TruBridge, Inc. (TBRG) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing-by, and welcome to the CPSI Third Quarter 2015 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded, Thursday, October 29, 2015. I'd now like to turn the call over to Boyd Douglas, President and Chief Executive Officer, Computer Programs and Systems. Please go ahead.

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 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 afternoon 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. There is no doubt that the market place 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 meaning for this program contained in the ARRA greatly accelerated EHR adoption. In our estimation, a process that would have probably taken anywhere from 10 years to 15 years to happen organically was compressed into three years to four years due to 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 totally 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 months to 36 months especially with the MU Stage 3 now in the horizon. From an operational perspective, in 2009 we decided to increase staff substantially to accommodate the demand for implementation from both current and new clients. We were also aware, that once implementation demand decreased, we would have to adjust our staffing to be reflected of the different market status. As you know, we began reducing staff through normal attrition and are 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. Our both system sales revenue drop 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 with system sales were no longer solely propelled CPSI's growth by starting a services business. We believe then and even more strongly so now, that CPSI will 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 statement processing and electronic claim 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 believe that a market for our services business would exists outside those customers that use Thrive, we formed TruBridge to get our services businesses its own brand identity with the sole purpose of expanding outside of our existing Evident client base. TruBridge's execution outside the Evident base has been beyond exceptions, but with that being said, it is just scratching the surface of the potential that exists. The world 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 revenues, it 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're currently reviewing locations for call center in the Western half of the country, as Evident has shown that having a local presence has a positive impact on sales, in that particular area. Evident sales, while still down significantly has shown signs of improvement with an uptick in contract/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 increase vendor churn in the next 12 months 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 bills continues to try 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 [indiscernible] and interview perspective partners, as we carry on with our preliminary work to build a solid foundation to enter the Canadian market. Finally, the first phase of our commercialization of our data analytics project is underway. Last quarter, we signed five agreements for business intelligence 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.

Thanks, Boyd and good afternoon, everyone. In the third quarter, we installed the Thrive Financial and Patient Accounting Systems 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 are approximately $2.1 million in normalized insulation 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 faculties in the fourth quarter, two of which 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 AED 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 manage 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 continuous to grow impressively. Based on recent sales results, prospects in the pipeline in 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. And 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, a net income guidance to $20 million to $20.4 million. And Ash, if you would please open the call for questions.

[Operator Instructions] and our first question comes from the line of Mohan Naidu with Oppenheimer. Please proceed with your question.

Boyd, thanks for taking my questions. Maybe quickly on the cloud and SaaS model. Can you remind us, what's 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?

Yes, it's both. The payment model is generally different, the customer pays for it on a permanent subscription basis as suppose to the license model, where there is the initial deposit and then, the rest of it is credit upon successful installation. So we get the 100% of the cash, within the 1 month or two month of initial implementation. Whereas the cloud is paid again overtime on a payment plan by the customer. In addition, in the licensed 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 offsite.

Okay, got it. You play each one of those SaaS our cloud installs, do you have it, separate proud install done on your one of the data centers, correct.

I'm not 100% sure I understand the question but it’s good, yes. Both their storage and their applications are - that they're running are being run from one of several off site locations and not on site, in the cloud environment.

Okay, All right. Just then a quick one on the bad debt expense. Can you remind us the two clients that closed out. What kind of revenue was that, what was in your receivables and not there anymore, [indiscernible] in your receivables?

Yes, well $1.1 million bad debt expense for the quarter. There's always that possibility, we've had a, I would say remarkably good bad debt experience for the last three years. And we just happened to have two large ones occur within the same quarter. So while there's no guarantees that there won't be similar experiences in the future. Based on prior history, this was definitely a one-off event.

Okay, one last ICD-10 and your TruBridge. What are you seeing as your initial customer reactions with ICD-10? Obviously it's helping you guys a lot in the coding, new clients in 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?

I don't know, exactly 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 a few had problems, that they probably weren't prepared as well as they should have been up front. But as from a software perspective and a billing perspective, everything's going very well.

All right, thanks. Boyd, David.

Our next question comes from the line Jamie Stockton with Wells Fargo. You may proceed with your question.

