Q2 2021 Computer Programs and Systems Inc Earnings Call
Greetings and welcome to C. P S eyes.
Second quarter 2021 earnings conference call at this time, all participants are on a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host drew Anderson. Thank you you may begin.
Good afternoon, and welcome to the C. P. S. <unk> second quarter 2021 earnings conference call.
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.
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.
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 on this call represents our outlook only as of this date and.
And we undertake no obligation to update or revise any forward looking statements to reflect events or developments. After the date of this call.
At this time I will turn the call over to Mr. Boyd Douglas President and Chief Executive Officer. Please go ahead Sir.
Thank you Terry.
Good afternoon, everyone and thank you for joining us today.
After my comments I will hand, the call over to Matt <unk>, Our Chief Financial Officer, who will provide additional color regarding our second quarter results.
Conclusion of our prepared comments, the 2 of us along with David dye.
Our chief growth Officer, and Chris Fowler, our Chief operating officer will be available to take your questions.
At the midpoint of 2021, and I'm extremely pleased to share that the focus commitment and hard work across CBS and our family of companies has delivered impressive results for the second quarter of 2021.
Our 3 year transformation initiative continues to guide our efforts to achieve core gross margin optimization and tangible upside through digital innovation.
Foundation, we are laying through margin optimization and sustain recurring revenue growth gives us confidence and our ability to create long term shareholder value.
I will start today by highlighting the results from our execution of core growth and margin optimization.
True group's volumes continue to recover nicely and at a pace that has surpassed our expectations and the second quarter true bridge generated $32.6 million and revenue with the newly acquired true code being a sizeable contribution.
In addition by leveraging our established customer relationships and cross sales of true grid services into our acute and post acute EHR base improved nicely over last quarter.
And while the pace of decisions for our EHR systems sales did not rebound as we had hoped and the second quarter, there wasn't a sizeable improvement and EHR bookings over the first quarter.
We are also encouraged by some key decisions that were recently made in our favor and both the EHR and services sales that have kicked us off to a solid booking start to the second half of the year.
Another important element to our strategy is the successful execution of initiatives that modernize our business and increase our efficiency and deliver long term cost savings and continued progress and on offshoring efforts with the true bridge medical coding and accounts receivable management services are.
We're getting factors to improve margins increased scalability and competitive pricing.
Given us greater confidence and visibility and achieving a combined cost savings as we stated last quarter of at least $1.5 million as we exit 2021.
And necessary element to our growth plan is the preservation of a healthy retention rates across our EHR base. As this is critical in order to achieve true bridge cross sale targets.
The advancement of our single solution across our EHR client base covers multiple care settings, including inpatient and ambulatory E D and skilled nursing and this initiative is progressing nicely.
Our latest offerings from the single solution include communication center and patient data console.
In addition, the recently announced partnership with medical and will allow us to integrate their clinical data engine, which will deliver even greater workflow efficiency and clinical decision, making with access to patient and problems specific information at the point of care.
These modules along with our previous releases of notes and web Com will further empower clinical users as they deliver care to their patients.
This combination gifts providers the ability to rapidly determine a patient's picture of health identified meaningful and sites take clinical action and efficiently alert or inform other care team members about the status of a patient with the same E. They communicate with friends and family.
The interest and acceptance we are seeing with these modern communications tools that improve care coordination is encouraging.
And finally.
With our new Chief Interventional and officer West Coast Guard on Board, we are pursuing additional uplift to our core growth and margin optimization efforts through innovation.
True bridge will see a direct benefit from these initiatives, which focus on robotic process automation and a core true merged services.
And from decision support from cash posting we have identified manual processes that contribute to unnecessary employee inefficiencies that once the automated well allow our revenue cycle teams to instead focus on real value add activities for our customers.
In summary, I want to stress how proud I am on strong start we have made to the transformation underway at CBS and only 6 months. There is still much work ahead of us as we continue on our 3 year journey to increase shareholder value. While also advancing the interests of our employees and customers.
<unk> commitment to enhancing and empowering our clients communities with our solutions and services is determined and relentless.
With that I'll turn the call over to Matt for a deeper dive into the financial results.
Thanks, Boyd and good afternoon, everyone on today's call I'll provide a high level overview of the quarter.
Including some additional detail on bookings performance and a brief walk through our second quarter financial results.
Obviously, the pandemic severe impact on patient volumes during the second quarter of 2020, coupled with the resumption of near normal volumes and the second quarter of 2021 made for a nice headline against relatively easy comps the comps issue aside the second quarter stands out as a strong quarter and in absolute terms with them.
Key themes driving the strong financial results.
