Q2 2022 Computer Programs and Systems Inc Earnings Call

true bridge cross cells into the evident acute care EHR base, which was a near record $7.7 million dollars. It's been visible in our

Shrewbridge sailed into the large hospital and healthcare system market, we're all supposed to substantially up. So So

And finally, on the booking highlights, record true code bookings were bolstered by a $1.2 million deal in the enterprise, hospital and healthcare system segment. We look forward to sharing more details on this contract in the very near future.

Operationally, we also had noteworthy high points during the quarter. Our GitRule Health Digital Front Door solution had a successful go-live in the ambulatory environment of Stuart Medical Group.

Stuart is a domestic health system that includes over 450 clinics in 11 states. And we're also currently on schedule to roll out our solution to their more than 30 acute care facilities in the first half of the fourth quarter.

This implementation showcases our ability to deliver virtual visits, self-registration, appointment scheduling, price transparency and bill pay, patient provider communications, accessible care records for the patient and their loved ones, and several additional facets of a complete digital front door solution.

And while GitRoll Health has previously had significant success internationally, this domestic installation creates opportunity for us to go after similar prospects in the US, and we are in the process of enabling ourselves to have to do just that. And we are in the process of enabling ourselves to have to do just that.

Specifically to our Revenue Cycle Management and Medical Record Coding Services.

Our hospital and post-acute customers are under considerable pressure from the labor shortage and the rising cost for these skills.

Well, we're not immune to the same challenges. Our scale, financial strength, partnerships, leverage of AI, and access to insure and offshore markets allow us to meet the needs of our client in all-concumpressed timeframes.

During the quarter, we significantly increased our internal and offshore resources, and therefore decreased the lag time from contract execution to service good or large. As the

And this investment will enable us to better meet our customer's short and long-term needs as the labor crisis likely continues for the foreseeable future. Thank you. Thank you.

A statement in previous calls are our existing customer bases have over $400 million of tribute revenue opportunity.

As such, our ability to satisfy and retain is paramount to our continued growth.

The continued adoption of our new cloud-based applications will be central to the success of our retention efforts. With that said, we're very pleased that we are above our goals for both evident and true bridge related to retention.

I would like to spend some time each quarter on these calls to provide context, updates, and performance against CPSI's strategic vision.

For our next call in early November , I will have completed my first 100 days of CEO , and I look forward to sharing more details and updates to our long-term vision at that time. And I look forward to sharing more details and updates to our long-term vision at that time.

However, I will call out three important items that are already in focus.

First, is to identify opportunities for revenue growth acceleration through calculated internal investment in existing products and services and thoughtful M&A. Notes in subculture review gorgeson legs wound ba?hol in?????? in taholfenstein check for complete preventive growth leads in existing products and services and thoughtful M&A. today.

Second, and of course complementary to the first, is to thoroughly and regularly evaluate our capital allocation strategy to ensure that we fully take advantage of our strong balance sheet and cash flows in order to provide maximum shareholder return.

And finally, to aggressively accelerate the work already in progress to build and maintain an always evolving culture of innovation and digital transformation at CPSI. you

After 22 years of working at CPSI in various positions, my first month at CEO has been indescribably challenging, rewarding and enjoyable.

In meetings with leaders of our hospital and post-acute customers, it's clear they continue to work daily in the stress of endless regulatory, economic, and competitive pressures and that they need a partner that can provide a platform of services and solutions for their operations, clinicians, and patients so that they can solely focus on providing the highest quality of patient care. We will be that partner.

And in face-to-face conversations across the country with the employees of CPSI, I've been consistently amazed that the talented team members, I&K Outer and their determination to meet and exceed our customer's needs.

We're going to the best of Stanley and our team, both existing and new, by creating and providing opportunities for continuous learning and personal growth. Needless to say, I'm proud to be at the helm, and I will work enthusiastically alongside them to ensure that our customers and shareholders reap their awards of our efforts.

With that, I'll turn the call over to Matt.

Thanks, Chris, and good afternoon, everyone.

