Robert Blum – IR, Lytham Partners, LLC
Brian Patsy – President and CEO
Don Vick – Interim CFO, Interim Treasurer, Controller, and Interim Corporate Secretary
Gary Winzenread – COO
Tom Carpenter – Hilliard Lyons
Jay Barder [ph]
Streamline Health Solutions, Inc. (STRM) Q2 2010 Earnings Call Transcript September 8, 2010 4:30 PM ET
Good afternoon and welcome to the Streamline Health Solutions second quarter financial results conference call. All participants will be in listen-only mode. (Operator instructions) Please note this event is being recorded. I would now like to turn the conference over to Robert Blum. Please go ahead.
Thank you, Amy. And thank you for joining us to review the financial results of Streamline Health Solutions for the second quarter of fiscal year 2010, which ended July 31, 2010. As the conference call operator indicated, my name is Robert Blum. I’m with Lytham Partners. We are the financial relations consulting firm for Streamline Health.
With us on the call representing the company today are Mr. Brian Patsy, President and Chief Executive Officer; Mr. Don Vick, Interim Chief Financial Officer; and Mr. Gary Winzenread, recently appointed Chief Operating Officer. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today’s call does not have a full text copy of the release, you can retrieve it off the company’s website at www.streamlinehealth.net or numerous financial websites on the Internet.
Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of Streamline Health Solutions during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will, and other similar statements of expectation identify forward-looking statements.
The forward-looking statements contained herein are subject to certain risks, uncertainties, and important factors that could cause actual results to differ materially from those reflected in the forward-looking statements included herein.
These risks and uncertainties include, but are not limited to, the impact of competitive products and pricing; product demand and market acceptance; new product development; key strategic alliances with vendors that resell the company’s products; the ability of the company to control costs; availability of products produced from third-party vendors; the healthcare regulatory environment; healthcare information systems budgets; availability of healthcare information systems trained personnel for implementation of new systems; as well as maintenance of legacy systems; fluctuation in operating results and other risks detailed from time to time in the Streamline Health Solutions filings with the US Securities and Exchange Commission.
Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. The company undertakes no obligation to publicly release the results of any revision to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
With that said, let me turn the call over to Brian Patsy, President and Chief Executive Officer of Streamline Health Solutions. Brian?
Thank you, Robert, and good afternoon. For today’s call, Don Vick, our Interim Chief Financial Officer, will summarize our financial results. After Don’s summary, I’ll discuss our second quarter results and then Don Vick, Gary Winzenread and I will participate in our question-and-answer session.
At this point, I’d like to turn the call over to Don for his financial summary.
Thanks, Brian. I would like to highlight the more significant aspects of the financial results of our second quarter of our fiscal year ended July 31, 2010. Revenues for the three months ended July 31, 2010 were $4.7 million compared with $4.0 million in the comparable quarter of 2009, representing an increase of 15%. The increase in revenues was primarily a result of a $520,000 or 118% increase in system sales as a result of two large sales made during the quarter, which I’ll describe in more detail a bit later in the call.
Hosting revenues from backlog also increased by $57,000 or 7% over the prior comparable quarter. Maintenance revenues also increased by $54,000 or 3%. These revenue increases in the quarter were partially offset by a decrease in professional services revenues of $25,000 and a decrease in hardware and third-party software sales of $62,000 from the prior comparable period.
As you may have seen in our recent press releases, we were successful in closing several new purchased contracts during this quarter, two of which contributed software system sales revenues in the quarter, totaling nearly $680,000. The largest of these contracts was through our remarketing partner, GE Healthcare, and was sold to Saint Francis Hospital and Medical Center in Connecticut. This contract included Streamline Health Enterprise Suite software and related professional services.
Another contract sold this quarter was with our existing client, Nassau University Medical Center, who upgraded their system to an enterprise level. In addition, three new BPM, Business Process Management workflow solutions, and additional add-on schedules were sold to existing clients. As a result, total new bookings for the quarter were in excess of $2 million.
Total operating expenses for the second quarter of 2010 were $4.7 million compared with $4.1 million in the comparable quarter of 2009. This increase in expense includes a $123,000 increase in capitalized software amortization as a result of the recent general availability status of Access Anywhere 5.0 and other new products. This increase is included in the cost of system sales.
The cost of services, maintenance and support for the three months ended July 31, 2010 was $1.4 million compared with $1.3 million in the prior period. This increase is due to increases in professional services staffing cost, including bonus reinstatements this year, third-party maintenance contract costs associated with supporting an increased customer base over the past two fiscal years, and further investment in the growth of the Business Process Management or BPM services initiatives.
