Auxilio's CEO Hosts Investor Webcast Conference Call (Transcript)

Mar. 5.14 | About: AUXILIO, Inc. (AUXO)

Auxilio, Inc. (OTCQB:AUXO) Investor Webcast Conference Call March 5, 2014 2:00 PM ET

Executives

Dustin Salem - Senior Vice President, MZ North America

Joe Flynn - President, Chief Executive Officer, Director

Analysts

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Auxilio Investor Webinar. During today's presentation, all participants will be in a listen-only mode. Following the presentation the conference will be open for questions via the web interface. (Operator Instructions) Today's conference is being recorded March 5, 2014.

I would now like to turn the conference over to Mr. Dustin Salem, Senior Vice President, MZ North America, Auxilio's Investor Relations firm. Mr. Salem, the floor is yours.

Dustin Salem - Senior Vice President, MZ North America

Thank you, Sarah. Good morning, everyone. Welcome to Auxilio's virtual conference call and webcast. The slides accompanying this call are available for Investor Relations section of the company's website or please email me at dustin.salem@mzgroup.us if you are unable to access the slide. The format of today's call will be as follows. President and CEO, Joe Flynn, will provide a summary of Auxilio's business and strategy as he walks through the investor presentation. We will then open up the call to your questions after that.

Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual performance or results to differ materially, including the risk that the results may be different than currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our report on Form 10-K for the period ended December 31, 2013 to be filed with the SEC for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of Auxilio's website.

Now I would like to turn it over to Auxilio's CEO, Joe Flynn. Joe?

Joe Flynn

Thank you very much, Dustin and thanks everybody for joining me today and taking time out of your busy day to learn a little bit more about Auxilio and what we have accomplished today and what we hope to do in the future. I am going to be the one driving the slides today. So just bear with me as I go through this and at the end, I think we will be having some questions. If anybody wants to ask question, I think you can type them in and I will be able to see them and answer them as beast as I can.

So the slide I have up right now is kind of a quick snapshot at the end of Q3 of last year, 2013. I think our current share price hovers somewhere between now about $1.30 and $1.40 which the market cap is then of course varies. We have 21.1 million shares outstanding as of the end of Q3 2013. We are roughly at $31 1 million in revenue with adjusted income from operations of $1.6 million and about $3.1 million of cash available to us.

Just to give you a quick summary or an overview of the company, Auxilio, and I was a cofounders of the company. The company was founded 10 years ago in 2004. We are headquartered in Southern California in Orange County in Mission Viejo, California. We are positioned and we are first healthcare exclusive and vendor neutral managed print services company in the United States.

When I mean vendor neutral, I mean, we do not have any relationships where we take any kind of marketing dollars or anything like that from any equipment manufacturer in the print world. We work with all the different vendors Xerox, Canon, Ricoh, HP, all of them. We find all of these different types of vendors in hospital. WE work with a lot of different software vendors as well. And one of the unique aspects of what we offer our client is the fact that we don't have a horse in the game. So we will go best to breed technology or work with their existing infrastructure. And this is an important differentiator for us in the marketplace.

We have a national presence in 22 states across the country where we have customers in 22 different states and hopefully that's a growing number of states over the course of the next few years. Our programs guarantee between 10% and 30% savings over the life of the contract. We are contracted with actually over now 94 hospitals covering about 1,600 affiliated care facilities, which may be attached to those acute care hospital facilities.

We manage well over 1.6 billion document for our customers annually. We manage well over now 50,000 devices. That would be copiers, printers, faxes, scanners. We manage those for our clients. And we serve more than a quarter of million end-uses in all these different various hospitals and acute care facilities, as well as tangential facilities.

Then lastly, there is a bullet point on what our projected adjusted income from operations in 2013 is at, it is $2.7 million. It's very early to be putting that number out. We are in the middle of our end of the year audit right now. So that number could change. So that is not a projection. It's just sort of an idea that we may end up there, but we may not. Could be less, could be more.