Good evening, guys. Thanks for taking my questions. I guess maybe the first one, Boyd. I think it was in your comments that you said that you thought there were some vendors that, didn't have viable platforms for MU 3 or 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 you know at the same time. Is this a situation where we're talking like MEDITECH MAGIC Hospitals that probably need to transition to something else or maybe Legacy Healthland Hospitals. And those vendors have another product that will actually get to MU 3 and so you're going to get out with them. If you could, just give us some more color there that would be great?

Sure, first of all in your first question. We're 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 specific. I'll just categorize it as certainly there are some platforms out there that are being sunset [ph], some have already announced, some we anticipate being announced. And then there's other vendors that appear to no longer be in the market. It was a little bit about, but don't want to get specific on what vendors are doing what.

Okay, sure. And then maybe just sticking with MU 3. I think you said $150,000 or so of opportunity with the typical facility. Can you talk about some of the functionality that you think would incrementally be needed from a module standpoint?

Yes, it's more on an analytical side, not to be confused with the big data and population health and all that. But getting that day that out of the system and reporting to various agencies and the thing - probably is the, 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.

Okay and then maybe just one more for me. 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 effort to make sure that from expense standpoint, you guys were doing everything you can to keep things tight?

Yes, at this time. There should be no expectation, if there's more to come. I mean obviously, as we look into 2016 and beyond. As we sort of 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're staffed appropriately for that. So at this point we feel, with the $6 million plus that we begin 2016 in a better position than [indiscernible] 2015, that we're position we need to be and 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 in 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 now and so that's a long answer. The short answer, is that there's no expectations right now for any more of that.

Okay, that's great. Thanks guys.

Our next question comes from the line David Larsen with Leerink Partners. You may proceed with your question.

Can you talk about TruBridge and do you plan to invest more dollars into that division and it sounds to me like you're migrating towards becoming more of a service company, with more recurring revenue. Can you just give a little more color on that process, thanks?

Yes, I mean we definitely did a lot of investment in personnel as I mentioned in our prepared comments in the third quarter with - that was based. In large part on the coding business and our success there and then our continued success with the business office and private pay outsourcing, primarily. We also continue to do, a good deal of clinical in revenue cycle consulting as well. And by looking at our pipeline, the number of hospitals that we're 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 mid-sized hospitals took to run their entire business office, that we're staffed adequate 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 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've got the scale now. We think that on any sort of six to 12-month timeframe that number should always be somewhere between 35% and 40%.

Great, thanks very much.

Our next question comes from the line of Donald Hooker with KeyBanc. You may proceed with your question.

Great. Good afternoon. So just when we think about the revenue guidance, if you don't mind. I mean we're just trying to sort of level that, 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?

In Q4.

I mean obviously.

I don't, 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 15% to 17% growth in TruBridge and I think that you ought to be able to plug your system sales numbers from there, I believe.

Okay and then I guess, one last one from 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 overtime? Is there a, I guess you've 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're very early?

Yes, the best way to look at it at this point is, we're going to charge a base license fee, just for analytics in general. Which is going to be a pretty wide swap of products, but just to get into that arena, the base fee for that's $50,000 and that's the one, that we've announced all five of those? 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 you know the $50,000 base license for analytics is probably what you're asking for now.

Yes as a starting point. Great thank you.

Our next question comes from the line of Garen Sarafian with Citi Research. You may proceed with your question.

Good afternoon, guys. I appreciate all the candor, but I guess as I look back, when we're talking about earnings and guidance few quarters ago. We're sort of talking about how those shift in the market, that took a turn quite quickly and how your guidance was reflecting more on the reality then. So I guess now, taking a step back and looking in the rearview mirror. What do you think you underestimated this prior quarter, that's now more accurately reflected?

Yes, that's certainly fair and we certainly blew it. We definitely were not aware, 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 any given quarter. We also certainly were not aware of the bad debt expense that we would undertake. If you're going back a couple quarters as we mentioned on the last call that we had about $500,000 to $600,000 in one time legal and accounting. And then on the revenue side, we've had more cloud than we anticipated over license fee installs which is good for a long-term, very bad for the short-term. And I would say in addition to that, which one thing that we have mentioned in this call, the whole potential shift from a 365 to 90 day at the station [ph] period that we talked about being in 2015, did not materialize officially until the beginning of October. Which meant that, they're basically any of our customers didn't have the opportunity to take advantage of it. And 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 the say, by the end of the second quarter of 2015, which is what we initially anticipated.

