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Executives

J. Boyd Douglas – Chief Executive Officer, President

Darrell G. West – Chief Financial Officer

Analysts

Jamie Stockton – Morgan Keegan

Thomas Carpenter – Hilliard Lyons

[Winston Coates] for Bret Jones – Leerink Swann

Corey Tobin – William Blair & Company

Computer Programs & Systems Inc. (CPSI) Q4 2008 Earnings Call January 30, 2009 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Computer Programs & Systems Inc. year end 2008 conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.

(Operator Instructions) As a reminder, this conference is being recorded, Friday, January 30, 2009. It is now my pleasure to introduce Boyd Douglas, President and Chief Executive Officer. Please go ahead sir

J. Boyd Douglas

Thank you [France], good morning everyone and thank you for joining us. During this conference call, we 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 are only predictions and are not guarantees of future performance. Actual results might differ materially from those projected in the forward-looking statements as a result of risk, 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 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.

Joining me on the call this morning is Darryl West, our Chief Financial Officer. Darryl and I have a few minutes of prepared comments and then we'll be glad to take your questions.

In the fourth quarter, we installed our financial and patient accounting system in nine hospitals, our core clinical departmental applications at ten facilities, nine hospitals implemented nursing point-of-care, and five customers went live with ImageLink PACS.

Add on sales to existing clients made up 20% of total revenue. For the year, add on sales to existing clients was 21.4% of total revenue.

At this time we expect to install our financial and patient accounting system at seven facilities in the first quarter. We anticipate ten new installations of our core clinical departmental modules, eight nursing point-of-care implementations, and seven ImageLink installs.

In business managements solutions during the fourth quarter, we executed 13 new accounts receivable management contracts, three of which were for full accounts receivable services, nine for private pay collections, and one for insurance follow up services.

During the fourth quarter, revenue from this segment of our business grew 18% year-over-year. For the entire year, revenue from the accounts receivable management services grew 14.9%. Demand for our business management solutions continues to be strong, and we're very pleased with our operations in this division of our company.

On the sales front, there have been no significant changes in the competitive landscape. We continue to be excited about our position in the community hospital marketplace. The current economic crisis that is paralyzing our country continues to have little impact on our operations.

As you can tell from our guidance, we do not anticipate a material impact from the crisis as we enter the first quarter of 2009. Our customers continue to pursue their strategic plans and IT objectives, and we are hopeful that we can continue our strong performance throughout the coming year.

In closing, we are excited about our recent performance and feel like we are in a great position within our marketplace. We're expecting another strong quarter and are happier about our momentum as we enter the new year.

At this time I would like to turn things over to Darryl for a few comments on the financials.

Darryl G. West

Thanks Boyd. Our day's sales outstanding were 45 days for the fourth quarter, which was the same as DSOs in the third quarter. Cash provided from operations from the quarter was $3.4 million, compared with $6.2 million in the previous year.

Free cash flow was $3 million, compared with $5.9 million for the prior year quarter. We define free cash flow as net cash provided by operating activities, less capital expenditures. Capital expenditures for the quarter were $329,000, compared with $332,000 for the prior year quarter. We recorded depreciation expense in the quarter of $442,000, compared with $480,000 in the prior year.

Cash collections remain strong at $29.1 million for the fourth quarter, compared with $28.5 million in the fourth quarter of 2007.

We recognized stock compensation expense of $229,000 in the fourth quarter of 2008, and anticipated charge of $229,000 in the first quarter of 2009.

We anticipate an effective tax rate for 2009 to be 39%. In the fourth quarter, our effective tax rate was 35.9%, which was down significantly from our historical levels. This decrease was related to, additional, I guess, renewed Katrina credits that were passed as part of the TARP Legislation.

That legislation went back and retroactively allowed hiring credits in the Katrina go zone, back to August of 2007. So in the fourth quarter, we recognized the benefit of that for the past eight – 16 months. That legislation does continue throughout 2009, and we expect that to have our rate, effective tax rate at 39%.

Our headcount at year end was 871, which was an increase of eight for the quarter.

Operator, we would like to open the call for questions at this time. [France]?

