Computer Programs and Systems, Inc.

Good afternoon and welcome to the CPSI second quarter 2022 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 releases and reports filed with the Securities and Exchange Commission, including, but not limited to, our most recent annual report on 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 now turn the call over to Mr. Chris Fowler, President and Chief Executive Officer. Please go ahead, sir.

Thanks, Drew. Good afternoon, everyone, and thank you for joining us on the call. I'm on my 33rd day in my new role as CEO of CPSI, and I'm thrilled to be with you today to discuss our recent performance and future opportunities. Following my comments, I will provide a financial update, after which the two of us, along with David, look forward to taking your questions. As you likely saw in our release this afternoon, we had an excellent second quarter, highlighted by revenue and bookings growth, And most importantly, we remain ahead of pace to achieve our previously stated objective of $80 million in EBITDA in 2024. With TrueBridge leading the way and representing almost 60% of total CPSI revenue in a quarter, our journey to transform CPSI into a cloud-based digital platform of healthcare services and solutions continues on course. Noticeably, led by both organic TrueBridge growth and outperformance of our recent acquisition, HRG, recurring revenue grew 21% year-over-year and comprised 92% of total CPSI revenue. TrueBridge also achieved outstanding bookings results in the quarter with organic year-over-year growth of over 50% and incredibly almost 150% when including TrueCode and HRG. We are equally excited about our execution during the quarter of TrueBridge cross sales into the Evident Acute Care EHR base, which was a near record $7.7 million. TrueBridge sales into the large hospital and healthcare system market were also substantially up. And finally, on the bookings highlights, record TrueCode 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 Get Real Health digital front door solution had a successful go live in the ambulatory environment of Stewart Medical Group. Stewart 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 Get Real 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. Specific 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. While we're not immune to the same challenges Our scale, financial strength, partnerships, leverage of AI, and access to inshore and offshore markets allow us to meet the needs of our client in often compressed timeframes. During the quarter, we significantly increased our internal and offshore resources and therefore decreased the lag time from contract execution to service go live. And this investment will enable us to better meet our customers' short and long-term needs as the labor crisis likely continues for the foreseeable future. As stated in previous calls, our existing customer bases have over $400 million of TrueBridge 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 goal for both Evident and TrueBridge 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 as CEO, 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. 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. 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 at the talented team members I encounter and their determination to meet and exceed our customers' needs. We're going to invest substantially in 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 the rewards 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 TrueBridge expansion, further expanding scale and deepening our offering set through disciplined acquisitions, and enhancing revenue and cash flow stability by embracing the transition to SaaS 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 TrueBridge 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, license mix dynamics, intentional investments in sales and marketing efforts, and bad luck in terms of health claims severity. First, headwinds related to license mix materialized in the form of decreased non-referring revenues as we continued to detach ourselves from the 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 costs, increasing $2.4 million from the second quarter of 2021, excluding the impact of M&A. 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 TrueBridge growth opportunity and 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 on a normalized go-forward basis. Looking forward on each of these three distinct headwinds, EHR license mix 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 in adjusted EBITDA. Specifically for the third quarter, we expect to see continued momentum in revenue growth that will translate into EBITDA gains. However, EBITDA expansion will be limited as that revenue growth is expected to come from lower margin service revenues. Although we expect some SG&A costs to alleviate in the third quarter, Current expectations around product development labor capitalization will offset much of the reduced SG&A costs. Moving on to the past quarter's results, 88% of the revenue growth over the second quarter of 2021 came from our recent acquisitions of TrueCode and HRG. Consolidated adjusted EBITDA decreased $1.9 million over the same time frame, despite TrueCode and HRG contributing a combined $2.8 million increase in adjusted EBITDA. The second quarter was the first period to include a full quarters activity for my recent acquisition of HRG, which closed on March the 1st of this year. Revenues for HRG totaled $10.8 million for the quarter and $14.6 million since the date of acquisition in early March, with adjusted EBITDA of $1.8 million for the quarter and $2.4 million for the year to date. On a pro forma basis, Year-to-date revenues of nearly $21 million and adjusted EBITDA of $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. Synergies are also ahead of pace as we've now identified total annual run rate cost synergies of more than $3 million compared to our initial expectations of $2.6 million. Although we'd actioned more than half of those items by the end of the second quarter, we estimate the total expense impact of the second quarter to be less than $300,000. Revenues for True Code, acquired in May 2021, totaled $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. 