The cost of application hosting services for the three months ended July 31, 2010 was $472,000 compared with $364,000 in the prior period. The increase is primarily attributable to increased staffing costs, depreciation and third-party license and maintenance fees as a result of the growing hosting center operations from the increased hosting customer base over the past two years.
Selling, general and administrative expenses for the three months ended July 31, 2010 and 2009 were $1.5 million and $1.3 million respectively. This increase over the comparable prior period is primarily due to compensation expense increases company-wide, including reinstated bonus plans, as previously discussed, an increased equity awards compensation, increased professional fees, increased bad debt expense, and new investments and customer initiatives that were offset by a decline in sales expense due to the restructuring of the sales team in the first quarter.
During the second quarter of fiscal 2010, research and development expenses increased approximately to $567,000 from $384,000 in the comparable prior quarter of fiscal 2009. The company capitalized approximately $578,000 and $1,071,000 of product research and development costs in the second quarter of fiscal 2010 and 2009 respectively.
I also wanted to remind everyone that capitalized software development costs should be included when determining total R&D expenditures. For this quarter, on an income state basis, it appears that our R&D expenditures increased, when in reality they decreased by nearly $310,000 when capitalized software is aggregated with R&D expense. The decrease is due to the completion of the final stage efforts of Access Anywhere 5.0 at the end of the fiscal year.
As a result of revenue and expense items discussed, the operating loss for the second quarter of fiscal 2010 was $28,000 compared to an operating loss of $17,000 in the second quarter of fiscal 2009. The net loss for the quarter was $76,000 or $0.01 per share compared to a net loss of $18,000 or zero cents per share in the second quarter of 2009.
Total backlog at the end of the quarter was $18.9 million compared with $18.6 million backlog at April 30, 2010. The bulk of our backlog continues to come from hosting services contracts versus software licensing sales. The recent growth in hosting revenues was primarily generated out of previously reported backlog.
In our earnings release, we included the table showing the non-GAAP financial measure of adjusted EBITDA. We define adjusted EBITDA as operating profit plus stock-based compensation, amortization of capitalized software development costs, and other depreciation and amortization. Given the relatively large amount of our non-cash amortization charges, we feel that this adjusted EBITDA measure is helpful in providing a more meaningful understanding of our underlying cash-based earnings.
For the three months ended July 31, 2010, adjusted EBITDA was $999,000 compared with the corresponding adjusted EBITDA of $760,000 for the comparable period last year, reflecting a 32% improvement. We will continue to provide this non-GAAP financial measure in future earnings releases.
Our cash at July 31, 2010 was approximately $581,000, with $2 million drawn under our line of credit. Our cash cycles are still very much dependent upon our seasonal patterns of prepaid annual maintenance billings to our clients. We are currently evaluating all of our longer-term funding options, both debt and equity, to supplement or enhance our current AR base line of credit. We continue to monitor our expenses, cash balances, and receivables carefully to ensure they are on plan.
That concludes my review of the numbers for the quarter. Let me now turn the call back to Brian Patsy. Brian?
Thank you, Don. This afternoon, I will briefly cover four topics. A discussion of the macro factors impacting healthcare IT spending; comments regarding our financial performance relative to our plan for Q2 and the first half of the year; a discussion of the recently announced organizational change appointing Gary Winzenread, Chief Operating Officer; and finally, an update on our guidance for the remainder of the year. After my remarks, we will conduct our usual question-and-answer session.
At a macro level, over the last six months, we have observed an increase in planning activity and interests in implementing healthcare IT solutions. We believe this is primarily due to hospital organizations positioning for the potential availability of stimulus dollars earmarked for IT expenditures associated with meeting the criteria around meaningful use or physician adoption of electronic health records.
Specifically, the high-tech provision in the American Recovery and Reinvestment Act offers healthcare organizations and physicians an opportunity to earn funding for meaningful use of EHRs. Because of the opportunity to qualify for funding decreases over time, healthcare organizations are now in planning cycles to understand exactly how additional qualified IT investments can position them to meet requirements and earn reinvestment or reimbursement for their investments in EHRs.
Likewise, Streamline Health has experienced an increase in planning activity for document workflow solutions, which we believe are complementary to and can indirectly assist EHR systems in achieving meaningful use. Our pipeline of activities through our largest remarketing partner, GE Healthcare, has picked up as has our deal kings in Q2 where we sold five new license transactions for a total of seven new transactions in the first half of the year. Accordingly, we are slightly ahead of plan relative to our guidance of approximately 10 to 12 new transactions closed this year.