Our customer base continues to surprise us and their resiliency with patient volumes once again exceeding our expectations driving true bridge to outperform internal top line expectations for the quarter.
This resiliency is working in tandem with improved retention of our hospital EHR customers to drive recurring revenue growth.
Midway through 2021, our hospital EHR retention rates are at their highest levels since our acquisition of health plan in 2016.
Second during the past quarter, we've worked with external subject matter experts to adopt best practices for labor capitalization, and and agile software development environment, resulting in a higher capitalization rate that we feel better reflects the investments we've been making to bring incremental functionality and features to our EHR products.
And <unk>, including progress towards our single solution.
Third the inclusion of true code and the second quarter numbers brought inorganic growth to our true bridge revenue line, adding an incremental $1.6 million of revenue absent purchase accounting adjustments and $600000 of incremental EBITDA.
These amounts represent roughly half quarters activity with the acquisition occurring in mid May.
True coach revenues for the full quarter were $2.8 million with a year to date revenues of $6.6 million share.
Core EBITDA for the full quarter was $1 million with year to date EBITDA of $3.1 million.
Moving on to bookings the second quarter showed a significant improvement over the first quarter's disappointing bookings with total bookings of $16.6 million marketing and 89% sequential increase.
We mentioned on our last earnings call that the pandemic continuing impact on rural and community hospitals created a particularly stingy bookings environment during the first quarter.
And while that environment became more favorable during the second quarter. The decision pace is still lagging historical norms, particularly among our net new EHR decisions, resulting in bookings for the quarter debt were short of our expert expectations and 17% below the second quarter of 2020.
System sales and support bookings were up 69% sequentially behind strength and add on bookings, but down 27% compared to the second quarter of 2020 net bookings for net new EHR sales continue to suffer from the slower decision pace.
Including add on sales subscription arrangements made up 45% of the second quarter's total EHR bookings as we continue our efforts towards driving recurring revenue growth through greater emphasis on our SaaS offerings throughout the sales process.
Steering more of our new business towards SaaS offerings, we're increasing the prevalence of recurring revenues within our topline mix, leading to enhanced predictability for revenues and cash flows.
Compared to the EHR business true British bookings Faired noticeably better during the quarter with improved cross sell success, causing bookings to more than double the first quarter's amounts and showing a modest 6% increase over the second quarter of 2020.
Turning to the financial results for the period, the inclusion of true co drove revenue to a slight sequential increase while revenues increased 15% over the second quarter of 2020 as hospital patient volumes plummeted and the second quarter of last year, placing intense pressure on true bridge revenues.
Overall recurring revenues increased roughly 2% sequentially and 17% over the second quarter of 2020, arriving at yet another all time high of 91% of total revenues compared to 90% and both the first quarter of 2021 and second quarter of 2020.
On the profitability front increased labor capitalization was the main driver behind a $2.5 million or 21% sequential increase and adjusted EBITDA and a $1.7 million or 19% sequential increase and non-GAAP net income.
Both non-GAAP net income and adjusted EBITDA nearly doubled from the second quarter of 2000, Twenty's pandemic weekend results.
The second quarter of 2021, 15, 7% non-GAAP net margin set of new Cps on record while the periods adjusted EBITDA EBITDA margin of nearly 21% missed setting another record by only 30 basis points.
Looking deeper at our segments true bridge revenues increased 3% sequentially as an incremental $1.6 million or 2 code revenue balanced out temporary revenue declines and other areas as patient volumes expectedly backed off their first quarter pace, while gross margins compressed to 47% compared to 50% and the <unk>.
First quarter due to increased cloud hosting expenses.
Unsurprisingly true bridge revenues grew significantly over the second quarter of 2020, showing a 31% top line improvement and a 260 basis point improvement and gross margin.
And next systems sales and support revenue saw a slight decrease in revenue sequentially debt combined with flat cost of sales gross margins down slightly from 52% and the first quarter to 51, 5% and the second quarter.
Compared to the second quarter of 2020 overall systems sales and support revenues were up $1.2 million or 4% as acute care SaaS revenues increased $1.6 million or 75%.
Despite the increase in revenues gross margins decreased from the second quarter of 2020, 55% as costs related to pre revenue projects outpaced revenue gains.
We currently anticipate 6 new client facilities going live with our drive solution and the third quarter of 2021 with 3 expected to go live and a cloud or SaaS environment.
Moving on to operating expenses product development cost decreased roughly $2 million and 23% both sequentially and year over year due to the aforementioned increased labor capitalization.
Excluding GAAP labor capitalization cash spend for product development was relatively flat sequentially and increased nearly 5% from the second quarter of 2020.
Yes.