On today's call, I'll provide a high level overview of the quarter, including some additional detail on book performance, and a brief walk through our second quarter financial results.

Our growth strategy centers on the harvesting of organic growth opportunities through continued through rigid expansion.

Further expanding scale and deepening our offering set through disciplined acquisitions and enhancing revenue and cash flow stability by embracing the transition to SAS for our EHR customers. By embracing the transition to SAS for our EHR customers.

Successful across the board execution on all three of these fronts has driven total revenues and recurring revenues to never-before-seen levels for CPSI, while the second quarter's unprecedented troop bridge bookings and strong remaining pipeline indicate this record-setting pace isn't likely to slow anytime soon.

While the story around our top line growth is straightforward, the method by which that growth converts to improved profitability metrics is a more nuanced discussion.

Year over year, EBITDA expansion was constrained during the second quarter by three primary factors. Year over year, EBITDA expansion was constrained

License Mixed Dynamics.

intentional investments in sales and marketing efforts and bad luck in terms of health claims severity.

First, headwind related to license makes materialized in the form of decreased non-relevant revenues as we continue to detach our system highly volatile, higher margin revenue sources.

EHR non-recurring revenues were down $1.4 million from the second quarter of 2021.

Second, the past quarter saw significant expansion in our sales and marketing cost, increasing $2.4 million from the second quarter of 2021, excluding the impact of MNA.

This includes almost $1 million related to our national client conference held in person this year for the first time since the onset of the pandemic.

This increased investment is necessary to capitalize on the true brief growth opportunity to maintain our recent momentum in bookings.

Lastly, the past quarter saw a severe uptick in high-cost employee health claims, causing total health claims costs to nearly double, increasing $2 million from the second quarter of 2021, excluding the impact of M&A.

There's no discernible trend or pattern in this flood of high cost claimants, and we don't expect this level of cost in a normalized go-forward basis.

Looking forward on each of these three distinct headwind, EHR License Mixed Pressures should naturally ease as 2022 comes to a close.

Sales and marketing costs should normalize from seasonally high levels in the past quarter. And we don't reasonably expect health claims to continue at this elevated level going forward.

Pairing our impressive top line gains with near-term normalization for these cost items were well positioned for future growth adjusted EBITDA. Pairing our impressive top line gains with near-term normalization for future growth adjusted EBITDA.

Specifically for the third quarter, we expect to see continued momentum and revenue growth that will translate into EBITDAGained.

However, EBITDA expansion will be limited as that revenue growth is expected to come from lower margin service revenues.

Although we expect some S-GNA costs to alleviate in the third quarter current expectations around product development, labor capitalization, will offset much of the reduced S-GNA costs. The S-GNA costs will offset much of the reduced S-GNA costs.

Moving on to the past quarter's results, 88% of the revenue growth of the second quarter of 2021 came from our recent acquisitions of Truth Code and HRG. Marissa measurements should be the heads of the new recent acquisitions of truth code and HRG.

Consolidated and adjusted EBITDA, $1.1 million over the same timeframe, despite true code and HRG, contributing a combined $1.8 million increase in adjusted EBITDA.

The second quarter was the first period to include a full quarters activity from my recent acquisition of HRG, which closed on March 1st of this year.

Revenues for AHRG totaled $10.8 million for the quarter and $14.6 million since the data back position in early March, which adjusted EBITDA of $1.8 million for the quarter and $2.4 million for the year-to-date. Revenues for AHRG totaled $1.2 million for the year-to-date.

On a pro-forma basis, year-to-date revenues of nearly $21 million and adjusted EBITDA $3 million have HRG outperforming our initial expectations of $40 million of annual revenue and $5.2 million of annual adjusted EBITDA stated in our initial announcement release.

Tenergies are also ahead of pace as we've now identified total annual run rate cost energies of more than $3 million compared to our initial expectations of $2.6 million.

Although we'd actions more than half of those items by the end of the second quarter, we estimate the total expense impact to the second quarter to be less than $300,000. The second quarter to be less than $300,000.