Regarding our financial performance in Q2, we ended up approximately 4% above our plan for revenue for the quarter. On plan for the first half of the year, approximately 15% ahead of our revenue performance in Q2 of last year and 5% ahead of our revenue performance for the first half of last year. Even though we had a services shortfall versus our plan for the first half of the year due to customer implementation delays, we were still able to make up for the services shortfall because of increased system sales in Q2.
Our system sales were 539% greater than Q1 of this year and 118% ahead of the prior year comparable quarter. We do anticipate making up much of the services shortfall experienced in the first half throughout the remainder of the year. New bookings for the quarter, excluding maintenance revenue, increased 71% to $2 million sequentially compared to $1.2 million in the first quarter ended April 30, 2010.
Regarding our Q2 net income, as Don said, three primary factors impacted our performance. One, the additional burden of software capitalization expense as a result of general availability status of Access Anywhere 5.0 and other new products; two, increased investment in customer initiatives and hosting operations; and three, compensation expenses including bonus reinstatement in amortization of equity awards.
Now I’d to discuss the recent appointment of Gary Winzenread as Chief Operating Officer. Gary has been a valuable addition to the Executive Team over the past three years. Through his leadership of product development organization, the company redesigned from the ground up its fifth generation service-oriented architecture Access Anywhere 5.0 on time and on budget. It has now successfully installed in numerous healthcare organizations in Canada through our remarketing partner, Telus Health.
Over the past year, Gary has also assumed responsibility for our customer services organization in implementing key programs to improve its effectiveness. Now, in recognition of Gary’s accomplishments and in order to consolidate all support and technical services under one organization, Gary will assume the additional responsibility for managing our hosting center in our internal information technology services.
Gary will focus on managing all day-to-day operations, allowing me to focus on leading the sales and marketing organization pursuing strategic partnerships and driving product strategy to further strengthen the company’s position in the marketplace.
As mentioned last quarter, Jon Phillips, our Non-Executive Board Chairman, has been invaluable in his expanded role of assisting me in dialog with the investment community, as we articulate our market strategy and plans to achieve future growth. His investment banking background and experience has been a definite plus.
Let me conclude my remarks by providing updated guidance for the remainder of the year. As provided in prior quarters, we still anticipate approximately 5% to 10% GAAP revenue growth. However, we are increasing our guidance for adjusted EBITDA margin and deal cadence. We now anticipate 10% to 15% adjusted EBITDA margin, a non-GAAP measure defined as operating income plus depreciation, amortization and stock-based compensation expense. Since we have already closed seven new transactions through the first half of the year, we now anticipate a deal cadence of approximately 11 to 14 new transactions for the year.
This concludes my formal remarks. I’d like to turn the call over to Robert for the question-and-answer session. Don Vick and Gary Winzenread will also be available for this quarter’s discussion.
Amy, can you queue up?
We will now begin the question-and-answer session. (Operator instructions) And our first question comes from Tom Carpenter at Hilliard Lyons.
Tom Carpenter – Hilliard Lyons
Good afternoon, Brian. How are you?
Good, Tom. How are you?
Tom Carpenter – Hilliard Lyons
Can you give us – I think we talked about this in the last quarter’s call. It seems like healthcare companies across the board resume strong interest due the healthcare stimulus bill. Can you give us any idea of metric? It seems like you guys are doing fairly well on new wins and you’re counting contracts versus actually hospitals that seems like you guys are up year-over-year. But can you give us any idea of discussions or pipeline or demo that might give us an idea of what we can see over the next year?
Well, as you know, historically a good portion of our enterprise software deals to implement Access Anywhere have been through our remarketing partner, GE. What’s interesting is that GE is picking up the pace this year over prior years. As I mentioned in prior earnings calls, the pipeline has increased substantially. I think part of that is due to the factor GE has stated that they want to be the low-cost provider and they are focusing on the middle market opportunities, the 200 to 500-bed market size. We’ve seen an uptick in our pipeline in GE accounts. And I think earlier in earnings calls I stated that we see four to five transactions through our GE partnership. We also have picked up the pace on our direct side, as you can see this quarter.
As you know, I’ve been much more involved in the sales and marketing effort, and I made a conservative effort to go out on the road and visit with all of our existing customers. And I think you saw the benefits of that in the numbers this quarter in terms of selling – up-selling to enterprise licenses in some of our accounts, including Nassau. So the direct sales force has seen an uptick as well in opportunities to upgrade existing customers, and we’ve even seen an uptick in direct sales to the marketplace outside the GE envelope.