Got it, so and you mentioned a point right there about the more mix in cloud versus not than expected. So just curious in, as a percent of the revised guidance. How much of that would you ballpark, is attributable for that mix shift alone?

Roughly $2.5 million, $3 million.

Okay, that's useful. And then how about from a competitive front? Can you discuss sort of what you're seeing in prior quarters, you sort of have, but anything to call out this quarter as to, any sort of change in behavior from the larger inpatient vendors or maybe even as new outpatient vendor developed cloud-based offerings, if that's sort of creating a pause in some client base, anything you can elaborate there?

No the latter thing, absolutely not. Definitely and we've mentioned I think on the last maybe three calls, certain being down more and we continue to see that. There's definitely some noise around being a slash razor [ph] but nothing concrete yet. We anticipate that coming at some point in the future and I don't think any of us know exactly when. Other than that, it's the traditional competitors Meditech, MEDHOST, Healthland, McKesson occasionally. All scripts vary occasionally that we've been competing with for the last 10 years to 30 years, depending on who you're talking about.

Got it and then my last question. It was sort of touched on debt expense. Can you elaborate little bit more as to, I'm assuming that there's sort of other buckets. Obviously before taking on that, Taking it in on as a bad debt expense so, is there any sort of deterioration in terms of past due 30 days, 60 days, 90 days. Is there any shift future earning?

Maximum are over 90 day AR is at, all time low as a percentage of total AR, right now. Now part of that, just had these two bad debts. But yeah it's at an all-time low as a percentage of AR at the moment. So again as I answered in the previous question. I mean there's no guarantees - in terms of the quality of our accounts receivable right now, we feel very good, as good as we ever felt about it.

Got it, great thank you very much.

Our next question comes from the line of George Hill with Deutsche Bank. You may proceed with your question.

Good afternoon guys. Boyd, you talked a little bit about the opportunity for 300 hospitals, that they potentially convert, don't have a Meaningful Use Stage 3 ready platform. Is there anything that you guys can do to accelerate their decision making process or ensure that you capture a disproportionate to share that opportunity?

I don't know that there's too much we can do accelerate it again to repeat from previous calls. I think 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're just taking a break. I think it's not really feasible that we can accelerate it, but as far as being a position to capitalize on it. Like I said on my prepared comments are. Our win rate at this point is really, really good in fact, it's at$8 all-time high because that goes back a long time, but any kind in relatively distant past, our win rate is exceptional. So we'll stay on top of that. I think that's mostly a function of our Meaningful Use success. So we'll still. You know talk about that and talk about all things that we can do to make that a feasible goal to achieve Meaningful Use, we've done that it very well. So I think that's really the main thing we can point out to do that. Obviously, the cloud hosting is really something that lot of people were interested in. So our ability to offer that, also I think is a benefit to go into with CPSI.

And I'll add to that, just a little bit George. The hospitals that are in this situation with vendors that probably won't be in a situation to have been prepared for Stage 3. In many cases they're on those vendors because they didn't want to spend the money to get on, where the ones that's the more reputable vendors in the space that have done a good job. Getting their customers at Stage 1 and 2. So inherent in that, is that most of those hospitals will wait until last minute to make a change.

Okay, maybe then just a quick follow-up given kind of, we've got pretty good visibility at least I think with performance will look like over the next couple of years. At what point, you guys start to think about things more radical the way to drive shareholder value, maybe a strategic M&A, maybe acquisition, maybe something, maybe just how you think about that? Thanks.