We had 33% recurring service revenue over the course of the last quarter. Again, just the number of accounts that we have that we have added over the last few year have been significant and specifically we have added 50 new hospitals since December 2011. So we have seen some tremendous growth here over the last couple of years.

So our business model and it's actually quite a simple business model. We manage the process of the production of documents in a hospital. I am going to give you some statistics a little bit later in this presentation about just how much a hospital is actually producing in terms of documents on a monthly basis. Our goal is really to drive out costs because this is an area inside of a hospital where there is very little visibility on the cost.

We drive operational efficiency. So we provide them with a level of service, both in the cost management as well as customer service around the devices themselves, installing, implementing and maintaining and more importantly, we provide level employee productivity that doesn't exist because in most hospitals where Auxilio is not operating, this is a very broken process in the sense that nobody really owns it. The IT department may have a piece of it. The purchasing department may have a piece of it. But it is really up to every individual department and it's a significant pain point.

Just to give you a statistic, about 25% of all helpdesk calls in a hospital, prior to Auxilio coming in, and we find this out when we do our upfront assessment are printer related as a very simple kind of stuff, such as I run out of toner, my printer is broken. 25% of calls print related is a significant burden for IT organizations inside hospitals. So we take that burden away from them.

The company crossed over to profitability last year. This is really a result of our continued growth of our customer base, as well as the maturity of the number of hospitals that we brought on in the last couple of years. Those accounts are now becoming mature and showing very nice margins or expected margin.

I mentioned before, we have closed over $90 million in new business, five year contracts since December 2011. And our gross margins, on our mature business, we target between 20% and 25%. To give you an idea what is mature, as people ask me, what does mature mean, why do you define mature. That's really a hospital or health system that has been with us for more than a 12 month period. Because the way our model works in the early stages of our implementation, we take on a lot of contracts with existing vendors that we work very hard to renegotiate.

So in those early months we may be at breakeven or a small margin but once we work our way through those contracts, it takes us six to 12 months, depending on the size of the deal we have signed. During that period of time, we are renegotiating and we are seeing, as we renegotiate those contracts, we see our margins rise. So essentially, the way we make money is by operating the profit that currently exists much more efficiently and that's how we both, make our margin, as well as provide savings for our client.

With 5,700 hospitals in the United States, we still see significant organic growth in our business and we have a very diverse referral network that gets us access to those market which include our customers. In this quarter alone, we have had some nice deals. They come in various ways. One, we won through an RFP, UC San Diego, the deal we just recently closed down in North Carolina. With New Hanover, that came through a former customer who was very good friends with the CIO at New Hanover and that deal just came through one of our channel partners as well.

So we are very opportunistic in the way in which we access the marketplace. Through channel partnership with large organizations like Aramark Corporation or through individual consultant, like a former client of ours who was a former CIO of Barnabas Health in New Jersey, he is now a referral partner for us. And so we have seen significant growth in that way.

I have a slide up about our income from operations. We are very pleased to have reported last quarter that our adjusted income from operations increased from a negative 10% for 2011 to positive 9% for the most recent quarter Q3 2013. While that is significant, it goes to a little bit of what our business model was about. I explained it earlier. As we took on in 2011 and 2012 a significant amount of new hospitals we, of course that all happened in a short period of time when we had a smaller base of business to work with, therefore we lost in those years, knowing full well that each one of these accounts will become a cash cow once we have renegotiated those contract and put ourselves in a position where we are hitting our margin target on these mature accounts.

So you are going to see that prospects continue. Now that we have a larger base of business, we feel very comfortable that we will continue to be profitable going forward. And so the business model is really playing out like we expected.

Okay. So this slide I am showing now, I think is a good level set to give you an idea just how much paper is being produced in a hospital. And this is actually one of our customers. This is a 8-hospital health system in New Jersey. This particular hospital system, which has about 2,700 beds in total in those eight hospitals in a number of affiliated medical office buildings, produces roughly 15 million pieces of paper every single month. So to give an idea that the amount that's being produced is tremendous and it is almost 5,000 feet higher if you stacked it on top. Each one of those pieces of paper, if you stacked it up on top of each other, it would be around 2,000 feet or so higher than the largest building in the world.