And then finally, we are seeing a significant uptick in the interest in departmental workflow sales. We were forcing it to sign three new solutions this quarter in addition to the one we sold last quarter to Children’s National Medical Center. And there are significantly more opportunities in the marketplace. So that’s why I up-scaled our guidance in terms of number of deals. Some of those are small, some of them are large, but in aggregate, our model shows approximately $400,000 total contract value for those opportunities.
Tom Carpenter – Hilliard Lyons
I’ve got two more questions and I’ll jump back in the queue if you don’t mind. What type of folks – were executives awarded options this quarter or was it mainly sales people?
Actually what we are talking about there in terms of the increased equity expense or option type expense through the equity was at the end of last year, some of our bonus payout, if you will, pretty much across the company was paid in the form of equity awards.
Tom Carpenter – Hilliard Lyons
And that amortization is what you are seeing as expense this year.
Tom Carpenter – Hilliard Lyons
Okay. I’m just –
And then there is like the Board of Directors get their annual grants, those kind of things.
Tom Carpenter – Hilliard Lyons
Okay. Got it. And one final thing, can you guys give us an insight into what you are going to do at the shelf without breaking any securities laws? And as soon as you are disappointed, it’s going to set out there for so long and it’s kept the lid on the stock price even though you’re showing some better results. Was the stock price kind of –?
It’s a fair question, Tom. Let me say this. We filed the shelf and it was approved by the SEC in the July timeframe. It was basically filed to provide the company the flexibility to raise investment capital should we wish to expand the business in response to additional market opportunities. And we see some market opportunities starting to unfold particularly in the department of workflow area. And we didn’t want to miss that opportunity once it unfolds. Regarding potential use of investment funds beyond our planned expansion when the time is appropriate, we believe that we have sufficient cash flow to meet our cash needs for our foreseeable future. And given the current stock price levels and our cash flow expectations, we really don’t anticipate using a shelf registration to raise capital in the near-term. I hope that answers your question.
Tom Carpenter – Hilliard Lyons
Yes. I guess if that’s true and you had some other opportunities, especially as you guys get pre-payments, it’s kind of silly to keep it out there. So you’re probably impacting your stock price by 30% to 50%.
Well, I can’t speculate on the impact other than to see we certainly filed it for the opportunity to have the flexibility to move quickly when the time arises. But I do certainly understand your point.
Tom Carpenter – Hilliard Lyons
Okay. Thanks, guys. I’ll hop back in the queue.
(Operator instructions) Our next question comes from Jay Barder [ph], private investor.
Gentlemen, can you hear me?
We can, Jay.
I’ve been a long-term investor, and myself and my family have a significant position in your company. And my frustration is that every time we listen in to the report of the quarterly activity, things really, really sound good, but there is a disconnect between that and getting earnings per share. And I’m – you make me crazy when you talk about diluting our interest even further to – for more opportunities where some might say it’s just a broader base to lose more money. When are you going to get on a track where we can see consistent positive earnings?
Jay, I appreciate your frustration. And I wanted to give you some insight in terms of some of the challenges we have. As you know, several years ago, we noticed a fundamental shift in the market from “purchasing licenses” to an ASP model. And we saw a kind of a shift from 80% of our transactions being the license model where we get the cash up front to approximately 70% to 80% of our transactions being a hosted model where the cash comes in over a five-year period on average.
And the challenge we have, Jay, that I’d like to make sure you understand is that through that, what we call, cash chasm or the shift from a purchase model to a hosting model that puts a pressure on the company in terms of its use of cash. And we’ve pretty much weathered that storm over the last several years. If you look at our backlog, if all those transactions would have been purchased, the backlog right now is slightly under $19 million. So I want you to imagine, if we had filed the traditional purchase model, you would have – you and all of the investors, including me, would have enjoyed an additional $19 million approximately in revenue over the last several years.
So we are kind of putting that in the bank, and that revenue is certainly going to unfold through these contracts over the next several years. That is why you haven’t seen significant revenue growth because every time we saw one of those deals, it does not impact short-term revenue. It unfolds over five years. In addition to that, Jay, when we do get a deal like that, we have expensed upfront in terms of putting investments in hardware and third-party components into the investments in the hosting center. So the breakeven on some of those transactions is typically a year-plus.
So I want to you to just be cognizant of the fact that when you don’t have that top line revenue growth because it’s flowing into backlog for future years, that also impacts our earnings possibilities. We could literally have sold 100% of our deals this year as ASP and you would not have seen revenue growth as a result. So that’s part of the challenge that we have here. I think the way to really evaluate us under these circumstances is to consider not only our revenue growth, but also our revenue plus – our backlog or to combine together is our deal cadence. So if you look at our total bookings, which considers both purchase which is recognized in the near term, and hosting, which is recognized over a mid-term, that’s a better measure of our growth. And I think that is a much more positive story.
