CPSI (2021 - Q1)

Greetings, and welcome to the CPSI First Quarter 2021 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

Good morning, and welcome to the CPSI first quarter 2021 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.

Thank you, Drew. Good morning, everyone, and thank you for joining us to that. After my comments, I will hand the call over to Matt Chambless, our Chief Financial Officer, who will provide additional color regarding our first quarter results. 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. I would like to begin by sharing how much I am looking forward to the day when the COVID pandemic and many ramifications it has created are behind us. Until then, I feel compelled to continue offering our appreciation for the tireless efforts of the healthcare providers in the communities we serve. Community hospitals serve as the epicenter of healthcare for their families, friends and neighbors from miles around, especially throughout the pandemic. With rural communities disproportionately at risk to COVID due to their increased vulnerability, the January surge of COVID cases hit many of our customers especially hard. Shortly following in March, efforts were focused on the initial rollout of the vaccination. All told, the first quarter of 2021 left our community customers immeasurably affected as a result of this ongoing fight against the COVID pandemic. Our respect is stronger than ever and the pride we have in our partnerships across the country is unwavering. The end of the first quarter of 2021 marks a strong start to the transformation under way at CPSI, as we began our journey executing on an aggressive yet obtainable plan to increase shareholder return over the next three years. As a reminder, there are three components to our plan, core growth, margin optimization, and tangible upside growth through digital innovation. Matt will provide more detail around our solid financial results in the first quarter. However, I would like to highlight a couple of key drivers that are directly related to core growth and margin optimization.

Thanks, Boyd, and good afternoon, everyone. On today's call, I will provide a high level overview of the quarter, including some additional detail on bookings performance and a brief walk through our first quarter financial results. As you heard from Boyd's opening remarks, the weak decision environment led to bookings results that shouldn't distract from an overall successful quarter for CPSI. Continued execution on our strategy of increasing sources of recurring revenues combined with improving patient volumes and efficiency gains led to a quarter that surpassed internal expectations on the top and bottom lines. As we look to the rest of 2021, we see these two developments, namely bookings below expectations and TruBridge patient volumes continuing to exceed expectations as effectively offsetting each other. As a result, there is no update to the guidance we gave back in February as those ranges still reflect our internal expectations. Moving on to bookings. Total bookings for the first quarter of $8.8 million were clearly disappointing as the pandemic attacked bookings, creating a stingy decision environment, the likes of which we can't recall seeing before. The early part of the quarter saw a severe uptick in COVID cases, while the latter portion of the quarter saw our clients facilities rightfully preoccupied with vaccine distribution efforts. Many rural communities are effectively healthcare deserts with our hospital customers serving as the lone Oasis, making them critical to vaccination efforts in these communities. As a result, we ended up with quarterly bookings that don't reflect the markets want and excitement for our products and services. System sales and support bookings were down 45% sequentially and 38% from the first quarter of 2020, as the stingy net new decision environment simply didn't yield many decisions either for us or against us. This same dynamic made its presence felt in our TruBridge bookings as well, which were down 73% sequentially and 72% from the first quarter of 2020, with the decline in bookings from outside our EHR base outpacing declines from cross-sell opportunities. Including add-on sales subscription arrangements made up 31% of the first quarter's total EHR bookings as we continue our efforts toward driving recurring revenue growth through greater emphasis on our SaaS offerings throughout the sales process. By steering more of our new business toward SaaS offerings, we are increasing the prevalence of recurring revenues within our top line mix, leading to enhanced predictability for revenues and cash flows.

Our first question is with Donald Hooker from KeyBanc Capital Markets. Please proceed with your question.

Great, good morning, everyone. A quick question, your reference - remind me your referenced bookings targets for the year and you referenced to healthy pipeline. I think we can all understand that the bookings in the quarter were challenged due to sort of macro conditions with COVID. But can you maybe elaborate on your reference to bookings target for the year and sort of the healthy pipeline? Is there a way to put numbers to that?

Yes, hey Donald, David Dye here. Approximately we are about $10 million behind as of the end of the quarter where we want to be. And as Matt and Boyd stated in their prepared remarks, our goal right now is to - we have been saying internally is to get back to even par by the end of the year. The three-month pipeline as we exited the first quarter was a good number, it is actually the best number that we have seen since September of 2019. And the last quarter of that year the following quarter was a really good quarter from an execution standpoint, so we certainly hope to repeat that. We have gotten off to a fair start, but we still got room to go in the second quarter. But the market is definitely picking up. We are getting on-site meetings, the engagement is - the vaccine rollout has slowed. Obviously, the surge is behind us hopefully for good. We certainly all hope that and the engagement levels have increased dramatically just over the course of the last couple of weeks. So we are hopeful that we are going to have a good quarter this quarter and get back some of that, with the goal of getting it all back by the end of the year.

