Q2 2023 Computer Programs and Systems Inc Earnings Call
Greetings and welcome to the C. P S <unk> second quarter earnings Conference call.
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I'll now turn the conference over to drew Anderson drew you may now begin.
Thank you good afternoon, and welcome to the G. P. S. I second quarter 2023 earnings conference call.
Leading today's call are Chris Fowler, President and Chief Executive Officer, and Matt Chandler Chief Financial Officer. This call May include 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.
1995.
The company cautions 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 no.
Known and unknown risks uncertainties and other factors, including those described in public releases and reports filed with the Securities and Exchange Commission, including but not limited to the most recent annual report on Form 10-K.
The company also caution investors that the forward looking information provided in this call represents their outlook only as of this date and they 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 now turn the call over to Mr. Chris Fowler, President and Chief Executive Officer. Please go ahead Sir.
Thank you drew and thank you to everyone for joining us this afternoon.
These are not the results should I'd hope to be sharing with you. All today there are bright spots in the quarter and we're still confident about our strategy and optimistic about our future, but while this has always been a story about transformation and change the change is taking a little longer than we forecasted.
The lesson learned is results from change takes time, and we simply were too optimistic about how quickly the payoff would start to show in our results.
Because I'm, taking the time to reflect on the year. So far in all of our planning for 2023, our message should've been that this was our year for investment and change and establishing a foothold for our future.
I thought perhaps a wing show positive results.
Chase this year.
Yes, again, we've reorganized ourselves see the transition to the public cloud we've moved to a global workforce and focus on becoming a people first organization focused on talent.
These initiatives have been successful and it put us in a position of strength for our next phase, but they have come at a cost.
Including both in and add to the bottom line and a longer lead time to show results.
This has been a valuable lesson for me and for our team regarding optimism versus realism.
We have been guilty far too long and being overly optimistic when it comes to our results and that is now.
I'm going to share an overview of what happened in the second quarter and touch briefly on guidance and then let Matt delve into the new launches of both topics.
Our revenue in the second quarter came in at $84 $6 million.
While the EHR business was in line with our expectations, our RCM business was lighter than we projected.
Digging deeper half of the RCM. This was due to a couple of recent true code contract wins. We initially thought these were going to be term licenses, where GAAP calls for mostly upfront revenue recognition, but when it was finalized as a SaaS deal. The revenue was instead smoothed out evenly over the next few years.
The other main source of the problem in our RCM business was a result of over optimism as it relates to volume.
We saw volume outperformance in the first quarter and model the continuing trend in the second quarter, but the volume shifted back towards the mean and some short term projects that we hoped would continue.
We laughed.
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Adjusted EBITDA for the second quarter was $11 $2 million also below our expectations.
The relatively fixed cost model is tough to absorb the lower revenue and much of the miss flowed through to the bottom line.
While we have the leverage to scale our cost structure, depending on anticipated demand over the next few quarters is admittedly challenging to do intra quarter.
The fluctuations are significant fluctuation has been detected.
That'll be clear, it's not all doom and gloom.
Despite the choppy financial results, we did make progress on several fronts during the second quarter.
I previously shared that customer retention and cross selling are critical to our long term growth and I am pleased to report.
We performed well in both areas in the quarter.
Halfway through the year EHR retention is coming in on the higher end of our projections from a cross selling standpoint, we signed two RCM contracts with existing our existing EHR customers each worth over a million dollars of annual recurring revenue. Additionally, we signed a large E b O contract with a non.
[noise] EHR customer.
Art medical in Missouri.
Lastly, just subsequent to the close of the second quarter, we signed a $1.5 million EHR agreement that was a competitive takeaway.
On another positive note in May we wrapped up a voluntary retirement program that we initiated to help streamline our organization with roughly 130 of our employees accepting the offer.
Our estimates this will lead to roughly $3 million in savings this year and around $6 million on an annualized basis.
To summarize our pipeline continues to grow we are seeing stability in our EHR customer base and we have taken the necessary measures inside the organization to better position us for the future.
That said, our missteps in the quarter led us to rethink the remainder of 2023.
