -- namely, with the generation 2 contracts, we don't get the benefit of the support and maintenance until they achieve Meaningful Use. So as those begin to kick in, you'll see a sharper than normal increase in support and maintenance to make up for that.

Okay. I guess that would explain a sharp tick up, but what -- I don't get what explains the tick down.

I'm sorry. Yes, now I get it. As I explained in the prepared comments, just a reclassification of several items that are now part of TruBridge.

Okay. All right. I heard you say something about that as I was taking notes pretty quickly, I thought I was going to have to circle back to that on the transcript, but you made that clear. And I want to do one more quick follow up to David's question, only I guess because it doesn't jive with what it sounds like in the press release. So you guys sell the gen 2 contracts, you recognized the revenue. So there is $10.5 million in revenue that flowed through the income statement this quarter related to those contracts, that receivable is now on the balance sheet. I guess I want to ask, is that the case just because the text in the press release says, I want to read this back, revenue for these installations is recognized. So I guess the installation is complete, if you recognized the revenue for it? Am I, I guess...

That's correct. Yes, that's correct, George.

And should we think of that all -- the receivable and the revenue recognized, is that all system sales or is there another -- does any of the revenue fall into any of the other buckets?

No, it's all system sales.

Our next question coming from the line of Jeff Garro with William Blair. Jeffrey Garro - William Blair & Company L.L.C., Research Division: First, I want to ask if you have any visibility on the remaining first-generation Meaningful Use installment plans when the attestation will happen and when your customers will receive the checks from CMS, and if there's any kind of waiting between Q2 and Q3?

I would roughly guess that slightly more than half will be Q2 and the rest Q3. But as we've said, I think it all wash out by the end of Q3 so we don't particularly care. But it's all in process and we're comfortable with them. Jeffrey Garro - William Blair & Company L.L.C., Research Division: Good to hear you. That's somewhat out of your control. So then moving to the second-generation Meaningful Use contracts. It seems like those were a disproportionate number of the new contract bookings. So can you talk about the kind of the strength that you're seeing in that area? And I think you guys have mentioned that competitors are offering those as well, but is there something unique to your terms that's making those more attractive?

I think what makes ours unique is the fact that we're better at getting people to Meaningful Use. So I think that makes ours more attractive. We can, clearly, just throw one sheet of paper down in front of them with a summary of the numbers competitively. And it's obvious that if their goal is to get Meaningful Use, they should go with us. And then back to the first part of your question, yes, it is virtually 100% of the contracts that we're signing now are gen 2 contracts. Jeffrey Garro - William Blair & Company L.L.C., Research Division: Great, great. And then to -- tell us kind of about the pipeline. I was just wanted to see if you're seeing any uptick from the ED application that you're going to launch shortly or on the TruBridge front having a separate booth for TruBridge that HMS started to really generate interest or if the kind of non-CPSI customer that came along if it was generated otherwise.

I'll start at the latter part of your question there. HMS is almost, I would say, it is impossible to quantify the value of being in HMS, whether you have 1 booth or now that we have 2. I think it's just one of those things that you're conspicuous by your absence if you're not there, so I can't quantify that. I know that the one -- we'll say that the one non-CPSI EHR contract that we got with TruBridge was not the result of being in HMS. Regarding the ED application, again, I'd say that's equally impossible to quantify. I think, the fact that we now have an ED application that's imminent, certainly helps us competitively with new client sales. And I certainly do know of cases now, where our current customers have not gone out and gotten a third party because they know that our releases is forthcoming shortly of our ED products. And it's certainly a positive element, but it's hard to quantify. Jeffrey Garro - William Blair & Company L.L.C., Research Division: Great. And then one last one then I'll jump off. I just want to see if -- you discussed 36 new installations as your forecast for the year, and if you could give us an update kind of on your progress there. It seems like you're more than halfway and if you kind of have to revise your expectations at all for that?

No. We have -- I think it's 35 we said on the last call and we haven't revised our expectations other than what we've tried to provide you with what Boyd said. In my commentary was it's that we feel as good about the new system sales market as we have in a while. So both in terms of folks that are scrambling the BIOS system to get to Meaningful Use because they don't have a system that can get them there. But then more than ever now, some that are on a vendor that could potentially get into Meaningful Use, but they're dissatisfied either with the current product or their dissatisfied with the recent attempt to install the competitor product and they're looking to CPSI. So overall it's positive.