Yes, it's - I'm sure you know our history, everybody does. Is that, we've always grown organically and we've always looked at that type of strategy that other vendors have used in the industry, is one that. If you wanted to do something strategic, it would be to get a product that we don't already have and we've always chosen to ride it ourselves or it would be to add 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're 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 of his comments. I think our main answer that has been and continues to be TruBridge as that becomes more and more a part of our business and as if we can keep up work or even accelerate the growth rate there. You know that gives us great opportunity in the future. We think Stage 3 is going to provide Evident with the growth opportunity to the beginning middle of 2018. And then we feel like we'll be in a situation similar to what we've been in 2015 with regard to system sales. So we're always, we have looked at things in the past and we will always be open to continue to look at things, so who knows.

Okay, thanks guys. I appreciate your color.

Our next question comes from the line of Jeff Garro with William Blair. You may proceed with your question.

Good afternoon guys and thanks for taking the question. Maybe a little follow on to George's question there. Thing 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's some flexibility with Stage 3 in 2017 and just kind of when, we might see an inflection point of more decisions in the marketplace being made.

Yes, Jeff this is Boyd. I do think that, there will be some demand and we are already seeing it and I talked about that in prepared comments. The pipeline is up and we signed few more deals than we have in last several quarters. So we feel good about that and some of that has to do with mostly physician satisfaction or dissatisfaction depending, 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 make Meaningful Use and puts disparate systems together. And at the end of the day, if they look back the hospitals 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 a Meaningful Use 3. I mean you bring up a good point there is 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 the end users, specifically physicians.

Great, that's very helpful. and moving to TruBridge, curious to hear your commentary on what the drivers for that business are going to beyond ICD-10 both on a macro basis and company specifics that are going to continue to drive, all time high pipeline for that part of the business.

Yes, there is a trend right now inpatient healthcare and certainly in the community hospital among community hospital to outsource more and more. I think that's undeniable. As the TruBridge is similar to system sales and it's very hard to go back to an earlier question. It's very hard to convenience people that they need to buy what you have and pretty much have to just make people aware that you're President and you have a good core business and so that when they're ready to pull the trigger whether as to buy a new system or to outsource their business office, that you're the first person that they call. And so, we're seeing more and more of that. That it's just becoming more prevalent in the industry to outsource non-clinical functions. Certainly as the industry and hospitals move towards quality based reimbursement over the next say two years to five years. They're going to want to, just put their entire focus on clinical quality of care and not worry about anything else and that's where we feel, we step in perfectly with a combined Evident/TruBridge offering. Here's your EHR and here's your we'll do your coding, we'll do implementation and consulting for you and of course we'll run your business office for you as well. So that you can concentrate on taking care of your patients. 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 years and 10 years probably, where virtually 100% hospitals out there outsourced their business office and that's where we want to be prepared for and feel like, we are.

Very interesting. One last quick one, if I could 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?

They're in action now. We're gathering data and working with them on the things that they want to see. So we're already in action with those. We're looking for a few more kind of as pilot/beta type environment and we would like to get that to 10 but then, soon after that right around first of the year, that piece will be open for general availability.

Great, thanks for taking the questions, guys.

Our next question comes from the line of Nicholas Jansen with Raymond James. You may proceed with your question.

Guys, lots have been asked this far. But I just want to get a better sense of, the Evident rebranding that you did at HIMS. I think part of it was to perhaps attack a bigger addressable market. You're historically have been 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 sub 50, thanks.

Sure. As far as, we haven't signed any contracts yet with 100 plus bed, but we're certainly talking to some and again, we did that anticipation of there several products in that size of hospital that we expect to be sunset and so that's you know the ones that we've got our eyes on.

Okay, great and then secondly on the $6 million benefit heading into next year. So we're seeing with some strategic action 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 what do they think about the potential offsets to that $6 million reduction program? Thank you.

No, we netted out that offset.

Great, thanks for the color.

Our next question comes from the line of Frank Sparacino with First Analysis. You may proceed with your question.

Following up on that question, David. For hiring specifically, should we expect the 14, 22 to stay relatively flat or will you continue to hire on the TruBridge side?

We will 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 of quarters. I would anticipate, now closing the year at a flat quarter-over-quarter rate and then flat maybe 10, 20 by the first quarter of next year. That's just, that's a very educative guess, depending on attrition and so forth. But relatively flattish for the next six months.

Great and lastly for me. Just, when you look at TruBridge just from a high level, very approximate perspective. Can you give us a sense of the major service kind of the revenue breakdown?