Super, great. And then in terms of - can you help us think about, I guess you referenced a real estate strategy and it sounds like you are going to make some investments in CapEx in the coming quarters. Can you kind of update us on your view on free cash flow and CapEx? Does that do anything to our models in terms of expectations there?

Yes, so Don, I wouldn't expect anything material to come through on the CapEx line. Boyd mentioned that we recently moved our corporate headquarters from our Wall Street campus in Mobile to downtown Mobile. And fortunately for us, the location we moved into is relatively turnkey. So there may be some remodeling cost, painting the walls, things like that, but nothing material, and that is kind of what we expect for the rest of our locations as well. So if I had to put a number on it, I would say it is probably for the year is going to be somewhere around $250,000 or so. So clearly not material compared to overall free cash flow.

Got you. And then maybe a last question from me I guess was sort of. I guess some people are concerned about inflation broadly in the U.S. economy. I'm just wondering if you have seen any sort of wage or cost pressure and can you kind of give us some thoughts on CPSIs pricing power across various products and services?

Speaking to pricing pressure at least for the resources that we consume, which is mainly our people, as the TruBridge line is very service intensive. We really haven't seen any demand or any pressure on those wage levels just yet, but it is definitely something that we keep an eye on to see what is happening in the macro trends as to a certain extent the geographies that we are in do tend to kind of lag behind the kind of macro economy in total.

Okay, thank you.

Our next question is with George Hill from Deutsche Bank. Please proceed with your question.

Hi, Its (Ph) on for George. Thanks for taking the question. So last year you guys talked about you need to solve what is the additional value for hospital to switch to a subscription-based model. Could you give us some update on the progress on speeding up the transition?

Sorry, can you repeat the question.

Yes, last year you guys talked about you need to solve what is the additional value for hospitals to switch to a subscription-based model. I was just wondering if you could give us some update on the progress on speeding up that transition.

Yes, I think a good question, and Matt touched on it in his commentary and I don't remember the exact numbers, but I think it was the SaaS EHR revenue was up, I believe 50% year-over-year from the prior period, which speaks of that progress. Some of that is some the new sales and installations that occurred in 2020 and going into 2021, the higher percentage of those have continued to be SaaS as opposed to the license model. But in addition to that, I believe we sold 18 nTrust subscriptions into our current customer base in 2020 as well. So you are starting to see the fruits of that flowing into the income statement as well.

And I think another thing to point out, Matt said it in his prepared comments that all five of the installs for second quarter are stats as well.

Thanks. That is very helpful, and maybe just a quick follow-up. Could you give us some color on what you are seeing in the process of TruBridge accounts receivable management services, I think last time you mentioned you had around 10% penetration within your existing EHR base.

Yes, well, that obviously that did improve a whole heck of a lot in the first quarter given the bookings performance, but the pipeline is certainly there to continue to do so again going back to nTrust that is a large part of our strategy there. I mean, clearly the way we view the revenue cycle management space both within our current customer base and outside of our EHR base is that it is extremely underpenetrated, it is similar to the where the EHR market was in 2010 prior to meaningful use, and we are positioned to capitalize on it and we hope to do so. And the pipeline supports that we just need to execute on that pipeline now.

Our next question is with Joy Zhang from SVB Leerink. Please proceed with your question.

Hey guys, thank you for taking my question. I just wanted to follow-up on the bookings question that was asked earlier. Maybe can you provide more color on what new in assumptions are baked into your FY 2021 guidance? For example, does the midpoint of guidance assume a similar booking levels as last year at that $20 million per quarter run rate or are there some questions on built in?

Yes. So the guidance we gave in February which we still feel kind of reflects our expectations for the year revenue wise. Yes, I would say that that is a fair assessment, the kind of $20 million-ish on bookings on a quarterly basis, perhaps just modest, very slight increase over 2020 levels.

That is very helpful. And as a follow-up. I was wondering if you saw any uptick in small hospital M&A through the pandemic that would lead you to assume a higher attrition risk for FY 2021? You mentioned the retention was 95% in 1Q. Does your guidance for FY 2021 assume a similar level to that or would it be slightly lower?

Yes, Joy, we did not see a pickup in M&A activity with the community healthcare market. I'm sure a lot of that had to do with government assistance that was provided as a result of the pandemic, we would say it is flat to down and that is reflected in our retention rates.