Why that slide is significant because it tells you, that amount of documents being produced, okay. There is a whole ripple effect in terms of the number of devices required for that amount of documents, the amount of toner that's being bought, the amount of parts around those devices, as well as the amount that's spent on a monthly basis to produce that much paper, okay. And so I hope it gives you some perspective on the size of this opportunity that we are dealing with in the marketplace.

Just to make it simple, hospitals are all more or less measured by bed size. So the average 250 bed, 350 bed hospital, which is an average size hospital typically produces between 1 and 2 million pieces of paper every single month. So this just hopefully gives you some perspective about the work that we are doing and the amount that's spent and the amount of process around it, okay.

Next slide. So a lot of time I get asked a question, with the advent of electronic medical records, isn't paper going away? And I think a lot of hospital executives, particularly CIOs have spent hundreds of millions of dollars with electronic medical record implementations which has been, by the way as we all know mandated by the federal government through the Healthcare Reform Act, think they would like to say yes, paper is going away. But the reality is, we see no significant reduction in paper volume. If anything, we see paper going up. Paper use going up, particularly through the implementation of EMR and that is because EMR was really not designed to make paper go away.

Paper is still very much a part of both registration and output of patients. Its still very much part of the communication between the hospital and the government, the hospital and employers, the hospital and insurance companies, doctors have a great familiarity with paper and especially the doctors that may be over the age of 40 years old, which is the majority of them, there is still a great deal of familiarity with that and it's still very much the shape that, especially when clinical systems breakdown and they have to have a backup and the backup is always paper. So there is an access and ease of use that really still drives the use of paper in hospitals.

And to give you some more anecdotes around that. In many of our contracts with our client, we have paper volume reduction targets where the customer comes to us and says, look, Auxilio, we love you program, you have given us savings, you are managing our equipment, you are managing our vendors. That's great. But we really to drive volume out. And that really comes with behavior change programs and really marketing and it really forces the customer themselves to be involved in that paper reduction at the senior management level.

And we find it very difficult to hit our targets in paper reduction, primarily because it is very difficult to change behavior and to change the way in which the government, in particular, regulates healthcare. But we do have those targets in place and we work very hard and I am pleased to say that in most of our locations, we have hit our target. But we hit those targets only when there is a buy-in and there is a direct relationship with really the CEO of that health system to force that on his or her staff. So it's not something that happens very easily. And it not something, we feel, is going to happen really in the near or even long-term over the next 5 to 10 years.

So just to give you the size, this slide really talks about the size of our addressable market. I mentioned earlier and this slide shows you. There is roughly 6,700 acute care hospitals in the United States. We really target only around 2,000 because we really like to target that 300 bed hospital facility and above. But most hospitals are part of corporate health systems. And that corporate health system may have eight hospitals but that system might have one hospital that's, let's say there are 3,000 beds, they may have one hospital with 1,000 beds which we like to call the mothership and a number of smaller facilities. So sometimes we take on smaller facilities below that 250, 300 bed target but that's only and only if they would be part of a larger health system.

So we really target those 2,000 hospitals in United States that are above that 250, 300 bed. So let's say, the average being about a million document per 250 bed at around 540,000 per year. If you multiply that by 2,000 hospitals, we are really targeting $1 billion-dollar market. If we can get 10% of that market here, 200 hospitals over the course of the next three to five years then we are looking at $110 million just in our core business.

And that's not including some other services that we intend to get involved in over the course of next couple of years where we see some real opportunities for us to provide additional services which will drive additional revenue to Auxilio and we are in the process of coming up with what plan or that strategy is of getting demand from our customers right now on that. But you will some information on that over the course of the next couple of quarters how we begin to diversify our offering.

