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Computer Programs and Systems, Inc. (NASDAQ:CPSI)

Q4 2009 Earnings Call Transcript

January 29, 2010 9:00 am ET

Executives

Boyd Douglas – President and CEO

Darrell West – VP, Finance and CFO

Analysts

Jamie Stockton – Morgan Keegan

Bret Jones – Brean Murray

George Hill – Leerink Swann

Richard Close – Jefferies & Company

Sean Wieland – Piper Jaffray

Gene Mannheimer – Auriga

Corey Tobin – William Blair & Company

Charlie Rasmussen – Insight Capital

Brad Hoover – Sidoti & Company

Operator

Ladies and gentlemen thank you for standing by and welcome to the Computer Programs & Systems yearend earnings 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 today, Friday, January 29, 2010.

I would now like to turn the conference over to Mr. Boyd Douglas, President and Chief Executive Officer. Please go ahead, sir.

Boyd Douglas

Thank you, Kamika. Good morning, everyone and thank you for joining us. During this conference call, we may make status 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 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 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 Darrell West, our Chief Financial Officer. Darrell and I have a few minutes of prepared comments and then we will be happy to take your questions.

In the fourth quarter, we installed our financial and patient accounting system in 11 hospitals, our core clinical departmental applications at 11 facilities, 10 hospitals implemented nursing point of care and two customers went live with ImageLink PACS. Add-on sales to existing clients made up 26% 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 nine new installations of our core clinical departmental modules, nine nursing point-of-care and limitations and two ImageLink installs.

In Business Management Solutions during the fourth quarter, we executed 12 new accounts receivable management contracts, two of which were for full business management services and the remaining 10 for partial business management services.

During the fourth quarter, revenue from this segment of our business grew 20% year-over-year. On the sales front, we continue to see movement as a result of the ARRA, especially amongst our existing client base. Demand from current customers for add-on software continues to be strong. For prospective clients, we continue to experience what we believe to be the temporary increase in the length of the sales cycles as hospital executives are assessing the potential financial impact of the stimulus can plan on their facilities.

We continue to be confident that we are in an excellent position within our market to capitalize on the increased demand for software and services as a result of the ARRA. We remain fully committed to meeting all certification requirements that will be required under the ARRA. And we are well prepared to help each and every one of our customers and prospective customers achieve the meaningful use status thus maximizing the financial benefits for which they qualify under the ARRA.

At this time, I would like to turn the call over to Darrell for a few comments on our financials.

Darrell West

Thanks, Boyd. Our DSOs were 53 days for the fourth quarter, which was an increase of eight days from the previous year, but the same as the third quarter. Cash provided by operations for the quarter was $3.4 million compared with $3.4 million from the previous year quarter.

Free cash flow was $3.2 million for the quarter compared with $3 million from the prior year quarter. We define free cash flow as net cash provided by operating activities less capital expenditures. Capital expenditures for the quarter was $183,000 compared with $329,000 for the prior year quarter.

Depreciation for the quarter was $478,000 compared with $442,000 last year. Cash collections were $32.3 million for the fourth quarter, compared with $29.1 million in 2008. We recognized stock comp expense of $229,000 in the fourth quarter and anticipate that same charge of $229,000 in the first quarter of 2010. Our effective tax rate for 2010 is projected to be 39%. Our headcount at quarter end was 1087, an increase of 81 for the quarter.

Kamika, at this time, we’d like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Jamie Stockton with Morgan Keegan. Please proceed with your question.

Jamie Stockton – Morgan Keegan

Good morning, guys. Thanks for taking my questions. I guess, Boyd, the first question is when you look at where earnings came in versus where you got it, what was the difference there in your mind? Were there incremental investments that you decided to make during the quarter that changed the situation or was it hardware as a bigger proponent -- component of system sales? If you could talk about that I would appreciate it.

Darrell West

Hey. Jamie, this is Darrell. The two biggest items that caused the variance were the mix of sales. Our equipment sales were $900,000 more than we had anticipated, so the mix there was more on the equipment side. The cost on that was around $600,000. So my costs were higher than anticipated due to that mix of equipment versus license fees.