Revenues for True Code acquired in May 2021, total $3.3 million for the quarter and $6.7 million year-to-date, absent purchase accounting adjustments, converting to adjusted EBITDA of $1.6 million for the quarter and $3.5 million year-to-date. Revenues for the quarter and $3.5 million year-to-date.

Comparatively, true code contributed just $1.6 million of revenues and $0.6 million of adjusted EBITDA to both the quarterly and year-to-date results from a year ago.

Explaining on Chris's earlier comments on bookings, the second quarter saw the continuation of the first quarter's momentum as record through bridge performance through total bookings to increase $3.4 million or 17% sequentially and $7.2 million or 44% about the second quarter of 2021. For 44% about the second quarter of 2021.

Specific to true bridge, bookings increased sequentially by $5.4 million or 53% for held by strong cross-sale performance and large client went for tribute to the product. And large client went for tribute to the product.

True code wins are particularly gratifying as this quarter's bookings once it full run rate represents more than 20% increase in revenues.

With 50% EBITDA margins,

Compared to the second quarter of 2021, elevated cross-cell and troop code bookings were met with considerable growth in bookings from outside of our EHR base. A target cohort we label as troop bridges met new markets. A target cohort we label as troop bridges met new markets.

True Bridge net new bookings increased $3.4 million to more than four times the same number from a year ago. The Association of HGRG has added considerable talent to our True Bridge sales force.

System sales and support bookings decreased $2 million was sequentially and from the second quarter of 2021. System sales and support bookings decreased $2 million was sequentially and from the second quarter of 2021. System sales and support bookings decreased $2 million was sequentially and from the second quarter of 2021. System sales and support bookings decreased $2 million

The net new decision environment continues to be dominated by SAS license models. With the second quarter marketing, the sixth consecutive quarter with a 100% SAS mix for new hospital EHR contract signings. The net new decision environment continues to be dominated by SAS license models. The net new decision environment continues to be dominated

Turning to the financials, HRG's $10.8 million revenue contribution drove the second quarter to record levels of total and recurring revenues, both increasing 6% sequentially and 21% from the second quarter of 2021.

Organic total revenue growth was 2.5% from the second quarter of 2021, while organic recurring revenue growth was 5% over the same stretch.

Recurring revenues made up 92% of total revenues during the past quarter.

These top line improvements were met with the three distinct headwinds that I discussed earlier, resulting in adjusted EBITDA declines of $3 million or 18% sequentially, and $1.1 million or 8% from the second quarter of last year. The $1.1 million or 8% from the second quarter of last year.

Non-GAP net income decreased $3 million or 26% sequentially and $2.2 million or 21% from the second quarter of last year as increased interest expense and effective tax rates further widened the profitability gaps.

Looking deeper at our segments, true bridge revenues increased 13%, sequentially as the inclusion of a full quarter of HRG activity, at an incremental $7 million to the top line. At the SEC breaks up Saturdayly on Thursday, by smiling over the highlighted areas of HRG. Planting across while over 35%. Drum?ament Bluetooth Shields PILENT Cleaning clearing Go to budget. Government hire infrastructurecimento point green performance PLACE extensive ademos rep wyn eth State projector Thank you.

Our True Bridge reported amounts include revenues from our GetReal Health and True Code subsidiaries, and we cautioned on last quarter's earnings call that license timing would cause a slight pullback in both of these high margin businesses.

Combined, get real health and true code revenue decreased by $900,000 or 16% from the first quarter.

We also call it an on the last call of hospital patient volumes, which are the primary prior to bridge revenues where likely to pull back from their first quarter record levels.

These same store declines caused to revenues from outside of HRG, get real help in true code to decrease by $600,000 or 2%. Get real help in true code to decrease by $600,000 or 2%.

Compared to the second quarter of 2021, true bridge revenues increased by 49% on the backs of the true code and HRG acquisitions.

Organically, true bridge revenue by 11% of the second quarter of 2021.