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

This is Stephen in for Jamie. Just a couple of quick ones. First, are the hospitals in the second half going to be mostly critical access facilities?

Yes.

I mean, how long do you expect demand from the critical access hospitals related to the Meaningful Use stimulus to remain strong?

Well, given that they've got until basically July of next year to do it, certainly would think -- it would be logical to think that, that demand will continue always. It's certainly through the first and second quarter of next year.

And maybe one other area really quick. How much demand did you see related to hospitals? They're expanding just user licenses for modules that had already been implemented during the quarter?

We don't have that number, Stephen, but it's minimal. We're selling site licenses for the most part now and have been for the last year or so. Because folks know that with Phase 2 Meaningful Use, they've got to be, for example, fully implemented with nursing Point of Care throughout the facility, 60% of their physician's orders have to be CPOE. So those applications that previously a lot of people were just wanting to buy licenses, they're buying our site licenses now for the most part.

Got you. So would you expect a similar dynamic in the June quarter or could we expect maybe to be stronger ahead of the July deadline for hospitals to start their Meaningful Use window?

Logically, there should be at least a little bit stronger based on the seasonality that we have experienced the last couple of years with regard to those applications.

Our next question coming from line of Bret Jones with Oppenheimer. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: This is Rohit in for Bret Jones. I just had a question. The last time I thought, on the quarter call, that you said there were 9 generation 1 hospitals and 5 had already attested, but now you're saying that there were 6 hospitals that are remaining in gen 1. Did I miss something there? I would have thought those 5 hospitals you would have been able to at least recognize that revenue.

Well, just because you've attested and then after you attest it generally takes an average of 6 weeks before you hear back and get paid. And then with critical access hospitals, sometimes it can take longer because they've got to submit their depreciation schedule for their cost reports and that kind of things. It's all a timing issue. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: Okay. So has more than 5 at this point attested?

Yes. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: So 5 of the 9 originally?

Yes. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: Okay. It just a delay in receiving that attestation in some maybe critical access hospitals.

That's correct. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: Okay. And then I just want to know the value of that extra gen 1 contract. I think last quarter it was $7.1 million, you had 1 extra gen 1 contract. You drew some down and that got you to the $5.2 million. What was the one that I'm missing there?

I don't follow. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: I was just looking for the map behind to get to the $5.2 million. You had $7.1 million of deferred revenue last year, you took one -- you took around one more gen 1 contract, which I don't know the value of?

No. We didn't. We haven't taken on any more gen 1 contracts. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: Okay. I'm sorry, I missed that the. And then the last question I have, was there anything consistent within those 7 shock loss claims within your employee base?

No.

Our next question coming from the line of Neil Chatterji with Sidoti & Company. Neil Chatterji - Sidoti & Company, LLC: Just to clarify on the financing receivable. So that revenue has already been recognized, correct? The $10.5 million?

That's correct. Neil Chatterji - Sidoti & Company, LLC: Okay. And then in terms of the installation timing, is there kind of an average timeline for the installations?

I'm not sure I understand the question. These are... Neil Chatterji - Sidoti & Company, LLC: In terms of how long installation or you get that point where you can recognize the revenue.

Yes. It all happens within a month. Neil Chatterji - Sidoti & Company, LLC: Within a month, okay.

Yes. With our traditional. We go live on the first of the month. Everything goes in. We recognize the revenue in that month. Neil Chatterji - Sidoti & Company, LLC: And coming back to just in terms of the pipeline. I think in the last call we talked -- it was a little bit more, I think, emphasis on the greenfield. It sounds like there are some more replacement opportunities coming up, so just kind of talk about kind of the mix there. And then also, I think we were at 16 signs of the 35, if there's an update on the number?

Yes. There has been an increase, I would say, in our prospects and contracts as a result of competitive replacement. And we still like the greenfield opportunity, but I mean there is no secret as we move towards 2015, in particular, that's going down. So I would say we're pleasantly, to some degree, surprised by the way it looks from a competitor replacement standpoint. I don't want to go in any particular vendors at this point. And then I think the updated number is 24 thus far for the year.