The other big area was travel. We spent a significant amount of -- more on travel than I had projected. A number of factors there was the mix of clinical installations. Also we have, as we've talked about on previous calls, some of the changes that we have made on the customer service side of things to -- we are spending more time with customers who are interested in what it's going to take to get them to meaningful use. So we've got a lot more people on the road in front of them, really handholding them through this process, showing them what they need as well as helping them to get ready. And as well on the marketing side, lots and lots of interest, so we are out on the road in front of people, but a lot of that still we're waiting to turn in into orders.

Jamie Stockton – Morgan Keegan

Okay. I think that on the implementation you guys thought you would do 13 new financial in the quarter end. It sounds like a couple of those got pushed out may be a couple of clinical as well. Could you talk about what drove that? Is it just timing, didn't get it in by the end of the quarter? Or is there some other factor going on?

Boyd Douglas

No. On the financial side on the new installations, there were two that did push and they were both construction issues. They are both new hospitals and so they pushed. They are being installed in the current quarter. The clinical installations came in just about where we thought. In fact, we had -- if I remember right, I think we had two ImageLink installs and we were projecting zero at the time of the call last time.

Jamie Stockton – Morgan Keegan

Okay. All right. And I guess the last question I have, Boyd, is in the conversations that you are having with these hospitals, you are out trying to talk to them about what they're going to have to do to get the incentive payments from the government, what software they are going to have to install. What is your sense for when demand will start to accelerate?

Boyd Douglas

Of course, that's the million-dollar question that you all have been asking now for several quarters and we ask that too. I would say at this point what we are surprised about is that the number of prospective clients haven’t turned into orders, new customers. So that's a little bit less than what we thought right now. But the current customers are actually exceeding our demand a little bit, which is why we've talked about the headcount increasing. We've actually added a few more people in our clinical areas because we are seeing just increased demand from our current customer base.

So the way I read into it from talking to our sales guys, I think there's obviously there's hesitation on the part of new system sales. Some of that is coming from waiting on again while we have got the interim final rule, we still don't have the final rule. And I think frankly, there's some degree of skepticism out there amongst some of these hospitals about whether the money is really available, whether they really think they can meet meaningful use, things like that. And I think that will certainly turn once you start seeing some money flow. But hopefully, it will turn sooner than that.

Jamie Stockton – Morgan Keegan

Okay. My last question, the increase in headcount, where did that come from?

Boyd Douglas

It was about half and half. About 40 of those people were installation and support personnel mainly in the clinical areas and then the other half was in our business management services. And most of that was we started a new way of hiring those people. We actually hired temps for a six-month period and then once they are here, we pick which ones that are working well for us and that we want to keep it and then that's when they become a permanent employee. So we had a wave of those that came through. That would be the other one.

Jamie Stockton – Morgan Keegan

Okay. Thanks, guys.

Boyd Douglas

Sure.

Operator

Thank you. Our next question comes from the line of Bret Jones with Brean Murray. Please proceed with your question.

Bret Jones – Brean Murray

Very good morning, thanks for taking the question. I just want to build up of one of Jamie's earlier questions. When I look at the guidance that you pre-installs that you laid out for Q4, it looks like the finances were down two. Clinical were also down two and nurse were down two. And you talked about two financials pushing due to construction. I was wondering were you also expecting putting clinical and nurse and those slipped into Q1?

Boyd Douglas

I don't believe so. I believe the two that again were new facilities. So those two were construction and they were not full system installations. I don't have the numbers back from what we projected. My information was that those were the same.

Bret Jones – Brean Murray

Okay. And then, I guess if I'm looking at Q1 and the projections for Q1 considering two financials slipped out, it looks a little light and I know you guys have talk about the sales cycle lengthening. But as I look at the bookings, the bookings have been pretty decent for the last three quarters. Backlog has continued to build. And I am just wondering is there an issue on installation times increasing or sliding? Is there something on the customer side that's causing delays? Or are these bigger installs that are taking longer than you expected?