Question-and-Answer Session

Operator

Ladies and gentlemen – yes – (Operator Instructions). Your first question coming from Bret Jones – Leerink Swann.

[Winston Coates] for Bret Jones – Leerink Swann

Good morning, this is [Winston Coates] and I'm calling in for Bret. Judging by your new, your system sales and the backlog, we're estimating that you added about $9.2 million in new system backlog for the quarter, which would be the lightest for the year.

So we just want to know, did you see any slow downs in purchases of new system sales?

J. Boyd Douglas

Compared to the second quarter certainly, we talked – I believe that was the second quarter we had such a strong system sales – so but certainly down, but we were certainly pleased with the number of contracts we signed during the fourth quarter.

[Winston Coates] for Bret Jones – Leerink Swann

Okay, well have you experienced any change in cancellations this quarter?

J. Boyd Douglas

We have not. In fact, that was one reason our numbers came in a little higher than what we thought. We were expecting maybe a little bit of slippage, but there was actually none at all, and in fact we were able to add a couple add-on sales we weren't really expecting. So that's why the number ended up being a little better than the guidance we gave.

[Winston Coates] for Bret Jones – Leerink Swann

Okay, well just in case you have a cancellation, how are your contracts structured? What sort of protections do you have in your contracts?

J. Boyd Douglas

It really varies contract to contract. We do have some that there are penalties, where we set the installation month and if that isn't met, then there are penalties for the hospital, maybe some of the discounts get taken back or whatever. So they're all structured a little bit differently, but most of them do have some sort of penalty for the hospital if they don't go in and be set.

As you know, the way our business is structured, we have a certain number of limited resources and we can only do so many installs per month. So it's very important to us to get those in, so we are protected contractually.

[Winston Coates] for Bret Jones – Leerink Swann

Okay and looking at your balance sheet it appears that you're doing some more financing. Are you seeing more of your customers seeking vendor financing because they're having trouble accessing other credit lines?

J. Boyd Douglas

Yes, we have seen a little more activity there. It's not, I guess significantly more than what we've seen in the past, but there have been some and we anticipate that trend is likely to continue, at least for the short term.

[Winston Coates] for Bret Jones – Leerink Swann

Okay, and finally we noticed that your allowance for doubtful accounts has been, has gone down a little bit and it sort of puzzles us that you would take it down in a time when there's all this economic stress. Could you explain that a little bit?

J. Boyd Douglas

The methodology we use in calculating that has remained consistent. The reason it went down is we had a couple specific accounts that were reserved for, and due to tax implications, we wrote those accounts off against the reserve, so that we could take a tax deduction for those for 2008. But as far as how we evaluate our AR, we have not changed our methodology there.

[Winston Coates] for Bret Jones – Leerink Swann

Okay, thank you very much.

J. Boyd Douglas

Thank you.

Operator

Your next question comes from the line of Jamie Stockton – Morgan Keegan.

Jamie Stockton – Morgan Keegan

Thanks, hey guys thanks for taking my questions and congratulations on being able to execute in a pretty brutal environment. I got a couple of them, one is on the healthcare economic stimulus legislation that's been out there, have you had a chance to look at it and do you have any thoughts about how it might impact your business?

J. Boyd Douglas

Certainly we're aware of it. We're reading the same things that you all are reading, and certainly we're looking forward to it. I think it's got some good things in there for us, but it is just legislation at this point and so, like we talked about before, we're positioning ourselves well that if it does pass and then indeed it is funded, we'll be in a great position to take advantage of it whenever that happens to occur.

Jamie Stockton – Morgan Keegan

Okay, and then the other question I had was just on the business management services. It seems like that business accelerated there, is that something that you thought – do you think that's being driven by the environment? And is that a trend that you expect to continue?

I guess was there any seasonality that impacted that or were there any hospitals that decided to outsource more as the year was ending? If you could give us any indication of what's going on there, that'd be great.

