Q3 2021 Computer Programs and Systems Inc Earnings Call
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Greetings and welcome to the C. P. S. <unk> third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A brief 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.
A reminder, this conference is being recorded it is now my pleasure to introduce your host drew Anderson. Thank you. Mr. Anderson you may begin.
Good afternoon, and welcome to the G. P. S. I third 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.
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 relations 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.
At this time I will turn the call over to Mr. Boyd Douglas President and Chief Executive Officer. Please go ahead Sir.
Thank you drew.
Good afternoon, everyone and thank you for joining us today.
After my comments I'll hand, the call over to Matt Chambliss, Our Chief Financial Officer, who will provide additional color regarding our third quarter results at the conclusion of our prepared comments the two of US along with David <unk>, Our Chief growth Officer, and Chris Fowler, Our Chief operating officer will be available to take your questions.
Yes.
The pandemic continues to disrupt many aspects of our lives both personally and professionally as such last month, we hosted a virtual of that for our clients after making the difficult decision to postpone our annual in person conference until March of 2022 and St. Louis the named.
Postpaid <unk> was disappointing however, it afforded us the opportunity to give the topic of mental health within the health care workforce the attention that it deserves.
It'll help twice apart throughout the care continuum.
And as our very insightful guest speaker, Dr. Izzie Justice said it is.
Not health care, if the patient is being healed at the expense of the health care worker.
And with the help of Tracey Schroeder, our Chief marketing Officer, and Omar <unk>, Our Chief people Officer, we also explored the phenomenon around the great resignation.
By the burn out employees have experienced due to the Covid pandemic.
This conversation highlighted the importance of celebrating diversity and supporting the significance of inclusion and equity in the workplace to ensure people feel that they can bring their whole selves to work.
Understanding these important factors that impact employee engagement and talent recruitment is something we are taking seriously see BSI and we felt that it was important to share this with our clients during our virtual event.
And lastly, as part of the business update our clients learn from our Chief Innovation Officer West Collenchyme about the innovation headway being made.
<unk> reaffirmed with clients that we are investing heavily in talent and technology and talked about the efforts behind expediting our approach to expand our offerings and deliver insights to clients.
In terms of our third quarter performance. We are very pleased with our results a strong rebound in bookings along with a higher percentage of SaaS deals in the sales mix our highlights from the quarter and showed good progress against our three year growth strategy.
This transformation initiative that we began in January of 2021 has delivered solid results across the BSI.
I will share a few highlights and later, Matt will provide additional details.
First <unk> cross sell bookings were just over $3 million in the third quarter and now stand at $8 $6 million year to date.
Cross sell opportunity for true bridge remains significant and is supported by our EHR client retention rate remaining above 95% year to date.
True bridge third quarter net new bookings were just under $4 8 million and we closed a large competitive takeaway deal for our accounts receivable management services in the third quarter that was just under $2 million.
Finally, the key Kpis that we hold ourselves, particularly accountable to is margin expansion as.
As we execute our cost optimization efforts, we'd like to remind everyone that achievement against this goal will not be linear, particularly in the short term as the transformation of our EHR business to a more SaaS oriented business model and the resulting near term pressure on profitability competes against other meaningful.
Opportunities for long term margin expansion.
Despite the counter effect from the SaaS transition third quarter saw year over year increases in both GAAP net margin and adjusted EBITDA margin driven by significant improvement in true bridge, where gross margins have improved 440 basis points from the third quarter of last year.
Contributors to this progress include the automation of our revenue cycle services through expanded partnerships that help absorb work related to medical coding and accounts receivable management.
Both have a direct correlation to our improved scalability and delivery of these services at a lower cost.
Our focused intent on increasing organizational efficiencies as illustrated by the pace in which we have been able to transition the billing and coding workforce offshore.
In the third quarter, we shifted 9% of this workforce, which has resulted in an estimated run rate in cost savings of more than $1 million in the third quarter.