Our next question coming from the line of Sandy Draper with Raymond James. Alexander Y. Draper - Raymond James & Associates, Inc., Research Division: Two questions. One, I was curious -- I can't remember, Boyd, if you said it or David, in talking about TruBridge and the positive reception from your existing customers. I'm just interested, I'm trying -- maybe I'm missing something. Is there a new service or did you expand the service offering from your new customers, I mean, from your existing customers? Because obviously, selling outside the base I can understand how the branding gets the image and say, hey, CPSI is in something different, this is new. I mean, what besides the name, is new and different for existing customers or maybe it's just the branding that's making your existing customers wake up to what you're doing?

It's the latter. You just took the words out of my mouth. I mean, it just puts more emphasis on it. And certainly, there are some services, mostly around the consulting services that we've added within the last 2 years or so that we're putting more emphasis on now with our current customers sort of in conjunction with the TruBridge announcement, but I think it's just mostly a result of positive emphasis from the branding. Alexander Y. Draper - Raymond James & Associates, Inc., Research Division: Okay. And I don't know if you've done a survey or anything. I mean, do you know what the -- I guess, maybe in a year from now you could do a brand recognition survey on TruBridge, but right now how many of your existing customers are running your software? Do you think fully realized the service capabilities you guys have?

We're pretty penetrated. I think we said it on the last call, but 600 of our existing clients use TruBridge for something. I don't think... Alexander Y. Draper - Raymond James & Associates, Inc., Research Division: So it's really just a function of them broadening it?

Yes. And it certainly doesn't mean just because they use this for something that they're as aware as they should be of everything that we're offering, and we should constantly strive to make them aware of the breadth of our services there, which we do. But I think just that number alone speaks to the fact that they're reasonably aware of what we have. Alexander Y. Draper - Raymond James & Associates, Inc., Research Division: Okay. Great. That's really helpful. Second question, I'm trying to see if there's maybe that's certainly -- this small end of the market operates a lot different than the big end. When I talk to hospital execs and it's generally, and especially CIOs, they're generally more of the mid to large size. I would say that they are a lot less focused on Meaningful Use 2 and 3 and doing something to time that. They are more focused on a longer-term vision and ACAs and ACOs and all these different acronyms. But it sounds like to your customer, they are still very much focused to either get me the Meaningful Use 1, can I make the Meaningful Use 2, so they are still really driven by those Meaningful Use milestones or signposts. Is that still very active in your marketplace?

That is very active. And I'd say the other thing that's going on, back to what we've said a couple of times with some other vendor struggling with implementations, I think that's part of it too. It's so unique that these implementations are difficult to do in the small hospital environment. So I think some of that is -- yes, it's these milestones of Meaningful Use, but it's also, okay, we've done this whether it was put up EHR on top of the existing financials or whatever they came up with to meet Stage 1. But they're now starting to realize, which is what we've been saying and what we have been hopeful would happened that, this really -- I think they're starting to realize this is a good long-term solution for us. And I think I've said it a bunch. But certainly, I think we've proved over the years that a fully integrated system like ours is really the only solution for hospital under 100 beds.

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

Can you tell the SAAS revenue in the quarter?

Give me just a second, Sean.

All right. And while you're getting that, what are your thoughts on Commonwealth?

I'll give you our general thoughts at this point as we think it's a great concept and are supportive.

So you think you'll have on intent to join?

Yes. I don't want to comment on that specifically right now, but I think -- I understand what has been done and what they're trying to do and Boyd and I are fully supportive in it. At some point it have to be on board.

Okay.

And the SAAS for the quarter was $289,000.

$289,000, okay. And just so I'm doing my math right, the generation 1 conversion revenue, was that $1.9 million, am I doing my math right?

Yes.

Okay. Great. And then last question on TruBridge. So interesting non-CPSI customer using that, what's the go-to-market strategy for outside the base to grow non-CPSI users on TruBridge?

Yes. When we go to market strategy, maybe to oversimplify, the system improve their cash flow and reduce their AR days. I mean, it's -- we don't really care who the EHR vendor is. I mean, we'll take -- we want outsourcing or back office business for many of them. The overall strategy is to point to our success and show them how much we've improved cash flow at our average client facility in each of the products that we offer and demonstrate how we've done that and now in their business regardless of the EHR vendor that they have in place.