So why is it that we are resonating in this marketplace? What's driving our growth? And this slide kind of speaks to that, but I think there are some key things that are happening in healthcare that are driving our growth. Number one, hospitals and hospital systems, given the changes in the Healthcare Reform Act are faced with a significant issue in revenue reduction and that is because Medicare and Medicaid reimbursements are going to be changed, have changed significantly in 2014, starting in 2014. So all of our customers are looking at a reduction of about 15% revenue across the board.

What is happening with that is they are looking to drive out cost in any area outside of patient care that they possibly can. When we started this business 10 years ago, it was very difficult to convince a small 250, 350 bed hospital that we can save them $75,000 or $100,00 a year in print cost. Now they are looking at every single dime that they can possibly save. So we offer a very low hanging fruit opportunity to drive out significant dollars. And of course, the bigger the institution, the bigger the health system, the bigger that number is.

Our largest client, Catholic Healthcare East are targeting year one savings with $2.3 million. And we nailed that number. We hit it right on the nose. To be multiplied that over a five year period, you are talking about $10 million to $15 million savings. Each one of these health systems have a target well over $200 million in savings because of what's happening in the environment. They are looking to outsource anything non-clinical.

So how do we meet the challenge? When we engage with a client in the early stages, we provide them a no-cost assessment where we look at a number of things. We look operationally, how the production of paper in a hospital is affecting that institution, financially what is the cost that they currently have and what is the savings opportunity. Thirdly, strategically how are we going to evolve into a less paper intensive environment for our customers.

So we reduce cost and we really focus on equipment leases, we focus on the cost of their toner, the part, the labor that they currently have. We look at all that in the aggregate and develop a pro forma for them. It's a little counterintuitive, but we come up with paper reduction strategies and that really comes in the form of reducing the actual footprint of equipment in a hospital. Without Auxilio, these hospitals are at the mercy of equipment vendor, all of whom produce great equipment in their factories all around the world, but rally their motivation in dealing with hospital client is to sell as much equipment as they possibly can.

So what we find is, hospitals being really oversold with equipment and very undersold with strategy where they have capacity for 200% more volume than they are actually producing. So we begin to reduce the footprint and we begin to provide suggestions on different types of clinical software applications that are compatible that can begin to drive out volume, as well as come up with change management programs to train end-users on printing less.

And that comes with visibility because our assessment and our program provides direct visibility at the device level and at the department level, we are able to sit down with department heads on a monthly basis to identify what's being printed and begin to come up with strategies to reduce that print. And we do that because we place people full-time at all of our hospitals. We have a team of people on-site that is working with our clients to do that. And that team various, again, given the size of the customer.

And then we improve the process. The way we improve that process is, the customer hands over the relationship of the vendors in this particular space to us. So we are able to manage those vendors, provide detailed insight into the volume and provide a level of customer service that doesn't exist in the marketplace. We provide them really with a roadmap, a five-year roadmap of how we are going to save money, reduce the footprint of print assets that are in the environment as well as begin to reduce volume and provide them with what we call an optimized state. And if we do that, we save them money and we can drive in the margins to ourselves.

So this next slide gives you a typical five year term with a couple of the customers. So let's assume, we were asked to come in and do an assessment of 3-campus, 1,000 bed hospital system, which might be producing somewhere around 4 million documents a month and in our assessment, we determine that their cost is roughly $0.045 to produce a black and white document. Just to give you an idea, color represents usually somewhere between 5% and 10% of the total volume and it's a significant cost as well. But this just gives you a snapshot. So that's costing the current customer about $174,000 a month, okay. And that's all expenses in. That's leasing cost, printer acquisition, toner acquisition, parts, labor all those cost elements.

So what we will do is, we will cap that cost to $0.035, providing him about a 20% reduction in costs and continuous process improvement. So our program then saves the hospital roughly $34,000 per month or $2 million over five years. So the revenue to Auxilio, if you do the math, is roughly $112,000 per month, giving us $1.3 million per year or $6.5 million to $7 million contract over a five-year period. And our goal in that five-year period is to average 20% to 25% gross margin.