From a gross margin perspective, the injection of HRG revenues tilted the revenue mix more towards lower margin, service intensive revenue streams, driving gross margins to decrease to 46% during the past quarter, compared to 50% during the first quarter, and 47% during the second quarter of 2021. In 47% during the second quarter of 2021.

Next, system sales and support revenues were down 2% sequentially due to continued retention challenges in our proposed acute and segment.

Compared to the second quarter of 2021, revenues decreased $1.8 million or 5% as we continue to advance recurring revenue models in new EHR arrangements, replacing significant pressure on non-requering revenues.

Declining revenues resulted in gross margins decreasing to 15% during the second quarter of 2022, compared to 52% in the previous quarter and 51.5% during the second quarter of 2021.

Moving on to operating expenses, product development costs were flat sequentially, while increased costs associated with our public cloud strategy for a $600,000 or 10% increase over the second quarter of 2021.

Sales and marketing costs increase $1.2 million or 17%, sequentially, at the resumption of our in-person national client conference introduced nearly $1 million of environmental cost. $1.2 million or 17% of our in-person national client conference introduced nearly $1 million or 17% of our in-person national client conference of our in-person national client conference

Compared to the second quarter of 2021, sales and marketing costs increase $2.9 million or 55% as resource expansion and other intentional investments in future growth added to the incremental client conference costs.

General and administrative costs increase $1.7 million from the first quarter, driven mostly by volatility and health claims.

Health claims were also the primary culprit in the 3.8 million dollar increase of the second quarter of 2021 with the addition of HRG and other resources of the province, causing further GNA burden.

Closing out the income statement are effective tax rate for the quarter increase to 20%, compared to 14% in both the first quarter of 2022 and the second quarter of 2021.

We continue to expect a four year effective tax rate of around 18%.

From a cash flow standpoint, operating cash flows at $7.3 million were down on $4.5 million sequentially, as net income decreased to $5 million, and we were down $12.1 million from the second quarter of 2021's record levels, as net receivables expanded $6.3 million due mostly to one-time integration disruptions, while net receivables contracted by $5.6 million during the second quarter of 2021.

This integration driven receivables expansion drove trailing 12 month operating cashflowers as a percentage of adjusted EBITDA to decrease to 60% as of June 30th, 2022, and they're to 80% at the end of the first quarter. And they're to 80% at the end of the first quarter.

As the past quarter's temporary disruptions are behind us, we expect that conversion rate to increase going forward.

In conjunction with last quarter's earnings release, we also announced the refinancing of our credit facilities.

With the major changes being the $50 million increase in revolver capacity, a step up in max leverage following acquisition, transition to SOFR as the benchmark rate and tweaks to the credit agreements even to the EMET Domescher to better allow a line with how we report adjusted EMET dot to the investing community.

These adjustments were in further into our capital allocation strategy, which prioritizes flexibility to have CPSI optimally positioned to opportunistically deploy capital to a combination of M&A, internal reinvestment, and value-based charitable purchases.

Our recent acquisitions of TrueCode and HRG bring proforma leverage to roughly 2.1 times EBITDA, well below our target of 2.5 times, ensuring that we remain well positioned to respond quickly to other opportunities that may arise.

We continue to groom our pipeline of potential M&A opportunities that fit our programmatic M&A strategy and fill this tremendous opportunity to enhance and supplement true bridge service offerings with recently valued Rolex and tuck-in.

Our largest non-operating uses of capital during the second quarter were internal reinvestments and the foreign capital health software element costs of $4.4 million and $2.6 million of share repurchases.

Nearly all of the quarter's share repurchases to place in the final month of the quarter, resulting in minimal impact to our weighted average shares outstanding and related EPS metrics for the quarter.

We'd like to 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, potential M&A, cost of replacement capital, and other capital allocation alternatives.

These alternatives and priorities and capital allocation are ever evolving, so the level of repurchase activity in a given quarter may not reflect our views on intrinsic value of our stock.

To close things out, we're proud of our top line successes of late and the resiliency of our business to absorb and achieve strong bottom line metrics.