Sales and marketing costs were flat sequentially and year over year as efficiencies, resulting from our business transformation initiatives were balanced by increased commissions and travel costs.
General and administrative costs decreased to $2 million from the first quarter of 2021 and severance costs associated with the reduction in force, we announced in our February and 90, 8-K filing decreased $1.9 million.
While the period $700000 of costs associated with the true coat acquisition were offset by improved health claims and bad debt experience.
Year over year costs were flat and improved health claims and bad debt experience where balance for the cost of the true <unk> acquisition.
The second quarter saw uncharacteristically low levels of both bad debt and health claims related to our self insured health benefit plans and we conservatively expect those amounts to normalized and the third quarter, creating some incremental headwinds to EBITDA growth.
Closing out the income statement, our effective tax rate during the quarter was 14% compared to a benefit of 4% and the second quarter of 2020 as the benefit from R&D tax credits normalized this quarter after having an outsized impact on the second quarter of 2020, we.
We now expect our full year 2021 effective rate of 17% to 18%.
From a cash flow standpoint, operating cash flows of $19.4 million set another cps on record and marked a 13% improvement over the second quarter of 2020.
Driving trailing 12 months operating cash flow to a record $57 million.
A 13% increase over trailing 12 month operating cash flows from a year ago.
This strength and operating cash flows has allowed cps side to limit our year over year increase and bank debt, so less and $14 million. Despite funding the entire $61 million purchase price for true code using revolver proceeds.
From a free cash flow perspective, the second quarter was $16.1 million of cash flow Mark the second highest in company history.
On capital allocation, our strategy prioritizes flexibility to have Cps Si optimally positioned to opportunistically deploy capital through a combination of M&A internal investments and value based share repurchases.
The most notable capital allocation event for Cps side during the second quarter was the acquisition acquisition of true code for an initial cash purchase price of $61 million.
As we mentioned during the May 13th call to announce the deal true co checks all the boxes on our IPO M&A target profile the.
The company has an impressive history of responsible growth with a 5 year revenue CAGR of 8%.
Nearly all of the revenues are recurring which pairs nicely with a renewed emphasis over the past few years of driving recurring revenue growth reaping the benefits of enhanced visibility and predictability.
True coach historical customer retention rates are in excess of 95%. So the revenue is both recurring and sticky.
And at around 45% the historical EBITDA margins are robust.
The initial purchase price of $61 million versus 2000, Twenty's total EBITDA of $5.9 million works out to and initial evaluation of 10, 3 times with a forward multiple of around 9.7 times.
And the potential $15 million earn out value incremental EBITDA at 5 times and if the maximum earn out is achieved and the overall EBITDA multiple decreased to 8.4 times.
This opportunistic acquisition was aided by our conservative leverage position driven by our target leverage ratio of 2.5 times debt to EBITDA.
Leverage currently sits at 2.3 times after the true co transaction, which has CSI well positioned to respond quickly to other opportunities that may arise.
To wrap up our prepared remarks, the second quarter proved to be and all around success for Cps side and we're excited for what the rest of the year holds with true code now fully and the folks.
On may 13th call to announce the addition of Truecar and we increased our annual revenue guidance to between $275 million and $285 million and adjusted EBITDA margins between 17% and 18%.
But the second quarter behind Us, we remain confident and the topline guidance, while revised expectations around labor capitalization and raise our full year adjusted EBITDA margin expectations to between 18% and 19%.
And with that we'd like to open the lineup for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad and.
A confirmation tone will indicate your line is and the question queue. You May Press Star 2 if you like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, 1 moment, please while we poll for questions.
Our first question comes from Jeff Garro with Piper Sandler. Please proceed with your question.
Yeah.
And congrats on the quarter and thanks for taking the questions..1 is a little bit more about the shift towards recurring revenue and I guess for starters would like to know what the specific percentage of recurring revenue was in the quarter out of the total and then.
I noticed in the year to date installs leaning heavily towards the implementation was hoping we could get some further commentary on.
What's in the pipeline and what the prospective mix of license and SaaS for the rest of the year in terms of new installs and the again the sales pipeline decision.
So Jeff Thanks for the question and I think we mentioned in the prepared comments that the mix of recurring revenue versus recurring revenue as a percentage of total it's about 91% for the second quarter. So that's an all time high for Cps side I'll turn it over to David to talk kind of about the license mix Thats and then the pipeline right now.
Yeah, Hey, Jeff David here, the and the pipeline for net new EHR and spoken about 80, 20 or 80% versus 20% license.
And then in addition to that.
As we continue to endeavor to.
So and trust into the existing client base, and we hope to see that number increase as well.