Yes. And as far as the retention assumptions that went into our guidance, 2020 retention of 95%. We are expecting 2021 to follow pretty close to that. And we have been pretty encouraged by what we have seen so far into 2021 with the numbers actually trending just slightly ahead of that. But we do expect it to normalize back down to somewhere to the 2020 levels by the end of the year. So that 95% retention is kind of what we are pegging as our goal for 2021.

That is super helpful. Thank you very much.

Our next question is with the Gene Mannheimer with Dougherty and Company. Please proceed with your question.

Thanks, gentlemen. Congrats on the good quarter. With respect to the TruBridge bookings in the quarter, when do you generally kind of see that convert to revenue, is there generally a three-month to six-month lag between those bookings and revenue rec?

Yes, Gene. So you are hitting it nearly spot on in kind of a three-month to six-month lag between ink on paper for the contract and when we get the customer up and running on rev rec. So I know when we model it internally, it is generally either a one or two quarter lag, probably more consistently a two quarter lag between when the bookings hit and when revenue begins.

Okay, perfect. And with respect to your longer-term goal for EBITDA of $80 million, I'm just trying to get a sense for how much of that will be driven by margin optimization as you call it versus organic growth and versus inorganic or acquired growth, is there a way we should think about that?

Yes, Gene. Boyd did a good job on the last call of laying out the details of how we expect to get to this $80 million in EBITDA by 2024. The first thing to point out is that the expectation is that will all be organic. Now any of our disciplined M&A contributions will be just additive to that $80 million number. But as far as the margin, that the cost on a margin optimization side of it, Boyd pointed out on the last call a $25 million cost reduction as far as the impact to the margin impact. And then the rest is just the incremental organic recurring revenue growth.

Great, thank you.

Our next question is with Donald Hooker from KeyBanc Capital Markets. Please proceed with your question.

Okay, great. Just a couple of follow-ups if you don't mind if we have time here. The gross margin at TruBridge was very strong and I'm trying to sort of understand kind of how to think about that going forward. My intuition is that aside from synergies and cost efficiencies that margin might trend down over time to the extent you have more revenue cycle outsourcing business that is my hunch. But can you update sort of what the other direction over the past couple of quarters can you give us sort of an outlook on the TruBridge gross margins?

Yes, Donald, a little of that comes from what the sales mix is. So depending on it, its accounts receivable management, the coding or the early out business, obviously that is a little bit more labor intensive. It is going to pull the margin down if that mix is heavier on the TruBridge RCM side, where we run at a higher margin more in line with your traditional software margins, we see a pickup there. Boyd also referenced in his opening comments, our efforts to improve efficiencies through automation and some offshoring initiatives throughout the coming years. So I would think that the margin that you are seeing right now is a good indicator of where we look to hold going forward as we see the bookings pick back up.

Okay, that is super helpful. And then I would also love to hear with the balance sheet continuously improving, can you give us any kind of teasers in terms of what kind of acquisitions you might be looking at overtime. Are there areas, I know this can be asked of you every quarter, but a common question. But I would love to hear any kind of areas of interest that you guys might consider in the coming year or so on the M&A front?

Yes, Donald. Boyd outlined this as well last quarter in his prepared remarks and the strategy remains unchanged and is really a key function of our next 36 initiative is that we just want to be thoughtful and specifically look at opportunities to drive TruBridge growth be across sales and new markets. That is where our focus is.

Okay, super. I will leave you guys alone. Thank you so much.

Thanks Don. I will just add on to that, I think again, and I said it last time, but I think it is worth repeating. The value of our customer base is something that we really feel there is a lot of untapped potential there both with the existing TruBridge services and then with future M&A. So that is really kind of the driver behind that, just to kind of follow-up on that question as well. Operator, are there any more questions?

We have reached the end of the question-and-answer session. I would like to turn the call back over to Mr. Douglas for closing remarks.

Thank you for your time this morning. It was a pleasure sharing the solid start we have made in our transformation this first quarter. We believe wholeheartedly that our strategic plan while aggressive is achievable. We will continue to apply laser-focus on the three components of our plan, core growth, margin optimization and the tangible upside growth through digital innovation with the objective to increase shareholder return over the next three years. And while there is still plenty of work ahead of us, we believe the progress we covered today has already begun to have a positive impact on our effectiveness, efficiency, and value delivered to our shareholders, clients and employees. Thanks everyone for being on the call and have a great rest of your day.

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