As we think about the second half of the year, we remain confident in our revenue forecast, but there are a couple of factors that have caused us to deviate from our initial EBITDA forecast.
I'll share some initial thoughts and Matt will discuss each in more detail.
In terms of cost pressures, we are seeing for the back half of the year I think about the two primary buckets.
First on the RCM side.
Over the course of the first half of the year, we saw certain RCM deals take longer to close compared to our historical rate.
In hindsight, we were far too bullish on our sales force expectations. Following our reorganization last fall.
We should've taken into account that sales is a relationship business and then it would take a few quarters for the re org sales force to establish the new contacts needed to close the business. As a result bookings are coming in just shy of expected levels, but we are up the learning curve now and back on track for the second half of the year.
As it relates to the RCM bookings that we signed in the first half of 2023, the mix between pure technology solutions and Tech enabled services is skewing more towards the services than we expected.
Well, we think our technology solutions are great standalone products that complement and house, our skim off.
Our target market of small to mid size hospitals, often have staffing challenges and look to us for more than just tack in the tech enabled services because they don't have the people.
Well, we're glad we can provide this service to our market. It does have an impact on our revenue mix and ultimately on our margin.
Finally at the same time that bookings are tilting more towards services, we're seeing outpaced labor pressure in our domestic market. While we believe our voluntary retirement program and the ramping of our offshore initiatives should alleviate some of this pressure over time it is not enough for the current year.
All of the RCM factors combined account for an approximate $6 million of EBITDA headwind in the back half of the year.
The other area, where we are seeing expenses come in higher than we initially projected is around our cloud migration to Azure, which began earlier this year.
As for <unk>. It is proceeding faster than we anticipated and unfortunately, the associated costs are increasing as well as a result of having to pay for duplicative cloud services. During this migration period.
While we anticipated the redundant services to agree to a degree we did not correctly estimate the length of time, we need to operate these redundant environment.
This migration has caused an additional EBITDA headwind of around $2 million for the year and while we expect these costs to continue to scale throughout 2024 with the migration of our hosted customer data, we anticipate that the duplicative spend for redundant public cloud environments will effectively wind down by the end of.
The year.
While it is a bit of an undertaking we feel that is ultimately the right thing for our customers.
Given our second quarter financial results and where we stand in the year, there's not enough time to make up the difference. So we are reducing our adjusted EBITDA outlook. Accordingly, we now expect EBITDA to be between $52, five and $54 $5 million.
Lastly, before I turn the call to Matt I'd like to welcome our newest board member Mark equal Ari.
Mark joins us after almost 30 years with ferrous while at various Mark served as CFO and C. O O playing a key role in their IPO and their subsequent outsize growth.
We welcome his decades of experience and insight and look forward to leverages growth minded approach coupled with thoughtful execution. We're.
We are thrilled to have him on the team as we continue our evolution as an organization.
Now I'll hand, it over to Matt.
Thanks, Chris and thanks to everyone joining the call.
I will now review the second quarter results net patient revenue, which represents our total NPR of just our end to end RCM customers was $3 $2 billion, an increase of 9% year over year.
Total bookings in the quarter were $21 $9 million RCM bookings of $13 6 million comprised 62% of total bookings were the second highest in our history behind only the second quarter of last year.
Cross selling RCM to our EHR customers, which is a key factor in our success represented 74% of total RCM bookings in the quarter.
Total revenue of $84 $6 million increased just 2% compared to last year for the quarter RCM represented 56% of total revenue EHR was 41% and patient engagement rounded out the remaining 2%.
Gross margins in the quarter of 47, 8% decrease compared to 49, 2% due in part to the labor pressures that Chris noted.
We believe globalizing efforts will begin to receive the labor pressure as we scale.
Operating expenses as a percentage of revenue was 51% in the quarter compared to 43, 6%.
We saw an uptick as a percentage of revenue and product development due to our cloud migration and other modernization efforts and general and administrative costs related to increased severance and other nonrecurring charges.
These all resulted in adjusted EBITDA of $11 $2 million compared to $13 $2 million a year ago.
Adjusted EBITDA margin of 13, 3% was down 260 basis points due to the expense pressure that Chris highlighted earlier in the call.