Before I turn the call over to Matt, Let me touch on our progress related to upside growth first the acquisition. This past may of true pad has delivered value as expected and is performing on plan for both top and bottom lines and last we continue to see the market evolve around patient engagement.
Which is a contributing factor to our optimism as we pursue digital innovation as a key adjacency to our core growth.
Patient engagement solution from get real health has experienced 117% user growth over the last 12 months and we're selective in the third quarter by U S. Based health care system that serves approximately 12 million people as their digital front door solution.
These successes contribute to the business case for our continued investment and get real health and new and expanded patient experience solutions with that I will 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 third quarter financial results.
Bar in a way the most notable development of the quarter was the significant growth in bookings as we saw the sales environment, becoming increasingly favorable with the resurgence in new hospital EHR contracts signings and the emergence of get real health is a viable player in the patient engagement arena.
On the financials. The third quarter was dominated by two topline themes that worked to offset each other and our GAAP results, but that each 0.2 exciting success areas for both our EHR and services businesses.
First and foremost trowbridge showed year over year growth of 24% with organic growth driven by improved patient volumes and recent new business wins and inorganic growth driven by our acquisition of Trucost in may of 2021.
As Boyd mentioned true code continues to perform according to plan.
A quarterly revenue contribution of $3 million absent purchase accounting adjustments and $1 $8 million of incremental EBITDA.
Year to date contributions since the acquisition date are $4 $6 million in revenues and $2 $3 million of EBITDA on.
On a pro forma basis, including acquisition amount true code has generated revenues of $10 $2 million and EBITDA of $4 $6 million.
The second dominant topline theme has been the success of our dramatic shift to a more SaaS friendly license mix shift that has been intentional and in keeping with our strategy strategic priority of enhancing long term shareholder value by expanding our base of recurring revenues.
While clearly aligned with long term value creation. These license mix dynamics put significant pressure on the periods nonrecurring revenues offsetting the gains on the true bridge line and limiting overall revenue and adjusted EBITDA growth to 3% and 4% respectively.
Clearly a full understanding of the financial performance of Cps Si includes an understanding of this nuance in how this shift in strategy for goes short term GAAP profits in favor of longer term value creation.
Moving onto bookings after a sub par performance for the first half of the year the third quarter saw sales environment headwinds, improving resulting an explosive bookings growth. This.
This growth was propelled by significant traction for get real health patient engagement solutions and net new hospital EHR bookings that were more than double our quarterly average for the past couple of years.
The quarter's total bookings of $29 3 million, our highest since 2017, 77% higher than the second quarter of 2021, and Mark of 37% improvement over the third quarter of 2020.
System sales and support bookings were up 58% sequentially and 18% compared to the third quarter of 2020 with net new hospital EHR decisions driving the growth.
While the growth itself is impressive the composition and quality of this quarter's bookings are arguably more important than the raw dollar figures as bookings for recurring revenue sources continue to expand.
Including add on sales subscription arrangements made up 77% of the third 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.
For the quarter and year to date SaaS arrangements have made up 100% of our net new hospital EHR contracts signings after averaging around 50% for 2019 and 2020.
By 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.
True bridges $13 $1 million of bookings for the quarter bested the prior record set in the third quarter of 2017 by 23% more than doubling bookings for the second quarter of 2021, and 68% higher than the third quarter of 2020.
A particular note was the unprecedented success of get real health, both domestically and abroad with total bookings of over $5 million for this early stage business after never having posted quarterly bookings of more than $1 $7 million in the past.
Other than get real health bookings from outside our EHR base increased nearly four times from the previous quarter and 60% compared to the third quarter of 2020, as we continue to execute on our initiative to expand through bridges client footprint beyond our EHR customer base.
Turning to the financials revenue headwinds from our shift in license mix offset much of the tailwind from the expansion of true bridge revenues weighing down the period's results with total revenue showing a 2% sequential increase and 3% ahead of the third quarter of 2020.