J. Boyd Douglas

Sure, I don't think there's necessarily any seasonality. I do think there's a little bit to it that, I think hospitals are realizing private pay collections are becoming even more important, and the more effort you put into it the more success you're going to have and we certainly have the resources to do that for them. And we've proven time and again our services more than pay for themselves when you contract with us to do your private pay services.

So I think we have seen a little uptick and certainly we hope that's a trend that continues. That's what we're out there telling our customers now, how important it is and we think it's going to become even more important to collect every bit you can from your private pay, and that's going to be more difficult clearly with the economic conditions that we're under, but we think it's important.

So we do see a little bit of an uptick there, some of it may just be the natural ebbs and flows of that business so I wouldn't read a whole lot into it, and we're not expecting any kind of substantial changes.

Jamie Stockton – Morgan Keegan

Okay, I guess in the last one you've done a great job of controlling costs, or at least I think so. On the headcount front, how do you see that changing over the next quarter or two?

J. Boyd Douglas

We're going to try to leave it relatively stable. We certainly don't have any plans to increase, our install – we're very happy with our install capacity where it is right now. We certainly can handle an uptick if that happens to come our way, so we're happy with our headcount and don't plan on making any major changes to it.

Jamie Stockton – Morgan Keegan

All right, thanks guys.

Darryl G. West

Sure.

Operator

Your next question comes from Thomas Carpenter – Hilliard Lyons.

Thomas Carpenter – Hilliard Lyons

Hey good morning guys, it's refreshing to see a company that's executing well in that environment. Can you, Boyd real quick, can you give the PACS number real quick? I didn't write that down quick enough, for fourth quarter.

J. Boyd Douglas

We had five PACS installs in the fourth quarter.

Thomas Carpenter – Hilliard Lyons

Okay, great.

J. Boyd Douglas

We're anticipating seven in the first quarter

Thomas Carpenter – Hilliard Lyons

When you look at cash and investments were down almost $500,000 this quarter, is that something you expect to reverse itself in one quarter, the first quarter with collections on the AR and finance and receivables?

J. Boyd Douglas

It's – I would expect it to probably stay stable where it's at. That half a million swing there is – I don't see that as being significant and eating into our cash reserves at this time, but I believe we should be able to maintain our cash position in the first quarter.

Thomas Carpenter – Hilliard Lyons

Okay, I was just trying to get if it was a one or two quarter phenomenon that would reverse itself.

J. Boyd Douglas

A lot of it will be driven by new signings, new installs, and how that's set up, as well as what happens on the financing front if we do enter into a few more financing deals that would inhibit our ability to bring that cash balance back up.

Thomas Carpenter – Hilliard Lyons

Okay yes, it's good that it dovetails off one of your earlier comments. Can you give us an idea then, maybe how many sale financing wins you guys have done the past couple of years, and contrast that with this year? Do you have those numbers or maybe I could get them offline?

J. Boyd Douglas

That's something I could probably get you offline. I don't have it right on hand. We do currently have 22 financing deals, that is compared to 17 at the end of '07.

Thomas Carpenter – Hilliard Lyons

Okay.

J. Boyd Douglas

So it is up some.

Thomas Carpenter – Hilliard Lyons

And you expect that to maybe, given the current environment and the funding out there, you expect that maybe a little bit of an uptick again in '09? Is that the picture?

J. Boyd Douglas

I would say that would be a likely scenario for '09 as well.

Thomas Carpenter – Hilliard Lyons

Okay, that's fair. Boyd

Darryl G. West

Just to add on to that, we're fortunate to be in the cash position we're in, so it does allow us to do a little bit more financing and get creative with some of these people that need some help and certainly we're diligent in how we do these deals and who we do it for. But it certainly gives us a little bit of leverage on what we can do.

J. Boyd Douglas

But one of the – in giving consideration to a financing deal, we are cognizant of our cash position and how we want to maintain that to meet our dividend needs and other operating needs. So we're not going to jeopardize our cash position to finance a deal for someone.

Thomas Carpenter – Hilliard Lyons

Sure, I was just asking more for informational purposes, and not to beat over the point, but could you just maybe educational wise, tell us how those deals are structured or whether you guys have any recourse? I'm just kind of curious how you guys structure those with hospitals.