Well, let me go back a step. I thought the job you did in managing the company back in the days of venture capital funding was absolutely outstanding, and kudos to your team. But all the information you give us in backlog and all this and that we’ve heard and we’ve heard and we’ve heard, you can’t seem to get it to the bottom line. And that’s my question to you. When is this going to get to the bottom line? I thought you were really on the right track when you wiped off $700,000 or $800,000 worth of overhead. But it seems to me that that’s crept back in maybe under another name of R&D or product development or however you want to label it. But just back to my original question, when are we going to see some consistent earnings per share?
That’s a fair question, Jay. First of all, I’m glad you brought up expense control, because Don, Gary and I are very much focused on managing expenses and holding the line. You are going to see through some of these organizational changes that we are tightening our belt on the expense side. However, there is a burden that we are incurring in terms of capitalized software expense because of the major investment over the last two years, $11 million in building this new architecture, which allows us to expand our market reach in the department of workflow. So we have that burden that will be carried forward for several years, but we are very much focused on expense control here, and you will see some of the benefits of that as we continue through the second half of the year. But –
How are you going to end this year? What – give me a ballpark on earnings per share this year.
I can’t speculate on earnings per share. I stick with the guidance I gave you earlier in terms of –
5% to 10% was last year’s, and now you’re saying a little more than that?
Well, 5% to 10% was the GAAP revenue growth. And the EBITDA margin growth was 10% to 15%. So I’ve upped it from our previous call. So that gives you some guidance in terms of what our expectations are. Don Vick, would you like to add some comments?
Yes. The one thing I would add to that is just the one thing that Brian was mentioning is about the burden from the amortization of the capitalized software. That number has become very significant. As a result, that’s one of the reasons why we’ve added to our earnings release the adjusted EBITDA view because that gives a little better picture in terms of understanding kind of the cash earnings, if you will, of our business and from a – if you look at the straight earnings per share, obviously you are impacted by those non-cash charges, whereas as you look with the adjusted EBITDA view, it actually is kind of a cleaner view of what’s really happening.
And Jay, I’m not in a position to speculate beyond what we’ve provided in the guidance. However, I want you to understand that we understand and we get the fact that if we can hold down this creeping-in of expense growth and continue to grow at the pace we have this year with the deal transactions, even if they go into backlog as an ASP deal, there is a turning point that where you start having your recurring revenue cover your fixed cost, and to the extent, we can hold the line on expenses. That comes much sooner than otherwise. I also want to point out that appointing Gary as Chief Operating Officer and moving certain portions of the company under his leadership will give us an opportunity to save money in terms of economies of scale. Gary, please comment.
I would just say simply that my goal is to capital reduce our expenses as we grow. And to do that, while delivering the same volume of product to the marketplace and at equal or better quality. So that’s my challenge. That’s the challenge that I’ve taken on. And I believe that that’s part of what the solution needs to be. So I’ll be accountable for that.
My frustration is still good deal, good deal, lot of good deals here, lot of good deals there, but we can’t get it to the bottom line. And that’s it on a nutshell. And then when you put on top of that, shelf registrations, you got me stressing the head here.
Well, again, the model – the recurring revenue model and the hosting model, if you carry it out several years, and I know you are frustrated and you’ve been an investor for a longtime, but once you hit that inflection point, some very positive things happen. And let me give you a specific example, Jay, that might help. And that is, when we sign a hosted deal for five years, as you understand, the revenue flows over a longer period of time. What’s really interesting about that model though and why we are excited about it is, our renewal rate on those license or those ASP deals is in excess of 90%.
And if you – let's say, for example, hypothetically, you are growing at 10% a year in terms of revenue. And we’ve given guidance 5% to 10%. When those deals come up for renewal, it literally layers on top of that 5% or 10%. It’s like having a new sale. So the further out we go with these ASP deals, the more leverage we get, and that leverage can create some positive earnings in future years. So again, I think at that point, Jay, we appreciate your comments and we’d like to – if you could go back into the queue, we’ll take some other calls and maybe come back to you a little later.
(Operator instructions) This concludes our question-and-answer session. I would like to turn the conference back over Brian Patsy for any closing remarks.
Thank you. And again, we appreciate your interest in our story and for participating in today’s earnings call. We look forward to the earnings call for Q3. Thanks again, everyone.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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