Overall recurring revenues increased 3% sequentially and 12% over the third quarter of 2020, arriving at yet another all time high of 91, 3% of total revenues compared to 98% in the second quarter of 2021, and 83, 4% in the third quarter of 2020.
On the profitability front, the SaaS transitions dampening effect on revenue growth for the period limited the ability for margin expansion and worked in tandem with elevated benefits cost to cause sequential declines in adjusted EBITDA and non-GAAP net income of 14% and 21%.
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Despite these headwinds adjusted EBITDA grew by 6% compared to the third quarter of 2020, while non-GAAP net income decreased 9% behind increased tax adjustments and lower non operating income.
Looking deeper at our segments Trowbridge revenues increased 6% sequentially behind continuous improvement in client patient volumes and a $1 $3 million increase in true code revenue as the third quarter marked our first full quarterly period with true code in the fold.
The expanding top line drove gross margins to 50% compared to 47% last quarter.
Unsurprisingly Trowbridge revenues grew significantly over the third quarter of 2020, Covid impacted result, showing a 24% top line improvement with margins improving by 440 basis points behind the improved top line the injection of higher margin <unk> revenues and the contributions from our offshore.
<unk> and automation efforts that Boyd highlighted.
Organic revenue growth for <unk> was $3 8 million or 14% compared to the third quarter of last year.
Next system sales and support revenue saw a slight sequential decrease in revenues that combined with flat cost of sales gross margins down slightly from 51, 5% in the second quarter to 51% in the third quarter.
Compared to the third quarter of 2020 overall system sales and support revenues decreased $4 8 million or 12% as the aforementioned shift towards greater SaaS mix cut out of non op nonrecurring revenues by more than half leading to margin compression of 540 basis points from the third.
Quarter of 2000, Twenty's 56, 4% margins.
While favorable to long term value creation the shift in license mix will continue to put pressure on our topline and associated margins as with all New hospital EHR contracts signed during the year have been SaaS.
We currently anticipate six new client facilities going live with our thrive solution in the fourth quarter of 2021, and all are expected to go live in a cloud or SaaS environment.
Moving onto operating expenses product development cost increased $1 2 million or 19% sequentially due mostly to lower labor capitalization as the quarters workload leaned more towards maintenance efforts.
Year over year cost decreased $800000 or 10% due to increased labor capitalization.
As mentioned on last quarter's call early in 2021, we worked with external subject matter experts to adopt best practices from labor capitalization, and an agile software development environment, resulting in higher labor capitalization rates that we feel better reflect the investments we've been making to bring incremental functionality and features.
Our EHR products.
Sales and marketing costs were flat sequentially, but decreased 18% compared to the third quarter of 2020 due to efficiencies, resulting from our business transformation initiatives and decreased commission costs, resulting from declining nonrecurring revenues.
General and administrative costs increased $3 $1 million from the second quarter of 2021.
As we stated on the last call we expected some incremental headwinds to sequential EBITDA growth as employee health claims and bad debt normalized from uncharacteristically low levels during the second quarter.
Year over year costs increased $2 $7 million as heavy utilization drove employee health costs higher lease termination cost increased our nonrecurring expenses and true code increased the G&A footprint.
Closing out the income statement, our effective tax rate for the quarter increased to 28% compared to 16% during the third quarter of 2020, driven mostly by provision to return adjustments.
This brings the full year effective tax rate to 19% and we don't expect that to change meaningfully during the fourth quarter.
From a cash flow standpoint, operating cash flows of $1 3 million marked our lowest point since the second quarter of 2016, but again the nuances tell the story here with working capital consuming a net of $9 $3 million of cash flows this quarter, while providing a net of $6 6 million.
During the second quarter.
The two most significant drags on cash flows where both payroll related timing items.
First the third quarter contained an extra payroll period, good for an incremental $5 million drain on cash flows.