Boyd Douglas

I don't know that it's, it's certainly not bigger installs. I think we are seeing more of -- and Darrell can help me here, but we're seeing more demand from our current customers, which shows up in the bookings number. So I think that's where maybe the disconnect is.

Bret Jones – Brean Murray

Okay. That's helpful. And then just lastly, I guess the cost structure has obviously changed with the additional personnel. Given the additional headcount, how many, I guess how many core systems would we have to expect to be implemented in order to return to a gross margin in the mid-40s? I don't know if you have done that calculation but just a sense of a ballpark number?

Darrell West

I haven't done that calculation precisely, but with the staff that we have added on the financial side, we are. I guess in the first quarter about at half capacity and so if we could bring that number back up to the four a month, I think we get back to that number.

Bret Jones – Brean Murray

Four per month would get you back to a mid-40s gross margin?

Darrell West

Yes.

Bret Jones – Brean Murray

Okay. In your capacity, was it 18? Do you know what your capacity is now for implementations, with the additional people?

Darrell West

That is what we had moved to on the financial side. We had gone from 12 to 18.

Bret Jones – Brean Murray

Okay. So it's still at 18.

Darrell West

Yes.

Bret Jones – Brean Murray

All right. Great. Thank you very much.

Boyd Douglas

To follow up on the first question, we did one of those installs. I was incorrect, it was a full system installation, so we did have an order entry and a point-of-care installation slide until the first quarter because it was going to be a full implementation.

Bret Jones – Brean Murray

Great. Thank you.

Boyd Douglas

Sure.

Operator

Thank you. Our next question is from the line of George Hill with Leerink Swann. Please proceed with your question.

George Hill – Leerink Swann

Hey. Good morning, thanks for taking the call. Darrell, first of all just a point of clarification, when you said you'd increased travel I just want to make sure that I understand you're talking about travel related to sales and marketing, not travel relating to your teams in the field doing customer deployments.

Darrell West

Actually, it's a combination of both of those with the mix of sales that we had for the quarter and what we've seen the last couple of quarters is, we have had with the add-on sales, that's on the clinical side of things, so we've seen more clinical installs versus the financial Phase I and Phase II. And those are more intensive on the number of people that are required. So, when I have a mix shift that is more heavily clinical, the travel moves up related to that.

George Hill – Leerink Swann

Okay. Can I ask why the travel that's related to system deployment isn't a pass-through?

Darrell West

Say that again.

George Hill – Leerink Swann

Can you explain why the travel that is related to sites that you guys are working on where the client is engaged is not a pass-through, as opposed to something that you guys have to absorb the cost on, as I would expect in a marketing situation? I would suspect that your teams that are traveling for doing deployments are billing the customers for their travel.

Darrell West

Yes. In some instances but in some of that, we are sending some more people. A lot of times we did that out on a fixed cost, a fixed fee on the travel and expenses. And depending on the situation or the available people, we will oftentimes send more than were initially included. And also with fluctuating travel costs, it could have been a customer that actually bought the product or I say placed the order six months or more ago. And there has been a change in the base cost as well as the number of people that we send.

George Hill – Leerink Swann

Okay. That's helpful. Thank you. Two other quick questions, number one, simply any observable change in the competitive environment, any of the bigger iron vendors coming down market or seeing any change within your normal competitive space?

And the other question then I will hop off and hop back in the queue is with respect to meaningful use and HIE connectivity, how do you feel like your technology is set up to facilitate local or regional connectivity based upon how the platform is developed right now?

Boyd Douglas

First of all on your… I've forgotten your first question now.

George Hill – Leerink Swann

The competitive environment.

Boyd Douglas

Oh, the competitive environment has not changed at all. We have not seen any of the bigger players anymore than we historically had, which is very, very little. Sometimes upfront we may see a McKesson with their Paragon product and the RFP process, but our main competitors continue to be probably in the order we see them, Meditech, first, Healthland second and HMS third at this point. But that still all the same.