Wrapping up with financials operating cash flow for the second quarter was $700000.
Turning to guidance, Chris gave you a run down in some areas, where we expect to see outsized expenses in the back half of the year.
A little more context on each factor we've taken into consideration.
First our domestic labor market cost increase roughly 10%.
RCM business, we saw labor costs increased 13% versus the 2% increase in revenues. Despite our successes in the global workforce initiative.
As Chris mentioned, we've put in place a strategy to alleviate the labor pressure by leveraging our global workforce, but it won't be enough to offset the impact in 2023.
As added context, we ended the quarter with 203 offshore team members.
The 100 at the beginning of the year and the goal of 400 by year end.
Second our RCM bookings are coming in at a different mix of services than we expected.
Initially thought our bookings would be more of a balanced split between tax and services, but so far this year, our actual bookings mix was much more heavily weighted towards services.
As a reminder, our tech RCM solutions typically have a gross margin in the 70 percentile range as compared to our tech enabled services, which are more labor base gross margin thirties.
Third as Chris mentioned, our Salesforce rework last fall caused a temporary elongation of RCM deals as these new relationships lead time to gel, but we believe it was a necessary phenomenon and temporary phenomenon given the data that we're seeing.
For example, our average decision timeframe, which we measure from open opportunity open to close four inch <unk> deals doubled from the first half of 2023 compared to full year 2022.
We've started to see that trend down meaningfully over the past couple of months.
Those three factors combined equate to an approximately $6 million impact our EBITDA this year.
Everything I, just covered as well as the incremental cost of our cloud migration this year.
In the half year benefit a voluntary early retirement program, we are approaching our guidance as follows.
Reiterating our revenue range of $340 million to $350 million.
Reducing our adjusted EBITDA range of $59 million to $63 million to between 52, and a half and $54 $5 million.
Introducing a non-GAAP net income range of $25 6 million to $27 $6 million.
Looking at the distribution between the remaining quarters. This year for Q3, we see revenue relatively flat compared to Q2 with revenue gains and low margin RCM lines offset by lower nonrecurring revenues from EHR and patient engagement.
In terms of profitability, we expect a sequential increase likely in the low double digits with lower seasonal cost in the third quarter.
Thank you all for your interest in our story and I'll hand, it back to Chris for some closing remarks, thanks, Matt to close let me just say that while we're taking a step back in 2023, I know our organization is stronger and better prepared to capitalize on the opportunities in front of us.
I guess said in the beginning this has always been a story of transformation and change and it still is and thank you for your interest in Cps I sincerely look forward to sharing an update on our progress in the coming quarters that concludes our prepared remarks, Rob let's open up the call to questions.
Well thank you.
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One moment, please while we poll for questions.
Okay.
Thank you and our first question is from the line of Jeff Garro with Stephens. Please proceed with your questions.
Yeah, good afternoon, and thanks for taking the questions. Maybe we will start out on the demand side of things and you talked about the pipeline continuing to grow.
I was hoping you could comment on how pipeline conversion has been in and what you could do to accelerate that in the future you know.
I realize that it might be a bit of a balance that you are not always in competitive procurements, but that lends itself to maybe less urgency on behalf of your customers and prospects. So I appreciate your comments there.
Yeah, Hey, Thanks, a lot Jeff I'll start and then Matt may have some additional color on the back into that.
I think it's a great point to call out that we've seen this elongation in the pipeline and I think a big portion of that is the fact that again remember that we're selling something to your point, where it's not necessarily competitive.
Creating the demand as well so we're going in to these opportunities, which aren't even opportunities in the beginning and so we're having to two the first sell them on the idea of outsourcing and then sell them on the idea of through bridge and so I think that there is always going to be a natural additional weight to that compared to.
Our historical.
Process on the EHR side, but as we continue to refine that value proposition and show.
Show the benefit of this being one of the things that the hospital can take out of their operation I think we will see that shorten I also think there's going to be a natural.
Acceleration on the on the buying side of this because the pressures are only intensifying from a labor standpoint, specifically and so as those labor challenges continue.