Second we opted for the cares act employer payroll tax deferral, which effectively propped up 2020 operating cash flows by around $4 $6 million.
We remitted these amounts during the third quarter for corporate income tax purposes.
Despite this quarter's low in their normal levels trailing 12 month operating cash flows of $56 million are effectively the same as adjusted EBITDA over the same timeframe.
The strength in operating cash flows has allowed cps side to limit our year over year increase in bank debt to $25 million. Despite funding the entire $61 million purchase price for true code using revolver proceeds.
On capital allocation, our strategy prioritizes flexibility to have Cps Si optimally positioned to opportunistically deploy capital through a combination of M&A and internal investment and value based share repurchases.
Our recent acquisition of Trucost raised our leverage to nearly two four times slightly below our target of two five times, ensuring that we remain well positioned to respond quickly to other opportunities that may arise.
With regards to share repurchases, we did not repurchase any shares during the quarter and remind investors that the cadence and volume of our repurchases have been and will continue to be influenced by a number of factors certainly considering value, but also considering capital needs and availability, particularly.
Central M&A cost of replacement capital and other capital allocation alternatives.
These alternatives and priorities and capital allocation, our ever evolving sort of lack of repurchase activity in the given quarter may not reflect our views on the intrinsic value of our stock.
To wrap up our prepared remarks, the dramatic shift in license mix continues to obscure much of our success during 2021 at least so far as the income statement shows.
We expect that trend to continue during the fourth quarter with SaaS deals representing all of the fourth quarter scheduled New hospital EHR implementations.
When combined with a vastly improved bookings environment and with true code proving our capabilities at generating accretive inorganic growth. We're excited for what the future holds as we began looking towards the new year.
And with that we'd like to open up the line for questions.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment, it bank be necessary to pick up your handset.
Pressing historically is one moment, please while we poll for questions.
Our first question comes from the line of Donald Hooker with Keybanc. Please proceed with your question.
Yeah good afternoon.
I wanted to hear a little bit more about the get real health bookings.
Particularly interested in you guys press released the deal win in Europe in the Netherlands.
She is obviously very new for Cps Si.
Can you expand a little bit and maybe break down those get real health bookings there were so high in the quarter.
Hey, Donald David here actually the Netherlands Press release was an expansion on our relationship that we already had there.
It has extensive opportunity for us down the road from a bookings standpoint, it was rather minimal in terms of the get real health bookings in the quarter.
To that.
Matt just mentioned in his prepared remarks are split about 50 50 in terms of bookings value both incredibly significant both deals.
Sure.
We're competitive we're certainly proud of that we want and now it's time to go execute the international was actually in the Asia Pacific Telecom provider in the Asia Pacific. We hope that this will be press released in the relatively near future Thats about as much information as we can give you right now its a nationalized healthcare system. Its very similar to the relationship that we have with Telus in Canada.
In particular in the provinces of Alberta and Saskatchewan.
Whether the telecom has the.
The exclusive right to utilize.
Products there.
Ah patient portal for the citizens.
Our country.
The second significant win is as he mentioned is the domestic health system here in the United States.
We're going to get real health is going to provide a digital front door.
The typical patient portal functionality and in addition.
Appointment scheduling and bill pay.
Pharmacy, refills et cetera.
Great and then maybe one follow up for me. Another data point you threw out there was interesting to me was the retention rate, which continues to be sort of 95% plus it sounds like I think I jotted that down correctly I.
I know in the past you had maybe last year or the year before.
You seem to be sort of alluding to an improving competitive environment, maybe getting some price as well just wanted to maybe get an update there on the competitive environment. It sounds like it's pretty favorable for you guys.
Yes, so on the competitive environment.
Well I mean, obviously, we felt really good about winning the 11 deals in the quarter from a pricing standpoint.
To your question.
We do have more pricing power than we did when we were competing with Athena both in our existing customer base and net new deals.