As far as the IAG and things like that or the health information exchanges, that we just finished and we actually did a press release yesterday about our participation for the fourth year in the Connectathon. If you look, most of our main competitors I just mentioned are not part of that. But we have done that for several years and I think that certainly demonstrates to the marketplace. Our ability with the technology, we have to connect with really any information system that's out there, send data to people as they need it and also accept data into our system. So, we are very confident in our ability to meet any kind of requirements that come forth as a result of the stimulus package to meet those HIE requirements.

George Hill – Leerink Swann

Thanks. I appreciate the color, guys.

Boyd Douglas

Sure.

Operator

Thank you. Our next question comes from the line of Richard Close with Jefferies & Co. Please proceed with your question.

Richard Close – Jefferies & Company

Yes. Thank you. Richard Close here. A couple questions, with respect to, Darrell, just getting back to this travel that George was talking about, should we think on a go-forward basis that maybe the contracts that you sign because you are using more people out in the field at those implementations, that the margin structure of these deals has changed permanently?

Darrell West

No. Not necessarily that the margin structure has changed permanently. It's an issue of the mix really, if I have a full schedule or more on the Phase I financial installs, the number of people there doesn't run my travel number up as high because it doesn't require as many people on the ground. And so really the mix of revenue impacts the cost on the travel site and in my projections, I must've had that awful low. Unused was, had been estimating that based on a mix that wasn't as heavy clinical. Now, moving into the first quarter and into the second quarter, we may see that similar mix and until we see more movement on the new sales side, we are going to experience the higher travel relative to revenue.

Richard Close – Jefferies & Company

Okay. So if I look at in the opening comments, I think you're projecting, what seven patient financial nine clinical and nine nursing? So when we're thinking about the stimulus then over the next couple of years, isn't it plausible to say that the mix is going to be more on the clinical side or am I misunderstanding that?

Darrell West

Yes. I'll say yes, you're correct. There will probably be more on the clinical side but we do anticipate a filling up of the financial side. The other part of that is as we move forward into this we feel we will be able to adjust our pricing structure based on demand, so that my margin can improve strictly based on demand or the higher demand that might be that we anticipate to be there.

Richard Close – Jefferies & Company

Okay. Boyd, I was wondering if you could comment a little bit on the, add-on sales and obviously, you are having success there and that's picking up as we progress through the year. Is there any type of target or percentage of total sales that you are looking at to add-on to commenting? Is it going to be mid-30s or is it going to stay here in the mid-20s?

Boyd Douglas

I wouldn't expect it to go up into the mid-30s. Obviously, it is a function of when these prospective business above when we start signing those up. Frankly, I would like to see the add-on sales percentage go down because that means we are installing more new systems, which gives us revenue opportunities both for add-on installs and for our business management services. We certainly look for new contracts and obviously, that's the -- how we handle our install capacity to install both the add-ons and the new system sales that mix is something that we talk about daily and work on daily and adjust our personnel for.

One thing, I would like to go back to just because I think we've kind of gotten off-track with these travel expenses, I don't think anybody should underestimate the amount of travel we're doing to our existing customer base both for retrains to get them up to snuff and to talk to them about the applications they need to purchase. This isn't necessarily sales and marketing trips; these are our installation and support personnel who obviously are well versed in what our hospitals need to meet meaningful use. So we're doing a tremendous amount of travel that isn't always reimbursed.

Again for those retrains, for facility evaluations and to evaluate where they are as far as meaningful use and what they need to add. So I think that's where you are seeing a bigger percentage of the travel increase is due to that as opposed to this mix of clinical installs versus financial installs.

Richard Close – Jefferies & Company

Okay. So a follow-on to that would be you incurred all these expenses here in the fourth quarter maybe in the first quarter as well. And then could we see that the travel, the retrains, the education process that leads to sales -- maybe towards the second half of 2010?