To be emphasized at the facilities I think that's gonna have a natural acceleration to the to the to the timeline.
And Jeff I think the question around pipeline conversion is really getting to whats happening in win rates in a competitive market and the competitive landscape here hasn't really changed all that much from when we entered the year and that story kind of holds true on the win rates as well.
Bit of context, we win roughly 90% or more of the opportunities, where we get a chance to what we call a demo true bridges RCM services, such situations, where the prospect has really taken the show to seriously and that's been our historical rate has been pretty pretty consistent in that.
Consistency is maintained throughout the first couple of quarters of this year. So what we're seeing on the on the pipeline and bookings side of things is really just an elongation of that decision timeframe, but the outcomes in sales haven't really changed all that much.
Got it all very helpful.
Maybe to switch over to the margin side of things and certainly it's a little bit related that you see in a relatively healthy demand environment, but facing labor pressure. So I think the natural question is how would you describe your ability to capture more price from your customers. While also trying to access.
Great song that conversion, we just talked about and then the second question. There is on the labor pressures and looking to globalization as an offset is there any variant of.
Moving too fast and globalization efforts given the pressures that you're seeing.
Okay.
So I'll take the I'll take the second question first and then they ask for some clarification on the first question.
We said from the very beginning that we were going to be very intentional about our conversion to the global market, we've always been profitable and the service that our team has put forward.
It's highly referenced referenced simple.
Our retention rate is very strong there and so we wanted to be mindful that while we were undertaking. This initiative that we were thoughtful of the impact on the service to our existing customer base. So with that said you know we were looking at and are on pace for our 400 employees by the end of.
This year and looking at potentially 800 employees by the end of 2024 that was the original plan.
At the beginning of the year as we continue to feel the same pressure, that's creating the opportunity for us with the new business. We're looking at how can we potentially accelerate that opportunity while not deteriorating the service that we're creating and so.
We will continue to be very thoughtful about making sure that the services high level, while seeing what levers we have to be able to put our foot on the gas for lack of a better term about seeing this conversion happen sooner rather than later.
And on the first question.
Come back to if you don't mind help me on again, you said it an opportunity to take more price from the customer.
Oh, yeah, yeah, maybe a bit of a concern that labor pressures are causing a pause in demand for your services, but there are also pressuring your profitability.
If you could speak to your ability to deliver these offerings more efficiently. These services more efficiently than your customers can and not just kind of take on their labor pressures.
Yeah, absolutely and so I think that speaks right into the heart of right into the heart of the globalization and then also automation I would say those are the two main levers we have the opportunity to pull from a providing a set of more efficient rate than our customers can now one dynamic that we've really.
Another another learning of the year as we were anticipating the ability to start with a higher offshore model from the beginning with our customers and what we're seeing is that as we take their employees on.
That ramp is taking a little bit longer than we maybe had thought it would.
So for an example of that if we take on a customer that's got 20 employees in their business office. We will we will we will take those employees on an R O S.
Our employees and either continue to keep them only account find opportunities to upgrade them and place them throughout the organization and that just creates another dynamic for us to continue to keep that right size of the of the percentage of onshore to offshore.
A cut of employees, but again I think thats, a big part of our future success is again remember on these small and mid tier mid sized towns that they're a crucial part of the employment.
Process and in the community Big part of the economic development and so we've got to continue to be mindful of that to some extent and so as we as we have learned more of what that looks like I think we've refined the approach of what the ramp to get to that maximum utilization is and while it may take a little longer than we thought I think AUM.
The long term.
As we signed three and five year contracts, we're gonna be better better better down the road.
Got it that helps I'll jump back into queue.
Okay.
Thank you.
To ask a question you May press Star one.
The next question is from the line of George Hill with Deutsche Bank. Please proceed with your question.
Hey, good evening, guys and thanks for taking the questions I'll say Christian Matt you guys talk first of all that I can take notes. So some of this might be a little bit repetitive.
On the impact of the sale that was a license sale that you guys thought was going to be like you feel that once that was that EMR or true bridge and I missed it if you talked about what the.
The revenue impact was I guess for both the quarter and your expectation for the year.