J. Boyd Douglas

Yes, we do have a recourse, and each one is a different deal and they can range anywhere from two to four years, depending on the situation. So each one – there's not a standard deal on those financing arrangements, and we evaluate each one separately.

Thomas Carpenter – Hilliard Lyons

And last question, I'll jump back in the queue, and this is for Boyd. Clearly Boyd, you guys did extremely well the second half of '08, and can you give us an idea of the number of decisions out there in '08? It looks like they picked up quite a bit versus '07, and your all's run rate, because we're just trying to get a handle on the sustainability of what's going on in the community's hospitals today.

J. Boyd Douglas

Right, the number of decisions definitely kicked back to '06 levels, right around in there. Certainly not back to the levels that we experienced in '05, but certainly there was an uptick there and we had an uptick in our win rate as well. We did some really good installs in the last 24 months or so, and there's been a lot of change in our industry, and I think a lot of that has helped us and our win rate has certainly improved.

Thomas Carpenter – Hilliard Lyons

Did you see any of your customers – any of your competition pull – I would imagine that Dairyland / health plans got more competitive over the last year or two, since they partnered with Francisco Ventures, but did HMS or Meditec pull back in the – as 50 bed or less hospital?

J. Boyd Douglas

No, we really – Dairyland, MHS, Meditec, we're in – and us, all four of us are typically in the – at least in the beginning, we're in every deal. We're against each other in every single deal. We haven't seen any pull back at all and we really didn't see Dairyland any more once they – they were in every deal anyway, so really no change there at all.

Operator

(Operator Instructions). Your next question comes from Corey Tobin – William Blair & Company.

Corey Tobin – William Blair & Company

Hi, good morning. A couple things, I'll start with a housekeeping question. Can you provide the stock comp breakdown, across the various different expense line items?

J. Boyd Douglas

Corey, I don't have that readily in front of me, but it is – it has not changed in the last three quarters. So it's still the $230,000 in the fourth quarter, and the breakdown is the same as it was in the second and third quarters.

Corey Tobin – William Blair & Company

Okay, so consistent with Q2 basically

J. Boyd Douglas

Yes.

Corey Tobin – William Blair & Company

Or Q3 rather, okay. Shifting to the backlog for a second, we noticed that the systems bookings were slightly down sequentially as well. Was any of that due to greater number of clients shifting to more of an ASP type model? Or asked another way, what sort of traction have you seen for the ASP offering over the traditional licensing being offered?

J. Boyd Douglas

Really no change there, we do very little of the ASP offerings. I don't recall – we had one in the fourth quarter.

Corey Tobin – William Blair & Company

Of the total, I guess if you look at in your total customer base, what percentage now are currently on ASPs?

J. Boyd Douglas

It's a very, very small number, I don't – Darryl do you?

Darryl G. West

I think we have about 20 customers that are on the ASP model.

Corey Tobin – William Blair & Company

Twenty in total.

J. Boyd Douglas

Twenty out of the 650 correct.

Darryl G. West

Yes.

Corey Tobin – William Blair & Company

Great, now looking at the cost side for a second, your systems margin looks like it had a very nice increase here, not a huge lift in revenue. Just curious, is there anything going on from the cost side in the systems area that would have popped the margins a little more than normal?

J. Boyd Douglas

There was nothing unusual there, but we did see from third to fourth quarter, system sales did increase $1 million, and because so much of that cost is fixed with being employees, to paying on the mix of equipment sales versus software sales, if it's strictly an increase in software, we'll see a big uptick in the margin.

Corey Tobin – William Blair & Company

Great, sounds good. Thank you. Congrats again on a good quarter.

J. Boyd Douglas

Thanks Corey.

Operator

Mr. Douglas, there are no further questions at this time. I'll turn it back to you for closing remarks, sir.

J. Boyd Douglas

Okay, thank everyone for taking the time out and thank you for your interest in CPSI and I hope everyone has a great weekend.

Operator

Thank you ladies and gentlemen; this does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great weekend everyone.

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Source: Computer Programs & Systems Inc. Q4 2008 Earnings Call Transcript
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