Boyd Douglas

Sure. It's leading to new sales now and will continue in the future. I think the other thing that is important that I've talked about on these conference calls before maybe not in the last several but this is one way we've always operated this business. When we don't have as many, when we have overcapacity especially in the financial areas, we spend a lot of money, we send the people out that would normally be doing these installations and we do send them out to these customers to get them up to speed. It's a good time for us, we think to get in front of the customers spend a week or two with them. Historically, there's a lot of turnover at our facilities, so by and large every time we show up at a facility, there's new department managers that we're talking to and training. And we think that's money well spent down the road because again it does put us in a position to sell more add-on software.

Richard Close – Jefferies & Company

Okay. And then with respect to the competitive environment just a final tie-up on that. Have you seen your win rate change at all I guess with respect to Meditech, HMS and Healthland?

Boyd Douglas

It is up from where it has been in 2007 and 2008. If you go back to total number of deals that we saw go down where we got to demonstrate our software and then ultimately there was a decision to make a system purchase that number is actually down. That number was 60 hospitals in 2009 this past year for comparison that number was 69 deals in 2008 and it was 59 deals in 2007. So if you look at it from that point of view and how well we did, with our top line by growing it on -- significantly fewer deals, we are pleased with our win rate.

Richard Close – Jefferies & Company

Okay. Thank you very much. I appreciate it.

Boyd Douglas

Sure.

Operator

Thank you. Our next question is from the line of Sean Wieland with Piper Jaffray. Please proceed with you question.

Sean Wieland – Piper Jaffray

Hi, thanks. So you guys seem a little unfazed by the miss here and so I just want to ask you in your eyes, you did anything really go wrong in the quarter? We have been talking about how things shifted around a little bit. And then to add to that over the past three months, what has changed and what remains the same versus three months ago?

Boyd Douglas

As far as -- I am positive about the quarter, I hate that we missed. We certainly have prided ourselves on coming in within our range. You look at the reasons why we came right in on the top behind even with an installation pushing. We came in well there and we are positioning ourselves, we think we are an extremely strong positioned to take advantage of this opportunity that as we see is once in a lifetime opportunity for this company. We think we are in great shape. I guess the critics could say we got ready maybe a quarter or two quarters early or something like that, but I would certainly rather be a little bit early and ready to go as opposed to behind the eight ball and scrambling and not being prepared to do quality installations when that number increases.

We are going to be ready and we feel real good about our opportunity to go out to our existing customer base and really spend some time with them and get them in a good position so that they can meet meaningful use. As far as the three months a very, very little has changed. We did get the interim final rule it was published in the Federal Register in the middle of this month. But we haven't seen any psychological change, I guess if you will on the part of the hospitals yet based on that final rule being published. I think part of the reason is that there's still a lot of unknowns in that, from our review of that document there are several things and I think other vendors agree with us that really seemed pretty onerous, not necessarily from a development point of view but for the hospital's sake.

Some of the auditing things that are going to be required as far as who has access to personal records and things like that when the hospital certainly technologically is not a problem, but just keeping track of that and being able to and having the disk space and things like that to do some of the regulations that have come from the government seem to be a little onerous. And again, it's going to be onerous on the hospitals not necessarily on us as a company.

Sean Wieland – Piper Jaffray

Okay. Thanks for your comments.

Boyd Douglas

Sure.

Operator

Thank you. Our next question is from the line of Gene Mannheimer with Auriga. Please proceed with your questions.

Gene Mannheimer – Auriga

Thanks for taking the question. And this is really sort of a follow-up to the previous one. In your view was there perhaps a misconception on how the timing of the stimulus would affect you? I mean or with perfect hindsight, would it had been more prudent to ramp up the install and support staff more gradually as the signs of the stimulus became more visible to you? Or are you pleased with the way you have executed so far?

Boyd Douglas

We're pleased with the way we have executed. The way we do, we do all of our own internal training here and things like and so for the resources we take, it would be difficult for us to ramp up say -- 10 people a month or 15 people a month to conduct that many classes at one-time and the classroom space and things like that would be extremely difficult and be more expensive. So certainly, I think the way we did it we are pleased with and like I said, I think we're already reaping the benefits of it by the fact, that we can go out to these -- to our current customer base and help them along better than we would've been able to if we weren't to this capacity yet.