Yes, so as far as the license mix impact you are calling out an important an important.
<unk> here you said that these were not EHR contracts EHR contracts had been 100% SaaS. That's all we've signed and probably the last three years instead to use where large true bridge contracts, specifically, the trucost product large truecar deals that.
Frankly, we're a lot bigger than our average deal size, we see in total.
Average deal size average contract value for Tucows arrangements is fairly small in the Grand scheme of things. So these were kind of outliers.
But.
That's the context between these couple of sites that we're talking about I'm sorry, what was the back half of that question George well you clarified my my first question on the product, which is I know what it was I guess what was the what's the financial impact for the year. So how about how do we think about what is the because you guys kept the revenue guidance the same.
But you also indicated a slowing revenue recognition from the nature of this contract. So how do we think about the headwinds and the puts and takes on the top line and then I have a couple more questions.
Yeah. So the puts and takes on the top line, while we did see this headwind.
Stir up with regard to these couple of true coat contracts, we have had some some tailwind on the topline theyre going to help offset some of the some of the overall top line impact from the year and I think Chris mentioned it earlier one of the positive surprises I would say I would say for this year has been that.
The EHR retention of that customer base, when we expected it to be strong coming into the year.
Outpacing even our expectations and this is probably the second or third straight year.
That business unit's been stronger and more more stable than what we had even expected. So that's kind of what what's offsetting that and resulting in top line guidance. This kind of unchanged right now.
Okay. That's helpful. And then if I think about the SG&A in the quarter.
Came in about $7 million higher than what I had modeled and that kind of that's pretty close to the EBITDA guide down for the year.
I guess, how should we look at Q2 is kind of a high watermark from a discretionary expense perspective as we go through the balance of the year you guys kind of indicated the cost cutting initiatives that you kind of like we believe for that number to go through with the employee retirement programs and stuff like that.
Yeah. So if you're looking at SG&A you know there are a couple of items that are making that really pop in the second quarter.
First of all.
We do have some seasonal costs in there with our national Your client conference that takes place in May of every year and as much as we'd love to be able to smooth that cost out throughout the year. The costs have to be you have to be booked when they're actually incurred and that all happens in the second quarter and I think that was for you know somewhere between one two and $1 $3 million.
In SG&A.
And frankly, the rest of the SG&A cost increase in the second quarter, which was really all EBITDA neutral soft from nonrecurring charges.
Partly related to the severance event that Chris mentioned on the voluntary early retirement program.
Okay, and then my last one will be.
Given what you guys discussed as it relates to inflation in this kind of piggy backs on Jeff's last line of questions. All of it is how does this change how you guys were thinking about the longer term guidance of the re accelerating the revenue growth profile and the earnings profile given that it looks like we're going to be operating from a higher cost basis as we go through 2024 2002.
Three probably into 2024 and 2025.
Yeah, I'll start there and then Matt can fill in any blanks that I leave you know what I would say is that we have taken a really hard look at the second half of this year and really really sharpen the pencil to make sure that we are we are fine tuned on where we're going to come in we continue.
To do work on what we have understood it or what we have seen happened through the first half of this year and what we know will happen in the back half and what impact that will have on next year. So I don't think.
I don't think that we're ready to give any any guidance into 2024, but that's something that we'll be doing in the in the next call or two but know that we understand that that's something that we've got to we've got to get out there I will say as we look at it big picture and I am not going to put a date on us we still feel like the leg.
<unk> that we have it in front of us as it relates to the offshore initiative.
And what we had talked about at the first of this year the offshore initiative our opportunities.
With with automation that we still see a path to get to those 20 plus percent EBITDA margin growth and we still see that opportunity to see the revenue growth continued but let's stay tuned on on sharpening what 'twenty 'twenty four it looks like for the next call.
Okay, we'll stay tuned thanks guys.
Thank you.
At this time, we've reached the end of our question and answer session I'll turn the call over to Chris Sadler for closing remarks.
Thanks, Rob and thanks for everybody for your continued interest in Cps I have a wonderful evening.
This will conclude today's conference you may disconnect your lines at this time and thank you for your participation.
Yeah.
Yeah.