As I mentioned earlier, in the beginning that gross margin maybe flat, zero, to a low number and by the time we are in years four and five, when we have a mature account, it might be as high as 40%, 50%, okay. So we really focus on margin improvement throughout the lifecycle of the customer engagement.

We have a presence now in over 22 hospitals. I am proud also to say that in our savings model, and since we started this company, have saved over $70 million for our customers. We are operating in 94 hospitals, 1,600 affiliated care facilities. We are beginning to have a very growing presence in the marketplace and we are seeing that in our pipeline, in the sense that we are now, from the time we started this company, we only had a few hospitals here in Orange County, California and Los Angeles, we have now grown to a national presence. We are now being invited to major RFP to major health systems. So we now have a real name in the marketplace even though our, and people ask, what do you compete with, because nobody is doing exactly what you do. And that's true, we really are the only vendor neutral, health care exclusive, managed print services company in the marketplace.

We compete with very large equipment manufacturers. That would be the Xerox, the Canon's, the Ricoh's, the HP's and/or local distributors or dealers of that same equipment. So we are really competing with equipment centric players whose driver is to sell as much equipment as possible, okay, where we are coming in from a very different standpoint. We are coming in from a volume management, cost management, process efficiency standpoint. It's a very different value proposition than our competitors in the marketplace.

Not to say that these competitors are not formidable. They are absolutely formidable. They are very large multibillion dollar organizations. But we believe we are very a disruptive force in the marketplace. And we believe that our message and our services are being very well received. All of our clients are referenceable clients and all of them, some of whom are very large health systems are helping us grow our business. We are very proud of what we have achieved to-date.

Really, our growth strategy, I mentioned it earlier. Trying to current capture 10% of those 2,000 hospitals that we target right now would get us to $000 million in revenue. We have gotten ourselves close to 100 hospitals now. Our goal is to get another 100 hospitals here in the next three to five years. We are hoping that gets accelerated. So just in our core MPS business, we still see a very big greenfield opportunity for us. And again, significant opportunities to expand our services beyond MPS which we are currently looking at right now because we have a nice customer base, there is more opportunities for us do that. And you will some more information about that over the next coming months.

So really try to get that 10%. The way we are going to do this is do what I mentioned earlier. We are going to leverage channel partnerships and alliances with healthcare consultants. We have individual consultants who are very well-known in the marketplace. We have very large groups like Aramark that we are continuously pushing them to provide us access to the marketplace. Because for any small company, one of the challenges is getting access. Getting access to decision makers and getting above the noise. And getting into that that C-Suite in those health system that's really where we like to sell.

We are going to capitalize on our customer references. We had a number of wins from customer references and having a staple of clients that are all customer references is extremely important to us. Customer service and the treatment of our employees, which now number over 200, is paramount to us. We are constantly honing our, both customer relationships, but more importantly employee relationship because our employees are most definitely our most important asset. So again, if we re serving our clients well, then they are going to be references for us for growth.

We are going to gain efficiencies on our assessment process. When we first started this business, it took us a long time to do our assessment. We have done an amazing job in shortening our assessment cycle. So we can take on more accounts and take on more opportunities simultaneously.

We intend to grow our sales force and we intend to scale the opportunity to sell additional services to our client. That will be related top MPS. But may also fall outside of MPS, by bringing on some additional expertise and people in the marketplace that can help us grow our professional service business.

This slide shows you some of the clients that we have, which are some of the largest health system in the United States. Not knowing where you live, many people recognize Johns Hopkins as one of the largest and most prestigious health systems in the United States. We do have them. We operate in all of their facilities.

Some other large ones like I mentioned to you before, Catholic healthcare East. It's actually the third-largest Catholic health system in the United States. Why that is significant, is because 30% of the hospitals in the U.S. are owned by some-end via the Catholic Church. So have a very strong relationship with Catholic Health East and Bon Secours is another large Catholic health system. Really targeting some of those large Catholic system, where we already have an in with the Bon Secours and the Catholic Health East.