Gene Mannheimer – Auriga

Okay. Very good, Boyd. And then just a clarification with respect to the earlier comments on travel expense. This period of education where you're out in the field showing customers how to qualify and what they need to do to achieve meaningful use, it sounds like this will expect to run a couple more quarters. So is it correct to assume that margins may pickup then in the second half of 2010?

Boyd Douglas

Yes.

Darrell West

Yes.

Gene Mannheimer – Auriga

Okay. Very good. Thank you.

Boyd Douglas

Sure.

Operator

Thank you. Our next question comes from the line of Corey Tobin with William Blair. Please proceed with your questions.

Corey Tobin – William Blair & Company

Hi, guys, good morning. I want to connect on just visit this headcount addition issue one more time. If my math is correct, you have added something like 215 or 220 people in the last three quarters. Does that sound about right?

Darrell West

We went from at the end of the first quarter we had 904 people, so we've gone up almost 200 since the end of the first quarter.

Corey Tobin – William Blair & Company

Since the end of Q1? Okay.

Darrell West

Q1, yes.

Corey Tobin – William Blair & Company

Okay. So we're looking at somewhere between a 20, 22% increase somewhere in that ballpark?

Darrell West

Yes.

Corey Tobin – William Blair & Company

And the questions I have related to this how much more headcount do you think you need at this point?

Boyd Douglas

Right now, we feel like we are in great shape. If obviously, we start seeing the schedule fill in and don't think that we've got the install capacity to do it then we certainly won't be afraid to pull the trigger and add more. But right now, we feel pretty confident, as confident as we've made for the remainder of this year that we are fine. Obviously, we've got factors like turnover with hiring this many our turnover ratio may go up a little bit. Typically, if we lose an employee it's usually within their first year of employment. Once they are here 12 to 18 months, they are usually here for a pretty long time just because we think we have great employee benefit plans and pay them well and things like that. So for now, we feel very comfortable with where we are.

Corey Tobin – William Blair & Company

Got it. So is that to say that Q1 we won't necessarily see the kind of additions in the over 50 range that we have seen in the last two quarters?

Boyd Douglas

That's correct. We will not.

Corey Tobin – William Blair & Company

Okay. Great. Now, looking at it from the other side, what kind of a revenue ramp would you expect to be able to support with an over 20% increase in headcount? Or asked another way, I mean would you expect that revenue should go up less than, equal to, or greater than sort of the 20 to 25% increase in headcount over the next year or so?

Darrell West

On the system sales line, I think that with that headcount increase that we should -- are able to see that 25% or so increase on that system sales line. On the support, maintenance and outsourcing lines those run in a little bit different dynamic from that, but we believe the capacity is there and that we will see that numbers in a similar range on the increase in system sales.

Corey Tobin – William Blair & Company

Understood. So then the question was more pointed toward system sales but the punch line is overall you should expect to see, we should expect to see that accelerated growth here over the next couple of years?

Boyd Douglas

Yes. Definitely.

Corey Tobin – William Blair & Company

Great. And then finally just recognizing again the customer base is moving slower than I think you or most of the industry would like to see, from your perspective is there any change to the long-term positive impact that you expect to see on the clinical add-on sales side or even new system sales side due to the stimulus funding?

Boyd Douglas

Not at all. As it draws out, it looks like maybe it's not going to be -- as big of a bubble right there in the beginning that everybody was thinking and it will go a little bit longer kind of the tailwind type thing. But certainly, we are as excited as we've ever been about it and frankly that would be better for us over the long-term is to not have this huge rush of business where we don't have the capacity to handle it all and we've got some more time to do these installations.

I think another thing, Corey, that I meant to mention earlier as far as what people are waiting on things like that, there's still really not very much information at all on the certification process as far as certifying vendors to be able to provide these EHR systems. So if you kind of look at the calendar and when people can start applying, I think it's going to be interesting to see how that all falls out and where these certifying bodies come from and what they've got to do to get themselves certified or ratified by the government before they can even begin to certify companies such as us and our software.