Are they CPSI user for revenue cycle for patient accounting?

No.

Can you tell us who they are using?

No. I mean, at some point in the future, maybe as we get more non-CPSI EHR clients, we may give some additional color sort of who's in place, but we're not prepared to that at this time.

[Operator Instructions] Our next question coming from the line of Gene Mannheimer with B. Riley.

Just piggybacking off of Sean's question, the new -- first of all, congrats on getting that TruBridge deal done within just 60 days of your announcing your service. How do we think about how many of those going forward in the non-CPSI pace, one a quarter, is that the right way to think about it or too difficult to quantify?

Too difficult to quantify. I wish I knew, but certainly very, very focused on adding to that number. And as is everything with CPSI, we're hell a lot more worried about the long term than the short term, but we'd like to see that number grow as quickly as possible, but I can't give you any guidance there.

Okay. Fair enough. And with respect to the CPOE, rather the physician applications, are you able to break out for us the CPOE for the Physician Documentation. I know you've done that in the past, it's about 1/3, 2/3. Is it the way to look at it?

That's probably a good guess. I don't have that right in front of me at this point. And it will certainly shift and become more and more stronger with the Physician Documentation piece. But probably 1/3, 2/3 is a good way to still break it down.

Okay. And then lastly, could you remind us, again, when is the ED product is slated for GA. Was it July 1?

No. Is it actually -- and I misspoke on the last call because I got confused between Version 19 and Version 18.5. So just to clarify, all that Version 18.5 is essentially out there now. The majority of our hospitals who have that are up and running on it. We've got a few stragglers that are left, but that's behind us. And then Version 19 is when the ED product is slated. It will be on Version 19. And Version 19, right now, we're scheduled for beta testing in June and July with a general release slated for August. And then -- so any revenue at all will probably be fourth quarter, would be my guess on the ED system.

Our next question coming from the line of Steve Halper with Lazard Capital Market.

It's Caroline LeCates on for Steve. Just 2 quick questions here, and I apologize if you went over this already. What accounted for the lower tax rate this quarter and what should we think about for the remainder the year?

I would say 36% for the remainder of the year, and the amount under that for this quarter was a result of the R&D tax credit for the full year 2012 being taken in the first quarter of 2013 because President Obama didn't sign it until, I think, it was January 2.

Okay, that makes sense. And then just in terms of the system sales margin, just with the first-generation contracts, a little difficult to forecast that going forward. Should we expect margins to increase in the fourth quarter after these contracts are phased out? And is there else something else driving the lower margins, like are the physician applications or the nursing Point of Care applications a little bit lower margined?

Golly, the first part of the question, I'm not sure how to think about that. As we -- we don't run our business based on margin, so that's why I'm going to struggle here for a second. But as the gen 1 contracts are recognized, that will help margins because it's revenue just recognized for work that was done previously and cost that have already been incurred. And if that's flushed out by the fourth quarter, then that would be a negative effect on margins for the fourth quarter, at least the way I’m thinking about it in this few seconds that I've had to answer the question. The cost -- these are, certainly, the installations that we're doing now are very labor and travel cost intensive with all the training that we have to do for the clinical staff. Additionally, we're doing a lot more than we've ever done on the West Coast, which is more expensive from a travel stand up. So our travel cost are up, which I think would maybe explain a little bit of that.

Our next question is a follow-up question coming from the line of George Hill with Citigroup.

I do think this one has been touched on yet. But on the competitive environment, where you guys are seeing more displacement RFPs? Can you provide, I guess, any color around -- I'll say, should we think of it as 1 of the 2 principal competitors where you're seeing difficulties or is it some of the what I'll call the share cherry competitors. I don't want to name names. The guy has only have like a clinical solution or have smaller than -- have fewer than 30 total customers. Were you guys are seeing the issues.

Yes. It's actually a little bit of both or a combination of both.

Mr. Douglas, there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Great. We certainly appreciate everyone's time this morning. Thanks for the interest in CPSI and hope everybody has a great weekend.

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