The thing to health and obviously, we don't have that competition out there at least from inpatient acute care standpoint anymore.
So.
Obviously now health plan in support of Us.
Some others that arent there anymore. Some other competitors that we traditionally competed with over the years, but.
Obviously, we still have the major competition from Meditech concerned or in some cases epic.
Formula competitors, so favorable I think is.
Is inaccurate term, but we still we certainly still have formidable competition out there from a pricing standpoint, it is noticeably slightly better than it has been in previous years.
And that's shown in our execution and our average deal size so far this year.
As to retention I think Matt touch on that.
Yeah. So Don you had touched on the success that was 2020, we finished 2020 back kind of at our historical retention levels of around 95% and right now on an annualized basis 2020 one's actually projecting to be a good bit higher.
Conservatively estimating that some of that in 2021 is going to pull in a little bit in the fourth quarter, but we still think that we're going to end the year, a good bit north of 95% retention for 2021, which historically speaking is going to be a pretty good year for us retention wise.
Great. Thank you.
Thank you. Our next question comes from the line of Joy Zhang with SBB Leerink. Please proceed with your question.
Good afternoon, and thank you for taking my question you mentioned in your prepared remarks, the great resignation movement in the labor market I was hoping you can provide more color on how much never rural hospitals are experiencing the labor pressures compared with their more urban tiers.
Sure Jamie Baker headwind, given how shallow the talent pool is and as a follow up do you see this labor dynamic is a net positive tailwind for our true branch given greater need for outsourcing.
Yeah, Hey, Joe This is Chris.
Some sort of interim staffing solution to our hospital. So it's something that we obviously, we're we're facing some of the same similar challenges that the customers that the hospitals are facing as far as from a labour standpoint.
So there are other levers that we're continuing to pull their to make sure that we can accommodate those needs from our customers and Joey I'll just add on to that in particular, because I've had some very recent conversations throughout this the labor market in the nursing for for our poached acute facilities skilled nursing facilities and things like that.
Really really tough and as Chris talked about the staffing agencies supplied nursing the rates, they're charging or or.
Really high and really tough to absorb so.
Absolutely the acute care is struggling with it but the post acute I would say if you put them on a scale pesky struggling even more than the acute.
On the nursing side for sure.
These are helpful.
A follow up question on Buckingham, it's great to hear the pumpkins and carrying on the legacy Sharp in addition to Trubridge. So, let's hoping can give more color on how much of a rebound with a gentleman by deals are pushed out from the first half of the year and what would it be fair to say that demand in a real hospital market largely normalized.
Or it's called it's still a meaningful headlines or more.
Yeah Joy, David Little trouble hearing you, but I think your question was.
By the success in the third quarter certainly part of it was.
Pent up from the lack of success in the first half of the year.
Anytime you get 11 deals in the core.
And they were all SAS and and the average deal size was was in line with what it has been recently, which is around $1 million, which is certainly good as well.
Really the good news is it from a pipeline standpoint.
The the three months pipeline, if you measure at the end of each quarter actually went up going into the fourth quarter.
Over the third now whether that means we actually execute on that exactly in that timeframe or not remains to be seen.
But.
So the three month pipeline went up a little bit the six month pipeline. The total number went down a little bit. So basically you know given that we had a $29 million bookings quarter and the fact that those remained roughly the same between the three milkshakes month, we were particularly painful.
Okay. Thank you very much.
Next door.
Thank you. Our next question comes from the line of Jeff.
Cara with paper Sandler. Please proceed with your question. Your line is now lives.
Yeah. Good afternoon. Thanks for taking the question. So maybe that's a couple on the bookings from the first of all I'm just.
Clarify those pipeline comment was that poor specifically EHR deals or.
The comment around three months pipeline going up does that refer to the broader pipeline the broader pipeline Jeff.
But the EHR pipeline was consistent with those comments also.