Corey Tobin – William Blair & Company

Okay. Great. Thank you much.

Boyd Douglas

Sure.

Operator

Thank you. Our next question is from the line of Charlie Rasmussen with Insight Capital [ph]. Please proceed with your questions.

Charlie Rasmussen – Insight Capital

Hey, guys. I appreciate the color and obviously, the hope is Q1 is just an anomaly and the rest of 2010 is much better. Along that line, Boyd and I know you've been pretty generous answering so many questions but given all the hires and the incremental 200 heads that have been added since Q1 you guys were 50% over budget 95 heads in Q2 and just looking back last night at the transcript, you were pretty confident that we would start to see the fruits of those additions in Q4 and specifically ramping the year starting Q1 '10 and just help us reconcile.

when I look at deferred revenues I understand and I guess this speaks to my question is there a bigger issue at the Company than maybe is in the press release and the numbers or even the guidance but deferred revenues were down year-over-year in what was arguably the most difficult selling environment system sales were also down year-over-year and you were comping the easiest selling environment Q4 '08 was a catastrophe, so comps should have been much better just against that selling environment and I guess have you guys made change, have there been payments term changes with regard to how you are collecting the maintenance for recurring piece on the system sales?

That also, sorry for the long-winded question but the other question I had was it looks like you financed roughly, you had an incremental change in the balance sheet roughly 20% on finance receivables which comprised more than 100% of your system sale changes. Is that something you plan to do more of? And if so, have you seen any kind of bad debt expense?

Boyd Douglas

Let me take a shot first. That was a long question. Let me answer part of it and then I will let Darrell follow up. Certainly we have seen a shift and part of it is due to the stimulus packets that there are a lot of people wanting to purchase this software. But the problem that has been all along within our market places is the funds that these hospitals have. I mean, they don't have the money in a lot of cases to buy these systems and so we are doing more up front.

We're doing more ASP-type deals. We're doing more Software as a Service and in a lot of those cases they are not paying us that 10% deposit that is under our normal payment plan which is what you are looking at in the deferred revenue. So I think in a lot of ways that answers your question. Yes. The payment terms are definitely different and I will let Darrell will speak to the bad debt and things but certainly you can see our DSOs have gone up.

Payments are slower and as far as for the future we wish we never had to finance the deal. I've said plenty of times we're a technology company and we are not a finance company but in a lot of cases or at least in some cases in order to sell the software, the last option sometimes is for us to finance it for them and we finance the ones that we feel comfortable doing. Certainly like I said, we would rather someone else finance it or for them to pay for it up front but that's just not the environment.

We're in right now and I think a lot of hospitals are feeling this pressure to install these systems purchase these systems so that they can be in a position to meet meaningful use and a lot of times they are doing it without necessarily the capital that they would like to have in order to proceed on with that. So that's kind of my version of it and I will get Darrell, can kind of give you his take on it as well.

Darrell West

On the bad debt side, bad debt expense for the year was right at $1.1 million and that was down about 200,000 from the previous year. So our bad debt position has not, it actually was little better than the prior year but we are seeing as Boyd mentioned, some slowdown in payments some I guess adjusting of our standard terms and then on the deferred revenue part of that when we, if we are financing a deal oftentimes nothing hits deferred revenue because I'm not getting any upfront payments Whereas in the, if I had a very strong, if I was projecting a very strong first quarter oftentimes I may have 40% of the funds prior to install. So there is a couple factors there that are affecting the deferred revenue.

Charlie Rasmussen – Insight Capital

Okay. That's really helpful guys. Just one final question as it relates to that backlog. Is there a chance we actually see backlog negative on a sequential basis in Q1?

Darrell West

I don't, well, that's a possibility but I don't think we would see a negative backlog there.