As we continue to execute on our strategy for top line growth and amplify efficiency through increased automation and off-shoring, our view on CPSI as long-term margin trajectory is up and to the right. And with that, we'd like to open the line up for questions. And with that, we'd like to open the line up for questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer solution.

If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation telephone indicate your line is in the question queue.

You may press star 2 if you would like to remove your question from the cue.

for participants using speaker equipment. It may be necessary to pick up your hands set before pressing the star key.

Our first question comes in line of Jeff Gaurau with Piper Sandler. Please proceed with your question.

Yeah, good afternoon. Thanks for taking the question. I want to ask about the drivers of booking success in the true bridge part of the business. Just curious whether you're seeing that it's a catch up in decision-making, benefits of the combination with HRG, maybe related to the labor environment, or is there some other key factor that's driving the successor? Or is there some other key factor that's driving the successor?

Good afternoon, Jeff David here. I would say it's more than a latter two. Certainly in that mentioned this in this commentary, certainly it's the acquisition of HRG. We've got some sales talent that came from that and they were already doing it, and they continue to do a really good job, closing deals in particular in the enterprise space, which is the Loggerter Hospitals and Health Systems, which we didn't really have a great market into before, and it's much improved the acquisition of HRP.

And it's certainly the fact that there's labor challenges in both the small and community hospital environment and in the larger hospitals and health systems as well. And they're calling us oftentimes and saying, hey, can we have somebody begin with some coding? And we just lost two coders in the next 15 or 30 days and we're able to meet those needs.

Great. That's super helpful. And maybe move on to touch on the three focus items that Chris mentioned and maybe an inference on those. It sounds a little bit like a greater focus on growth than margin expansion. So I'm curious if you had any thoughts on areas that will need continued investment to capture more of the exciting growth opportunities that Dirich faced as such.

Yeah, I think that really feeds into the first question, Jeff, as it relates to the continued interest in the triberage services based on where the market is right now. Obviously, we have been talking over the last several courtes and courtes about our initiatives related to offshoring and automation. Those are obviously the two big levers for us to pull it and continue to expand margins on the triberage side.

And right now, we're laser focused on making sure that we have the capacity to meet the needs, knowing full well that as we continue to execute on the cost-saving side, that we'll balance that out down the road. So to that point, we want to make sure that we're in a position to serve the customers and then we'll continue to be focused on the automation and the ensuring.

Got it, make sense. I'll hop back in the kit. I'll hop back in the kit.

it makes sense. I'll hop back in the queue. Thank you.

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

Yeah, good afternoon guys. Thanks for taking the question. And I'll say Chris congrats on the first 30 days. I guess my first question Chris is you and I, if talked about kind of an extensive M&A pipeline, I'd be interested if you could talk about kind of which functional segments. Do you guys think of the most attractive right now? Particularly as it relates to servicing the clients that you guys already have from a cross-self perspective? And then as it relates to the margin weakness, I guess can you talk about how long you expect to kind of the negative mixed trends?

Yeah, so I'll take your first one and then I'll let Matt jump in and get in the ring with us on the margin side. You know, as we think about the M&A, if you look, just look back at the last three deals with GitRill, Hel, TruCode, and HRG. You've got a little bit of everything there. And if we focus on the last two, and I think we may be touched on this the last call, the TruCode really points to a nice opportunity for us to enter, okay? So, take your first one and four three deals. Right. opportunity for us to.

cross-sell into our customer base with dollars that they're already spending somewhere else. So it's not that we're introducing something new necessarily versus that we have found an opportunity for us to provide a service or solution to them more efficiently through our ability to bring that in. And then secondly, with the HRG sign, obviously that was a consolidation play. You know, the services that HRG provided very much overlap with what we do in the troop.

they're not realizing right now. So that's really where I would say we're you know, duly focused on the M&A side and I'll take the margin question.