And I feel that that helps them and also little bit more about the end market and in the release and positive comments on the pipeline and the start to the second half of the year and and also and there a reference to the 3 year targets.
And the expectation that bookings will pick up from the second half. So any more comments that you could offer on the type of performance that you need and the second half to stay on track to achieve those 3 year targets and.
And any areas, where you're expecting outsized strength, whether its the net new EHR prospects or or maybe with true bridge fixed us going up market and outside the base.
Sure, Jeff David again.
And we certainly have a lot of work left to do for the rest of the year, but and we did get off to a good start to the third quarter backing up for just a second our pipeline our 6 month pipeline as of June 30 of this year was up sequentially.
Sequentially, 33%, so that was certainly a positive sign.
In particular, its up and the net new EHR segment of the business and then as we alluded to in the and the press release, we did have a good July we signed 3 net new EHR deals and we also got a large competitive true bridge takeaway.
From a non EHR hospital.
For true bridge accounts receivable management services, so that was a very positive as well.
Excellent thanks for taking the questions.
Thanks, Jeff.
Our next question is from Steve Halper with Cantor Fitzgerald. Please proceed with your question.
Hi could you just go through the revised guidance again because.
And then.
Yes, so Steven.
Yes on the May 13th call when we announced the true co deal we adjusted the topline guidance at that time to between $275 million and $285 million and we still feel comfortable with that range.
We are revising upward our EBITDA margin expectations to between 18 and 19% for the year.
Because of the higher <unk>.
Software capitalization rate now that's right okay.
Yeah on the.
The contribution from true code you said it was $1.6 million is that net of the deferred revenue.
Thanks.
The deferred revenue items.
And so that is.
And that is before any purchase price and any purchasing purchase accounting adjustments. So there was about $158000 deferred revenue haircut impact for the first quarter. So $1.6 -158, so about 145 would be the GAAP number that's showing up on the financials this quarter.
Got it okay, that's what I needed to know and then the other thing is.
At 1 point, if I recall correctly, you were talking about share repurchase is that on hold or is that contemplated going forward.
Yes, so as we've mentioned on past calls, we definitely want to be opportunistic as we deploy our multifaceted capital allocation strategy and.
And maximizing that flexibility, obviously means that we're not going on we don't necessarily want to tie ourselves to some sort of arbitrary goal and what we think annual share repurchases are going to look like.
Because we don't necessarily know what the what the value of the options that is going to look like on the M&A side, and so I'd say that there's probably a lean somewhat towards using capital to fund growth and.
And the quality the quality and maturity of our M&A pipeline is going to dictate a lot. So stay tuned there on the share repurchase side.
It goes hand in hand, with what happens on the M&A pipeline got.
Got it okay. Thank you.
And as a reminder, if you'd like to ask a question. Please press star 1 on your telephone keypad 1 moment, please while we poll for questions.
Our next question comes from Joy hang with SBB Leerink.
Please proceed with your question.
Hey, guys congrats on the quarter and thank you for taking my question.
And Michael I'll start with <unk>.
Share count on.
Can you provide any sort of early color on how the cross sell pipeline and trending and is it sort of more geared towards the standalone cross from outside or are they more sort of bundled with other true break offering.
Joy for the first part of your question.
The deal closed on May 12, or somewhere in the middle of May and we were really happy we got 4 cross sell deals into the EHR base close between net and the end of the quarter.
So that was certainly very positive I didn't get the second part of your question Krishna.
I think Joe This is Chris I think the question is as it relates to whether it's true code standalone and into the base or whether we're bundling it with other services is that correct.
Okay, Yes, I would say right now obviously, the 4 deals point and the fact that its standalone, but obviously as we continue to enable the sales force.
Want to continue to leverage the overall goal, which is to move as many customers to and trust as possible and obviously this is just another another part of that strategy.
Strategy.
Got it that's very helpful.
And 1 more housekeeping question from me on.
Now what sort of volume assumptions are baked into guidance is it still at day, 90% of pre COVID-19 level as in your prior guidance or has that increased given that volume trended above expectation earlier this year.
Yes, so Julian I think we've increased it based off of kind of the new information that we've gotten from our patients or from our hospital customers and I'll say, we've elevated somewhat above the 90% range and more reflective of what we're seeing right now.
That's helpful. Thank you.
Thanks Jordan.
We have reached and the question and answer session I would now like to turn the call back over to Boyd Douglas for closing comments.
Great. Thank you I certainly want to thank everyone for their time and for being on the call today and your interest and CBS.
Clearly we're excited about.
And our strategic direction, and our execution and the <unk>.
6 months on that and I, certainly look forward and more to come but thank you for your time and hope everyone has a good rest of your weighted.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.