In California, we are proud to be working with Sharp HealthCare in San Diego, which is big here in Southern California as well as Sutter Health up in Northern California out in the New York City or in the Mid-Atlantic, we have the Barnabas Health System. So what we have done here is, we have proven that we can deliver multi-state spread out geographies of large health systems and our current pipeline includes large health systems, medium-sized health systems, multi-state health systems as well as individual hospitals that are still, may or may not be affiliated with a large health system. So we are very proud of what we achieved in taking on these large institutions which are billion-dollar organizations and really delivering for them and making them formulation referenceable clients.

Going forward, we are going to leverage our advantages right now. We believe it's a major advantage to the health care exclusive, vendor neutral and place people on-site. We really have standardized that staff training and implementation in order to be able to continue to scale this business. So we feel very comfortable that we can take on other large health systems and scale our business without seeing any disruption.

We have a very experienced management team and active directors who have a lot, combined hundreds of years of healthcare experience and business experience. We believe we are in a recession proof industry in healthcare and we believe we have a significant greenfield opportunity because we are selling a cost-cutting measures. And I say this to a lot of people that call me all the time that want to get into health care. If you are not selling a cost savings initiatives to hospital in today's environment, unless you have something that they absolutely need like a medical device that's paramount, it will be very difficult to sell anything to them. So hospitals are focused on cost savings and we really have that in the sweet spot area.

We have a proprietary benchmark database that is very important in the healthcare environment right now where all hospitals and hospital systems are dealing with data. They are managing by data. So providing them with a lot data around volume related to expenses, related to patient days, all that type of stuff is very proprietary. Nobody else has this and our competitors to that. [ph] We are going to continue to expand our channel partners and look for every avenue to get access to decision makers in hospitals.

The other thing is, we have a recurring revenue model. We push very hard for early contract renewals. All of our contracts are three to five years. So having a recurring revenue gives us a lot of visibility on the long-term health of our business.

Just a slide on our management team. Myself and my CFO. Myself have been the founder of the business. I came out of the technology and media business and we made an application to create Auxilio and we started off with a $1 million in revenue closing in on $42 million now, and hoping to get to that $100 million revenue in our core business here over the next three to five years. My CFO, Paul Anthony, has been with me since the second year we started the business. Then our business development expert comes from the industry. Simon has worked with Lexmark and IKON. So he really knows the business from the managed print world and from the vendor world and understands all the nuances around that.

And then lastly, just to give you an idea of our Board of Directors, some of whom a very deeply invested in the company but all of whom have ownership of the company, Mr. Pace, who was the former president of ServiceMaster, hospital managed services. They were one of the largest until they were acquired by Aramark. We have got William Leonard, he recently purchased roughly 7% of the company, the former CEO of Aramark Corporation. Max Poll, he was the former CEO of a large health systems, Scottsdale and the Barnes Jewish Christian in St. Louis. Michael Vanderhoof, who has been with us since inception, our largest single shareholder from Cambria Capital. He owns 10% of company. Ed Case runs our audit committee. He is currently the CFO of a major hospital up in the Chicago area, as well as he has been CFO of other large health systems. And lastly, Mike Joyce, lots of experience coming out of AlliedSignal.

So what we have here is a team that is put together, a very strong recurring revenue business that is delivering value for our customers. It is still a very greenfield opportunity where we feel we are really still scratching the surface of the opportunity, as well as having the opportunity to expand our services with our existing customers as well as possibly into other markets.

So that's my presentation. Operator, I am available to take any questions. But I think you need to type in. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we ask that you submit any questions you may have via the webcast interface.

Joe Flynn

Yes, a question came up with regard to the recent announcement with Beth Israel.