Yeah, so George, you know, we think that the second quarter of this year was really kind of the final time that the HRG related pressure on margins was going to come through. And when we think about it, kind of take a step back, the margin pressure from HRG was really primarily on the gross margin side. When we look at the bottom line, the EBITDA margin impact, you know, we stated in the opening commentary that HRG on about $11 million of revenue did almost $2 million.

of EBITDA. So that's a pretty healthy margin through to EBITDA. So we don't see that really being a drag on EBITDA margins. Or at least not that much of a drag going forward. What really happened to us here in the past quarter, where some, you know, more either some anomalies or some intentional investments in places like sales and marketing. You know, the sales and marketing stuff was a little bit more of intentional spend on our end to try to pull forward growth. You know, that we think is reasonably there for true bridge.

So the opportunity, you know, where we're, you know, let's say we're round and first headed to second, they were still at home plate. So there'll be a bit of a lag there, but we think the upside is pretty good. Yeah, and there should be, there should be more upside on the HRG EBITDA margin, particularly as we look forward and we capture more of those synergy opportunities actually in the P&L. You know, you know, we mentioned on and prepared remarks that, you know, we've kind of upped our estimate of what the potential synergies are from 2.6 million to 3.

And we've decisioned roughly half of those items as of 6-30, but the timing of vendor contract renewals and things like that means that the P&L impact in the second quarter was limited to somewhere around $300,000. So there's a lot of upside there.

Okay, and maybe just a really quick follow up is like kind of the benefits issue just sounds like some real adverse selection on your guys' part I guess.

Do you guys have any visibility to when that sun sets? And I guess the flip side question is, would you guys even like, does it even make sense to buy risk on the benefit side, given that you guys are a public company, or is that just something you wouldn't even consider?

Well, so first, I'll cover the self-insured versus being more fully insured on the health benefits side. Given our scale, we look at the long term and long term kind of view that we have, the prospect of fully insuring that health claims risk really just doesn't make sense long term financially that does subject us to some short term volatility. And although it's unfortunate for the participants to have our health plan that were impacted by these incidents.

these recover a one time bump in the room.

Okay, thanks for the call, and I hope your teammates are well. Thank you.

Thanks George.

Our next question comes from the line of Joy Zhang, FVB Securities. Please receive a new question. Please receive a new question.

Thanks for taking my question and congrats on your first 30 days. Just following up on the question, hoping for more granularity on the composition of the new ones. You mentioned in the prepared remarks there was one enterprise deal, but wondering if you're also seeing an increase in average deal size across the new ones at all or is that more of a one-off? Any color on how much the new ones is from existing age or customers versus new customers should be helpful.

percent margins is you know that's great news for us.

And do.

Got it, that's helpful. And then, I guess, not to be a bummer, but a recession is on the top line of a lot of folks. And I recognize that the last recession is kind of impossible, given the federal safety net that is being fully reused.

depending on my

What is the incremental downside to your business if we slip into a full-fledged recession?

Yeah, so, you know, we'll start with that, you know, taking a look at, you know, capital structure and, you know, the potential there that does impact our thoughts on what our long-term interest rate risks are and what the potential is for, you know, rates to actually settle down from where they are right now. So I wouldn't say that it injects more risk on the capital structure side of things, just a little bit. It makes things a little bit hairier for us to navigate through as we think about that risk.

I'll let David and Chris chime in on what they think operationally. Yeah, I'll jump in here, Joy. I would say, at a worst case, as we continue to see Truebridge take more and more of the revenue side of the house, and obviously that's contingent on the volumes that our hospitals are seeing, you could see something that would look sort of similar to COVID, where from a elective services.

would be the area where I would think that we have the biggest opportunity to see some hit but you know again that could also be something that there could be some short-term when to that that people are you know you could look at our claim history of the last quarter that people are hurrying up to get to get the elected services done so there might be an up and then a down as it relates to that.

We don't have a crystal ball just like, you know, nobody else does. I would say operation, that would be the biggest risk to the, to the business. And so we'll just kind of wait and see.

Ok.

Super helpful. Thank you.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thanks everybody for joining us today. I hope you have a wonderful rest of your Tuesday and a good rest of your week. Thank you all. abre

Ladies and gentlemen, this does include today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.