CPSI (2020 - Q4)

Greetings, and welcome to the CPSI Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Drew Anderson. Drew And

Thank you. Good afternoon and welcome to the CPSI fourth quarter 2020 earnings conference call. During this call, we may make statements regarding future operating plans, expectations and performance that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that any such forward-looking statements only reflect management expectations and predictions based upon currently available information and are not guarantees of future results or performance. Actual results might differ materially from those expressed or implied by such forward-looking statements as a result of known and unknown risks, uncertainties and other factors, including those described in our public releases and reports filed with the Securities and Exchange Commission, including but not limited to our most recent annual report on Form 10-K. We also caution investors that the forward-looking information provided in this call represents our outlook only as of this date and we undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call.

Thanks, Drew. Good afternoon, everyone and thank you for joining us. After my comments, I will hand the call over to Matt Chambless, our Chief Financial Officer, who will provide additional color regarding our fourth quarter and year-end numbers and discuss our expectations for 2021 and beyond. At the conclusion of our prepared comments, the two of us along with David Dye, our Chief Growth Officer; and Chris Fowler, our Chief Operating Officer, will be available to take your questions. Before I begin, I would like to acknowledge our sincere appreciation for the never-ending efforts of our hospital, nursing home and clinic customers as they continue to aggressively and tirelessly fight the pandemic and their communities. In recent check-in calls with hospital leadership, I have heard descriptions of overflow ICU beds and hallways along with nursing shortages and overworked clinicians, all while simultaneously executing on vaccination rollout efforts for essential workers and elderly community residents. We are beyond proud to be partnered with these heroic healthcare providers and their communities. We end 2020 with pride in our execution during a challenging year and enter the New Year looking forward to what the future holds in 2021 and beyond. To that end, this afternoon, I'm going to spend some time framing up what's next for CPSI and our strengthened focus to increase total shareholder return. Although it may sound cliche, we have taken the never waste a crisis mantra to heart, using disruption of the past year as an opportunity to reassess our company growth strategy. During the past several months, we have partnered with a premium consulting firm to review our business and growth opportunities and to assist us in identifying the best path to increased value for our shareholders while also safeguarding the interest of other critical stakeholders such as our clients and employees. The purpose of this assessment was to more clearly define a strategy that would drive long-term sustainability and stewardship, gross CPSI's footprint and maximize our success in a post-COVID world. Our assessment confirmed and identified several compelling opportunities to grow our core business while investing in new technologies and improving overall profitability. The outcome is an aggressive yet attainable plan that is intended to provide significant shareholder returns over the next three to four years, culminating in an end goal of $80 million in adjusted EBITDA in 2024. There are three equally important components to this plan that we will pursue simultaneously. Core growth, margin optimization and tangible upside growth through innovation.

Thanks, Boyd and good afternoon, everyone. We're pleased with the way we concluded the challenging year that was 2020 recognizing that the lingering impact of the pandemic in the continued shift towards a higher mix of SaaS arrangements had a muting effect on the past quarter's results. On today's call, I'll provide a high-level overview of this quarter, including some additional details on bookings performance, a brief walk through our fourth quarter financial results and our outlook for 2021 and beyond. Starting with bookings, total bookings for the quarter of $21.2 million were flat sequentially and mark to 22% decrease from a tough comp against the fourth quarter of 2019. System sales and support bookings were down 19% sequentially due to a slow pace for net new acute care EHR decisions driving acute care EHR bookings down $1.5 million or 13%. Our post-acute segment saw bookings normalize somewhat after posting its highest bookings quarter of the past four years during the third quarter with the fourth quarter showing a $1.1 million or 50% sequential decline. Compared to the fourth quarter of 2019, system sales and support bookings were down $6.5 million or 37% as the fourth quarter of 2019 saw bookings that were at near-record levels adjusted for MU3 making for a particularly tough comp. Looking back at full year bookings, 2020's total system sales and support bookings of $48.8 million mark to 7% annual decline with declining bookings for acute care EHR add-on sales masking what we see as promising trends for 2021 and beyond, particularly net new acute care EHR bookings increased 4% despite the headwinds posed by the pandemic, while our post-acute segment had its best bookings year since 2016, showing a 25% improvement over 2019's annual result. We see both of these trends, the improvement in net new acute care EHR bookings and the gaining momentum for our post-acute segment as tangible proof that our markets recognize and appreciate the investments, we've made in our EHR products serving to protect our EHR customer base that is so vital to our core growth initiatives that Boyd touched on earlier.

At this time, we will be conducting a question-and-answer session. Our first question is from Steve Halper of Cantor Fitzgerald.

Yes, hi. Just a point of clarification on the EBITDA guidance for 2021, does that include the costs related to the headcount reduction as well as the benefit, I guess?