For those of you that live in the Northeast, you may know that Beth Israel Deaconess is one of the largest, certainly one of the most prestigious, but one of the largest medical facilities in New England in Boston, affiliated with Harvard University. That particular arrangement is a little bit different than our three to five year recurring revenue deals that we have in MPS.

The reason that it's a little different, it provides us with a couple of opportunities. That environment, Beth Israel in that environment has some significant issues in their print environment that before we committed to a major three-year, three to five year agreement, we wanted to wrap our heads around what those issues were. So they agreed to provide us a 12-month consulting agreement to really dive into the problem.

Instead of just doing an assessment and moving forward, they really wanted us to dive into the details. They are undergoing some changes there. So we agreed to a consulting agreement. We think hopefully that will lead to a broader, longer-term MPS program, but they really wanted us to wrap our heads around that and we also see that as an opportunity to sell more different types of service going forward.

Another question came in. Do most hospitals have multiple printer equipment vendors or usually standardized on one vendor?

That's a great question. Most health systems have multiple vendors. Most of these health systems have been cobbled together through acquisition. So they have been saddled with agreements that they may have signed three and five years ago. So a very few of them have a uniform approach to this. Definitely from an individual printer industry, HP dominates. So we see HP everywhere. But there is a lot of specialty printers in hospitals as well. So we may come into a health system and be told, yes, we have three to five vendors that we work with in this area. When we are done with our assessment, many, many times we found 10 to 12 different vendors. Because a lot time, departments are making their own decisions. So yes, the answer is, it is very disparate and confusing for them.

A question came in about revenue from equipment sales releases.

We do book revenue for equipment and that's roughly about 20% and the margin is very low. That margin is roughly around 5%. The reason we even take margin is because we have to have some dollars to cover our implementation of that equipment in a hospital as well as taking those equipment out when the leases are up. One of the reasons why we don't really make a business out of selling equipment is because that is a significant advantage to us in the sales process, where we are not making money off of selling equipment. We are making money off of providing a service that makes our customers more efficient and if we make it more efficient, that's where we drive our revenue. I hope that makes sense.

So gross margin on this business, we target between 25% and 30% over the life of the contract. But as we get bigger, as we add on more customers, we see our G&A as a percentage of revenue going down. So we hope that when we are operating at that 200 hospital level, our goal is to try to get this business, from an EBITDA margin, somewhere between 15% and 20%.

Just reading the questions as they come in. Yes, is there anything else you can add regarding additional services you are considering?

There are opportunities in the healthcare environment right now where IT departments in particular are being pared down. You are going to read in your local newspapers that such and such health systems announces layoff. Well, a lot of those layoff happen to be people who are in the back-office area. The IT organization or plant maintenance organization. That doesn't mean the work is going away. So as these layoffs are taking place, there is a lot of additional work that can be done around implementation or post-implementation of electronic medical records, around desktop support, around server maintenance, all these different areas that up to this point we really haven't focused on because our goal was a land grab and get to that 100 hospital mark.

But we definitely, now that we are profitable and intend to be profitable here going forward, we are really going to begin to dive in to those opportunities and that's going to come with hiring expertise to go after that. We don't currently have expertise. We want to bring that expertise on in and attack that opportunity. So hopefully here over the next couple of months, you will see some information on that.

See, that's cool, though. I am just looking at these. Someone is asking if they can ask on a phone. I think that the questions are only coming in through email, through typing. So I apologize for that.

Okay, good question. The question was, why are we deciding to sell different services to existing customers instead of going after other markets?

The answer to that is, well, certainly when you have a customer base who likes you, who enjoys your service, they are probably going to be much more open if you have additional services that they may need that you can do at a much more cost-effective rate because you have already have people on-site. So that's the main driver there. And also, we understand healthcare very well. We understand clinical environments. And we understand all the problems that they are facing. All of our people are resident managers. Typically sit on the committees and they report to the CIO. So they will sit on the EMR implementation committee. They will sit on Windows 7 upgrade committee because our business is directly affected by that. This is where we are seeing opportunity.