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. Expanding on Chris's earlier comments on bookings, the second quarter saw the continuation of the first quarter's momentum as record True Bridge performance drove total bookings to increase $3.4 million, or 17% sequentially, and $7.2 million, or 44%, above the second quarter of 2021. Specific to TrueBridge, bookings increased sequentially by $5.4 million, or 53%, propelled by strong cross-sell performance and large client wins for TrueCode's in-color product. TrueCode wins are particularly gratifying as this quarter's bookings, once at full run rate, represent a more than 20% increase in revenues with 50% EBITDA margins. Compared to the second quarter of 2021, elevated cross-sell and true code bookings were met with considerable growth in bookings from outside of our EHR base, a target cohort we label as TrueBridge's net new market. TrueBridge net new bookings increased $3.4 million to more than four times the same number from a year ago, as the addition of HRG has added considerable talent to our TrueBridge sales force. System sales and support bookings decreased $2 million both sequentially and from the second quarter of 2021. 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. 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. Non-GAAP 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, TrueBridge revenues increased 13% sequentially as the inclusion of a full quarter of HRG activity added an incremental $7 million to the top line. Our TrueBridge reported amounts include revenues from our Get Real Health and TrueCode 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. Get Real Health and True Code revenue decreased by $900,000, or 16% from the first quarter. We also cautioned on the last call that hospital patient volumes, which are the primary driver of True Bridge revenues, were likely to pull back from their first quarter record levels. These same store declines caused revenues from outside of HRG, Get Real Health, and True Code to decrease by $600,000, or 2%. Compared to the second quarter of 2021, TrueBridge revenues increased by 49% on the backs of the TrueCode and HRG acquisitions. Organically, TrueBridge revenue grew by 11% over 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 percent during the second quarter of 2021. Next, system sales and support revenues were down 2 percent sequentially due to continued retention challenges in our post-acute and segment. Compared to the second quarter of 2021, revenues decreased $1.8 million, or 5 percent, as we continue to advance recurring revenue models in new EHR arrangements, placing significant pressure on non-recurring revenue. Declining revenues resulted in gross margins decreasing to 50% 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 drove a $600,000 or 10% increase over the second quarter of 2021. Sales and marketing costs increased $1.2 million, or 17%, sequentially, as the resumption of our in-person national client conference introduced nearly $1 million of incremental costs. Compared to the second quarter of 2021, sales and marketing costs increased $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 increased $1.7 million from the first quarter, driven mostly by volatility in health claims. Health claims were also the primary culprit in the $3.8 million increase over the second quarter of 2021, with the addition of HRG and other resources causing further G&A burden. Closing out the income statement, our effective tax rate for the quarter increased to 20% compared to 14% in both the first quarter of 2022 and the second quarter of 2021. We continue to expect a full year effective tax rate of around 18%. From a cash flow standpoint, operating cash flows of $7.3 million were down $4.5 million sequentially as net income decreased $5 million And we're 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 cash flows as a percentage of adjusted EBITDA to decrease to 60% as of June 30, 2022, compared 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 an acquisition, transition to SOFR as the benchmark rate, and tweaks to the credit agreements EBITDA measure to better align with how we report adjusted EBITDA to the investing community. These adjustments were in furtherance of our capital allocation strategy, which prioritizes flexibility to have CPSI optimally positioned to opportunistically deploy capital through a combination of M&A, internal reinvestment, and value-based share repurchases. 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 feel there's tremendous opportunity to enhance and supplement Truebridge service offerings with reasonably valued roll-ups and tuck-ins. Our largest non-operating uses of capital during the second quarter were internal reinvestments in the form of capitalized software development costs of $4.4 million and $2.6 million of share repurchases. Nearly all of the quarter's share repurchases took 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 in capital allocation are ever-evolving, so the level of repurchase activity in a given quarter may not reflect our views on the 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 headwinds 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 offshoring, our view on CPSI's long-term margin trajectory is up and to the right. And with that, we'd like to open the line up for questions.