Yes, Steve. So yes, the anticipated costs from the 8-K that was announced today in the headcount reductions that Boyd spoke up, they are included in that guidance number.

Right. So, in theory, you should be able to get most of the benefit in 2022, correct?

That's right.

On a net basis. Okay. And then you talked about procedure volume increased - inching closer to historical levels with regard to your 2021 profitability expectations, have you made assumptions around that topic?

Yes, hi, Steve. This is Chris. As it relates to the model that we've put out for 2021, we're making assumptions based on 90% of historical volumes and that's just based on that being flatlined over the last several months and also with the thought that that volume may not return just based on trends over that last six to 12 months where it may be going to Telehealth, our urgent care or some other form service versus back into the historical setting in the hospital.

And last question as a follow-up. Have you - did your customer base see a decline in utilization say in November, December, January as COVID cases starts to increase again in some markets?

Not from the elective services but I would definitely say again, where we're seeing that flat line is in the ER, which I think long-term is probably a positive for the hospitals. It's just a matter of making up that utilization in the interim.

Great. But elective procedures are hanging in pretty good - pretty well?

From our hospitals, what we're seeing, yes.

Great. That's very helpful. Thank you.

Thank you.

Our next question is from Donald Hooker of KeyBanc Capital Markets. Please state your question.

Great. Good afternoon. Thank you. I just want to make sure I understand the math, you kind of threw out a bunch of numbers here. So it would seem like by my quick back of the envelope math, a math where you're growing TruBridge at about $111 million in 2020, I think you want - you're saying, you want to add, looks like about $85 million on top of that by 2024. So we're kind of talking about kind of a 15% revenue CAGR to get to that incremental revenue both within the client base and without outside of the client base and again, my numbers there right or am I missing something?

Yes. You're right. I mean if - I mean I don't have the math in front of me, but the starting point, 2020's aiming revenue number and we do expect the incremental $60 million from cross-sell, $25 million from outside of the EHR base. So yes, you're thinking about it right.

Okay. So that's a hefty, that's a good growth rate. I'm thinking about any kind of investments near term, just to - I know you kind of threw out an $80 million EBITDA target which is an admirable goal as well. Are there any kind of upfront costs? I'm just thinking about, to grow that, I mean you have a 51% gross margin in TruBridge from the outside looking in, it would look like you're running pretty lean there, how do I think about that? Am I - how do I interpret that gross margin of 51%? Does that need to come down significantly, they bring in staff to grow that 15%?

Yes, Steve, one of the ways that we're thinking about increasing that margin specifically on the TruBridge side is through automation and looking for opportunities for efficiencies there. Right now, we're still very human capital heavy on delivering the TruBridge services. So one of the initiatives inside of our Transformation Management Office is a focus towards that automation and process efficiency.

Okay, super. And then maybe one last one for me, kind of outside of the talking points around this quarter, would you still have these long-term financing receivables on the balance sheet? They seem like they have been coming down, just as you told us they would. Are you still have a fair number - fair amount of receivables there left? I'm hoping that comes in. What - how do we let's take $11.5 million long-term and $10.8 million short-term and I think a lot of that I thought was related to the meaningful use program to a $22 million of receivables - financing receivables. When will we expect that to be collected? That would be a nice lift to cash flow.

Yes. So you pick up on a nice - a nice pickup in cash flow for this year. I think it was worth about $6 million of cash contribution from financing receivables, which right now are at their lowest point that they've been in the past three years, which makes sense given the high SaaS mix that we've seen in the past couple of years and then our collection on these meaningful use stage 3 balances which were mostly financed over these 12-month terms. So in short, the past financing decisions coupled with this shift in license mix towards more SaaS has created a bit of a now a favorable disconnect between current period revenues and cash flows. So all that to say going forward, we may see some 90-day windows where financing receivables drag down cash flows, but we generally expect them to be cash flow positive next year somewhere and say $5 million to $6 million range.

Okay, super. Thank you. I'll jump again. Thanks.

Our next question is from Joy Zhang of SVB Leerink. Please state your question.

Good afternoon and thanks for taking my question.

Certainly.

So I would like to circle back on your comment on investing in automation within RCM. Can we assume that's going to towards hedge acquisitions or will that be since we're in health effort as well? And as a follow-up to that, can we sort of read that as that will be your area of focus within M&A rather than, let's say, Get Real Health or other areas ? Thanks.

Hey, Joy. This is Chris. I don't know if I would necessarily assume that that's going to be the lien for us from an M&A standpoint. I think we're looking at it much like we do the other development innovation throughout the company, it's a mix of what we can deliver in-house, who we can partner with to achieve that goal or is there anything opportunistically that we can find. Yes, when you are thinking about automation, artificial intelligence, you want to throw a handful of other buzzwords there, the multiples go sky high. So there is, we'll probably lean in a little more towards the partnership aspect of it, but we're not ruling anything out there.