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 obviously a big chunk of it, by far the fastest growing segment right now is medical record coding.

Great, thank you, David.

Our next question comes from the line of Steve Rubis with SunTrust. You may proceed with your question.

Hi, this is Steve Rubis with Stifel. In your prepared remarks, you highlighted the Meaningful Use to spending level is driving weakness. What gives you solace that problems are related to this Meaningful Use too low and not a more deflationary environment driven by CMS reimbursement reform?

Yes, I'm not sure I understand the second part of your question. We're not seeing a core financial weakness among our hospitals right now. It's certainly, the climate has been much worse as many points in our history. A reluctance to buy systems right now, generally speaking isn't because they want and they don't have the money. It's because everybody has invested anywhere from a $200 million to $2 million in their EHR within the last three years to five years and there is a weariness to continue to spend at IT at this point. Unless there severe physician satisfaction as Boyd alluded to in his earlier comments. So I think that's more of it right now. Certainly, there is, where I thought you were going is our solace is really is in the fact that, we're not seeing deals out there, that we are losing or that we are not involved in at all that are going to other people and certainly there's some occasionally, but that of the deals that are going down out there, are win percentages that are normalized rate and higher than normalized rate and so that's what really gives us solace. And we're also aware of other vendor that focus on the community and hospital market place and where their numbers are shaking up and the systems sales standpoint as well. And our numbers are very similar if not maybe a little bit better on our end. So that definitely gives us comfort that is not you problem or an us problem, if you will, it's an environment problem. But I do think that it's we never described the financial condition of the rural hospital market is strong, but we certainly don't care for as it is, weak right now.

Perfect, that was wonderful. Thank you.

Our next question comes from the line of Matthew Gillmor with Robert W. Baird. You may proceed with your question.

Thanks for taking the question, just a couple quick follow ups. For the shift to cloud platform, just curios which of your customers are moving in that direction? Are you seeing that one in the critical access side within some of the larger faculties? Is there any common theme to call out there and your customer base?

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. I mean, obviously everybody's 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. And some of our customer communities, the reliability and bandwidth isn't there, yet.

And then just, getting an update on the ambulatory activity. It seems 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're targeting? And then also what's the sales strategy for ambulatory? Are you working through the hospital relationship or the direct to the physician?

We're still primarily working through the hospital relationship. I mean, the opportunity 90% of our hospitals now have direct relationship with their physicians. Majority have some physician-owned clinics and those that don't certainly formalized relationship that we can, at least through our hospital contacts have interaction with the physicians and their IT departments. We have begun an effort to in specific areas to market our Thrive Provider EHR product to standalone clinics. It's a bit of a test case for us, we're doing it locally and then we're also doing it of course in communities, where we already have relationships with the hospitals and that initially has gone very well. So you know, it's - we don't expect at any point in the near future to be a competitor to all strips and greenway etc. But it is something that we're 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'll see where it goes.

And one last number's question. You might have mentioned this, but the $2 million of severance and the $1 million of bad debt in the quarter. Whether the both was included within your G&A one?

Yes.

Okay, thank you.

Our next question comes from the line of Eugene Mannheimer with Topeka Capital. You may proceed with your question.

Two part question here, David can you tell us if, ICD-10 challenges by your customers wait on the quarter at all or did that not play into 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, their small hospital segment. Just curious if you had a look at it and in general, what's your appetite for buying market share versus buying things you don't already have? Thanks.

ICD-10 question, I had absolutely no impact on our system sales business at all. I mean, you could make an argument that maybe some hospitals that otherwise would have been more aggressive in their process to buy a new system, we're concerned about implementing ICD-10 there's a lot trouble first, but I don't know 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 what documented both in our actions in the past and then what we've said about it, many times before. As I said earlier in, I think Boyd said on previous call. We were definitely entering a new timeframe here, where there is virtual 100% penetration other than what we've already talked about on the call. So who knows what the future holds.

Okay, thank you.

There are no further questions at this time. I will now turn the call back to you Mr. Douglas.

Great. Thank you so much. Thanks to everyone for being on the call and thank you for your interest in CPSI.

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.