Excellent great great to hear and.
More broadly Q3, it was a really nice result, with with bookings, but also want to make sure that the right context on it with.
Versus a year to day results and and actually there were headwinds last year as we look at the the comparison.
Maybe most specifically interested in the subscription line, we're just trying to parse out where that is year to date and how we should.
Frame our expectations as we go into the queue for weather.
Kind of a new run right or.
Whether we should Rio and those expectations, maybe looking more at the first nine months of last year.
Yeah, So Jeff.
Get into that question about subscription rates and where they land I don't have the year to date numbers in front of me, but from a quarterly standpoint, which is given the growth the growth curve that were on there is probably a little bit more indicative of what we're gonna do heading into the fourth quarter and heading into 2022, you are right now we're looking at just shy of a 50% increase in our SaaS.
E R subscription revenues compared to the third quarter of last year, So definitely substandard substantial and an incremental growth there and when we take a look at the bookings composition year to date, we mentioned in the prepared remarks that 100% of the net new hospital EHR deals that we have signed during too.
21 have been sass and that's actually a little bit ahead of what we had expected coming into the year, we had expected somewhere closer to a 70 30 split and we're happy with this 100% mix for SaaS licenses, because we obviously believed that that's in the best interest of creating value long term.
So as far as the sales mixes concern you can't get much higher than 100%, but on the revenue line. We definitely expect to continue to grow that because there is incremental customers are added the chances are increasingly more favorable towards them coming on SaaS customers.
Excellent all very helpful and maybe try to translate.
Some of that commentary around exceeding expectations bound SaaS transition to your your margin expansion goes I'm curious, how we should think about the the the timing of your platform investments as well as the revenue mix shifting to subscription you know some some interesting cross currents, there and and just.
Just how that impacts the the cadence of margin expansion I know, it's not going to be linear, but I think the the margin levels the score or maybe a little bit bigger of a step back from Q too that sounds just might have expected.
Yes, you are kind of hit the nail on the head as far as the logistics of what happens with our margin expansion initiatives at least in the short term. We do kind of have have these competing projects going on they have different impacts on margins, obviously the shift towards SaaS more SaaS mix in the new sales environment.
It's a drag on margins, there's no no way around that in the near term and that was something that we are expecting even with the 70 30 split that we had planned coming into the year, but obviously with net new installs installing at a higher rate.
SaaS, what we're expecting is pulling margins down somewhat more than what we had expected but you are right. There is there is a given taken in the very short term.
Two initiatives margin expansion initiatives to increased offshore reliance and investment in in automation technologies in the short term the two dynamics do tend to offset each other but again the pay off being in the longer term as we continue to stack up more and more recurring revenue.
For our top line that we should see margin expansion increase in the future.
And just to try to turn it down a little bit further so is it fair to think about year over year margin expansion on every three months been unappropriate expectation or will there be even more nonlinearity it than that.
Yes, I would still say that I mean, I would expect it to still be a bit nonlinear.
There's still the chance going forward that we may have a couple of quarters here a day and a 90 day period anything can happen, but there may be some quarters, where we do have the resurgence of.
The perpetual license deals that kind of held the day back in the pre 2019 2020 timeframe.
So, but we do expect at least for say the next 12 months that.
Margin expanding the margin on the acute care side is going to see some headwinds from this this transition to SaaS.
Understood. That's all for me, Thanks again guys.
Thank you we have no further questions at this time I'd like to turn the floor over to Mister Douglas for closing comments.
Great. Thanks to even just to quickly summarize.
Certainly, we're very pleased with our third quarter performance and the positive impact that our three year growth plan is having on our effectiveness efficiency and value delivered to our shareholders clients and employees. We remain keenly focused on core growth margin optimization, and achieving tangible upside grow through digital innovation.
Hope everyone has a great evening and we appreciate your interest in Cps and we look forward to giving you another update after the fourth quarter.
Thank you.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.