Helpful. And as a follow-up, given your prepared remarks on strategically targeting new wins within the EHR market, wanted to just ask about the competitive environment and that has changed over this past year. I know during this time last year, you talked about seeing a health exit and seeing opportunity in perhaps Cerner being up, it's quite focused on that market. Are there still opportunities going forward, or were there some others?

Yes. Hey, Joy. David Dye here. We haven't seen any significant change over the course of the last year. I mean, we still have Athena health is still supporting their acute care customers but not doing any further sales efforts or development on that product. So we have seen some of those hospitals enter the market. We expect that more will do so over the course of 2021. There are still approximately 150 or so acute care hospitals under 100 beds that are on what we call vulnerable vendors, some are not enhancing the product and others are continuing to enhance the product, but we feel like from a position in clinician satisfaction standpoint, their scores are incredibly low. So a lot of those hospitals either currently or will be entering the market in the near future. We do continue to see Cerner on a somewhat regular basis, they - I would say that they don't have an intense focus on the small hospital marketplace right now, but it continues to be an area where they play in selectively and we continue to see Meditech as we have for decades as well on a somewhat regular basis. But there is no significant change.

That's helpful. Thank you very much.

Thanks, Joy.

Our next question is from Sandy Draper of Truist Securities. Please state your question.

Hey guys, It's Sandy. I guess I dropped my S.

We were wondering,

Yes. So a couple of questions. First on the, I think I heard you right, saying it was a 100% SaaS sales in the quarter. I know this bounces around a lot, but do you - are you seeing anything and it may be related to the pandemic, related to financial situations that suggest that we're leaning more towards those type of deals and you would expect a hyper ponder to SaaS? But that's kind of recall there was a several quarters ago, whereas very heavy SaaS and like the next quarter, it was like literally inverse traditional license and it's just flipped back. I'm just trying to see if there is anything you guys are seeing that suggest, okay, we're likely to stay more towards the SaaS.

Yes. Sandy, this is Matt. Just a point of clarification. So 50% of the contracts that were signed during the quarter for net new EHR on the acute side were SaaS, but 100% of the installations. So it's just a bit of a...

Okay. Well, so I guess maybe then if I take the last two quarters' then - trends, I guess the question is the same. I had that some of the - I misheard you. But are there trends that suggest we're leaning more towards SaaS or do you expect it to still be really lumpy quarter-to-quarter?

Hey, David Dye. I'm picking up here, Sandy, so from Matt, but it will of course be somewhat lumpy, but we are definitely seeing a trend move more to SaaS and I'd say that's for two reasons. One is frankly because we're pushing in that direction as much as we possibly can. But two, the customers continue to be just more receptive from a marketplace standpoint to a SaaS environment, a lot of that has to do with the connectivity and bandwidth availability and rural areas continues to improve quickly. So that's helping us as well. But we're currently projecting that 75% of our net new business sales in 2021 will be SaaS, based on the pipeline that we have today.

Okay. Great. That's helpful clarification. I'm sorry about that, the mishear on that, Matt. But so on the - second question is on the RCM side of TruBridge. When you think about there have been some sales in the space, when you think about going outside of your customer base, what are the key things that you think can differentiate you? What are people looking for? And is it really a reference sale and they just want to talk to five other people and they say you guys do a great job? Do they want to see specific metrics, capabilities? What is it? Because there - it's changing but there's still a lot of players out there. What is it that I think you have that you think can be - make you successful outside of the - where you've got a core software relationship?

Hey, Sandy. This is Chris. So lot there to unpack. I guess I'll start by saying for us and what we've really been focused on over the last 18 months is just a brand awareness, is making sure that we are in the game when somebody is making a decision. If you look to the other side on the EHR front, I don't think there is a community hospital EHR decision that CPSI is not a part in. And so what, aspirationally, we'd like to be there from an RCM standpoint. When we're thinking about metrics and referenceable and we feel like our stands up against anybody else. And we've got the - we've got some, the awards, whether it'd be HFMA Peer Reviewed or other credentialing to show that the product stands up, it's just a matter of getting the at-bats. We had some significant wins last year that we look to capitalize on and obviously, used those as a reference to catapult going forward.

Great. That's helpful. Thanks.

Yes. Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Boyd Douglas for closing remarks.

I want to thank everyone for your time this afternoon. I hope that you were able to sense our genuine enthusiasm around the transformation that we have begun at CPSI. We believe the time and effort that is going into this plan, some of which we highlighted today will have a very positive impact on our effectiveness, efficiency and value delivered to our shareholders, clients and employees. We look forward to providing updates on our progress each quarter as you join us on our mission to deliver efficient, accessible and transformative products and services to the global healthcare marketplace. Thanks, everyone, and have a good evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.