As it relates to other industries like schools, most definitely there are opportunities, particularly in higher education and we are in the early phases of investigating that. But before we put dollars towards that, we want to make sure that the value proposition is there and that it's worth the effort that we put forth. So we are definitely exploring that right now. But I think other services inside our existing customers we are being much more aggressive about.

Somebody asked how many salespeople we have?

We have two sales people. We have an East Coast and a West Coast sales executive, both of whom had more than 25 years of healthcare sales experience between the two. They are supported by a solutions group, who runs the assessments, who helps do those assessments. We will look at adding additional sales people, particularly in the Midwest here probably towards the end of this year or early next year. But this is a business that doesn't require a lot of feet on the street. It requires very skilled feet on the street. People who know how to sell to the CFO of a major health system. That's not an individual that just walk in here. That's an individual that has a specific skill set that we have to look at very carefully and hopefully that individual comes with a Rolodex that we would invest in. So that's the answers to that.

We will be releasing our Q4 2013 full-year financial reports around March 31, I believe. So hopefully you will want to take a look in that.

Outpatient market opportunity. The question being, is there an outpatient market opportunity?

The answer to that is, most definitely in the sense that most of these outpatient facilities and most of the doctors' practices in your neighborhood all across the United States are actually selling themselves to major health systems. And the reason they are doing that is most of them cannot operate a stand-alone business anymore given the fact that Medicare and Medicaid reimbursements have been cut so dramatically with the assumption that more insured patients will be entering the marketplace through the Affordable Care Act.

So what we are seeing in our larger customers is a proliferation of buildings, of physician practices that we are now responsible for taking care of which is driving new volume to us, but it is also providing additional challenges for us because they are spread out geographically all over the place. So we are having to adjust our service level agreements because it is much easier to turn around a problem in 20 minutes if you are in the building inside of a hospital. But it's a heck of a lot more difficult is that building is 50 miles away. So there is some adjustment going on there, but physician practices as a standalone opportunity, we are not really focusing on, but most definitely our customers are taking on more and more physician practices.

Another question here is, what does the competitive landscape look like and who are our biggest competitors?

I mentioned that earlier. Our biggest competitors are the large equipment manufacturers. Particularly when we are in an RFP with a major healthcare institution like UCSD. UCSD, I think we were up against four finalists in that. And other than us, they were all large equipment manufacturers. So that's who see. We are always on the lookout for some organizations, big IT services company who wants to take a run at our business. So we are very vigilant with our competition. We are involved with the Managed Print Services Association. We keep up with what's going on with these competitors because remember each one of these competitors is also a vendor to us because we manage those vendors for our customers. We have to have good relationships with equipment manufacturers because we need that equipment and our customers need that equipment. So those institutions or those companies are both competitors as well as partners to a certain extent. So it's kind of an unique position that we are in.

I have time for a couple more questions. One question on long-term operating income margin, if we are at $100 million in revenue.

Again because we don't have to add a lot of overhead as we take on new accounts, our hope would be, if we were at $100 million in revenue, we have got an EBITDA margin closing in on that 15$ to 20%, hopefully closer to at 20% EBITDA margin. Now imagine that, that would have our gross margins operating at probably closer to that 25% to 30% range. Again that's a hope as we go forward but remember as we take on large health systems that help those upfront cost, they are still going to be with us and until those accounts become mature, we are going to have some impact to the bottom line on that.

Well, I think that's all the questions that I have for today. I don't see any more coming in. I really would like to thank everybody for taking time out of their busy day to hear our story. If you are interested in more information and you want to get in touch with me and have a one-on-one conversation, you can get in touch with Dustin Salem whose name is on our contact sheet here. We would love you to continue to keep your eyes on us going forward and again ask us any questions as we go forward. Dustin or operator?

Dustin Salem - Senior Vice President, MZ North America

That's it for today.

Operator

Ladies and gentlemen, this concludes the Auxilio investor webinar. Thank you for your participation. You may now disconnect your lines.

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