Charlie Rasmussen – Insight Capital

But the trend of deceleration I assume just given the weak, just the difficult environment we shouldn't expect it to reaccelerate from the 6% to the 1% to the 8/10 of a percent. Should we kind of just model that trends and as you decouple from the rest of the industry?

Darrell West

I think, what we anticipate or what we have built our whole model on here going forward with the new hires and everything is that in the first quarter we see some more decision-making some more prospects turning into orders that would allow that backlog to continue to move in the positive direction.

Charlie Rasmussen – Insight Capital

Great. Thanks for the patience in taking all my questions, guys.

Darrell West

Thank you.

Operator

Thank you. (Operator Instructions) and now our next question is from the line of Brad Hoover with Sidoti & Company. Please proceed with your question.

Brad Hoover – Sidoti & Company

Hi. Good morning, guys. I just wanted to get back to the installs and your average deal size. In the fourth quarter and then also in the first quarter guidance do you know how many were under 50 beds and how many might have been over 150 beds for the new installs?

Boyd Douglas

I do not. I don't think there are any over 150 beds.

Brad Hoover – Sidoti & Company

Okay. For both quarters?

Boyd Douglas

Correct.

Brad Hoover – Sidoti & Company

I'm just trying to get a sense to understand, I guess the last year or so is the reason that it seems maybe the new deal size is going down is that just because you've been doing more installs under 50 beds and also maybe more installs that are just doing financials up front? Is that more or less the reason or are there other parts to that?

Boyd Douglas

That’s definitely the reason. That is the two reasons.

Brad Hoover – Sidoti & Company

Okay. And then on the headcount, just to touch on the sales force, are you guys still at 30 for sales force? Has that changed at all?

Boyd Douglas

Darrell has got that number. It's higher than that. The last time I recall it was 44.

Darrell West

Total marketing is 44 but that includes support people as well. But we have not, we did not see any change in the quarter in our sales staff.

Brad Hoover – Sidoti & Company

Okay. And then do you expect to hire in sales in 2010?

Boyd Douglas

No. We don't.

Brad Hoover – Sidoti & Company

Okay. And then just over to the business management services the margin jumped up a little bit to 44%. I know historically you have kind of been in more of the 40% to 42% gross margin. Was that just a one-time thing in this past fourth quarter or do you expect to be able to keep that margin in the maybe 43% or 44% range?

Boyd Douglas

No. We think, it will go back down to more historical ranges. I think that was just an anomaly.

Brad Hoover – Sidoti & Company

Just an anomaly, Okay. And then just lastly, since there was a definition coming out about three weeks ago and obviously you've been in touch of your customer base what have you been doing to talk with them? What has been the general feedback and reaction from the real hospitals with that definition?

Boyd Douglas

I think everybody came in pretty much like everybody expected. I don't think there was any, certainly no major changes to it. Our major surprise is in the definition and we've got customers all across the spectrum. We've got some customers that don't seem to be too motivated at all about it for a variety of reasons and then we've got other customers that are chomping at the bit pushing us to make sure that they've got everything in place so that when the final rule does come out that they are in great shape and can go ahead and qualify or apply for their money as soon as they can.

Brad Hoover – Sidoti & Company

Okay. Thanks. And is really, is meaningful use may be the only focus? Are they asking about certification and wondering where that's going?

Boyd Douglas

Are you talking about certification for us?

Brad Hoover – Sidoti & Company

Yes. For vendors.

Boyd Douglas

We get very little questions about that at all. I think our customer base and prospective customers realize our position in the marketplace and our abilities and technological abilities and there's no doubt that we'll be able to be certified.

Brad Hoover – Sidoti & Company

Okay. Yeah. And I agree with that. All right, guys. Thanks for taking my questions.

Boyd Douglas

Sure, Brad.

Operator

Thank you. There are no further questions at this time. I will now turn the conference back to you, Mr. Douglas, to continue with your presentation or closing remarks.

Boyd Douglas

Great. We certainly appreciate everyone's time this morning. Thank you for your time and have a great weekend.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.

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Source: Computer Programs and Systems, Inc. Q4 2009 Earnings Call Transcript
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