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Computer Programs & Systems (NASDAQ:CPSI)

Q2 2014 Earnings Call

August 01, 2014 9:00 am ET

Executives

J. Boyd Douglas - Chief Executive Officer, President and Executive Director

David A. Dye - Chairman, Chief Financial Officer, Vice President of Finance, Secretary and Treasurer

Analysts

Mohan A. Naidu - Stephens Inc., Research Division

Chris Abbott - Leerink Swann LLC, Research Division

Ryan Daniels - William Blair & Company L.L.C., Research Division

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

David K. Francis - RBC Capital Markets, LLC, Research Division

Richard C. Close - Avondale Partners, LLC, Research Division

Sari Newman - SunTrust Robinson Humphrey, Inc., Research Division

Sean W. Wieland - Piper Jaffray Companies, Research Division

Eugene Mark Mannheimer - Topeka Capital Markets Inc., Research Division

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

George Hill - Deutsche Bank AG, Research Division

Garen Sarafian - Citigroup Inc, Research Division

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the CPSI Second Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, August 1, 2014.

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

J. Boyd Douglas

Thank you, Suzie. Good morning, everyone, and thank you for joining us on the call. During this conference call, we may make statements regarding future operating plans, expectations and performance that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that any such forward-looking statements only reflect management expectations and predictions based upon currently available information, and are not guarantees of future results or performance. Actual results might differ materially from those expressed or implied by such forward-looking statements as a result of known and unknown risk, uncertainties and other factors, including those described in our public releases and reports filed with the Securities and Exchange Commission, including but not limited to, our most 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 David Dye, our Chief Financial Officer. David and I have a few minutes of prepared comments, and then we'll be happy to take your questions.

In the second quarter, we installed our Financial and Patient Accounting System in 5 hospitals and our core clinical departmental applications at 11 facilities. Additionally, 7 hospitals implemented nursing point of care and 66 customers went live with physicians applications, which consist of ChartLink, CPOE and Physician Documentation. Add-on sales to existing clients were $16.5 million or 31% of total revenue for the quarter. At this time, we expect to install our Financial and Patient Accounting System in 9 facilities in the third quarter. We anticipate 10 new installations of our core clinical departmental modules, 4 nursing point of care implementations and 59 installations of physicians applications.

On the new development front, we are pleased to announce that we've completed 3 successful implementations of our new emergency department information system with 2 additional sites scheduled for the third quarter. Given this success, we have moved forward with this application with it now being generally available to our client base. Our sales team is already taking orders, and we remain confident in the substantial potential of this product. We are also excited about the advancements we continue to make with our new ambulatory platform, Medical Practice EHR 5. We are now live in 10 provider practices, and we expect to implement 7 more practices during the third quarter. The feedback we've received to date from physicians and other clinicians regarding these applications has been overwhelmingly positive. These 2 products could not have come to market at a better time, as we now have viable solutions for 2 areas that are critical to building a complete electronic health record across all settings of care.

I'd like to spend just a moment on Meaningful Use, specifically Stage 2. If you followed any of the industry reports or numbers coming out of CMS, then you know that Stage 2 attestation is considerably more challenging than Stage 1. In our opinion, it is even more so for rural and critical access hospitals with regard to certain objectives such as patient engagement. With that being said, I want to pass along that we now have had 10 hospitals successfully complete their Stage 2 attestation and another 13 who have met all of the Stage 2 objectives in the quarter ending June 30, and are in the process of submitting their attestation to CMS. I'd like to offer our congratulations to these hospitals and their staff members on this significant achievement.

Now I'd like to update you on the progress from our services subsidiary TruBridge. During the quarter, TruBridge executed 15 new accounts receivable management contracts, 6 of which were for full services and 9 for private pay and insurance follow-up services. We continue to be excited about the long-term growth opportunities for TruBridge.

With that, I'm going to turn the call over to David for his comments.

David A. Dye

Thank you, Boyd. Good morning, everyone. Before I get to my traditional prepared comments, there have been some questions around the newly presented net income attributable to participating securities, unvested unrestricted stock on the earnings release. So I'd like to take a moment to explain the new presentation. The newly presented net income attributable to participating securities unvested restricted stock is our attempt to increase transparency into our EPS calculations, given our recent increased usage of share-based payment arrangements, along with the introduction of performance share awards as part of our compensation package for executive officers and certain key employees beginning in 2014. This new presentation does not impact any of our previously reported EPS amounts and is, therefore, largely cosmetic. The accounting rules governing the calculation of EPS have always indicated that unvested shares of restricted stock should be excluded from the calculation of basic EPS. Because these shares participate fully in dividends, GAAP requires us to not only carve out the unvested shares from the number of shares used in the EPS calculation, but also to carve out on a pro rata share of the period's earnings from that calculation as well. EPS is then calculated by dividing the income allocated to the fully vested shares by the weighted average fully vested shares outstanding for the period. GAAP calls this carving out of unvested shares and the allocated income from the EPS calculation the two-class method. Because our unvested restricted stock participates in dividends on a one-to-one basis with vested shares, the EPS calculation under this method for all prior periods in this quarter is essentially the same as if we simply took net income and divided by the weighted average of all shares outstanding. Historically, we presented only net income and the weighted average shares outstanding we presented have always included both vested and unvested shares allowing for easy calculation of basic and diluted EPS on the face of the income statement. We haven't historically disclosed this allocation of shares and income to the unvested restricted stock because it was clearly immaterial, both in pure quantitative terms and in its impact on the final EPS amount, which has always been 0. For the record, under the prior presentation methodology, our second quarter 2014 weighted average share count would have been 11,186,803, and our 2014 year-to-date 11,174,839.

So why the presentation change now? Because the introduction of the performance share awards this year could make our diluted EPS calculation a bit more complicated in the future, which would necessitate some expanded disclosures around basic and diluted EPS calculations. Instead of waiting until that added complexity becomes a reality, we have decided to go ahead and increase the transparency now so that when that complexity does become a reality, the transparency will already be there. As it relates to prior periods, we've elected to increase the transparency in the comparative disclosures. However, because we're pulling both income off the numerator and shares off the denominator in the EPS calculations, it ends up being a wash for all periods, so you won't see any of our previously reported EPS numbers changing, and therefore, no restatements.

So with that out of the way, I'll get back to my regular commentary. Our employee headcount as of June 30 was 1,363, down 21 sequentially and 47 year-over-year. CapEx for the quarter was $177,000 compared with $1.1 million in the second quarter last year. As is evident from the projected third quarter implementation numbers Boyd mentioned, add-on sales to existing CPSI customers continues to be strong. Not surprisingly, we believe this is primarily the result of the demand for our certified clinical software applications necessary for successful Stage 2 Meaningful Use attestation. CPSI is the only community health care IT vendor that has demonstrated any measurable success with hospital customer Stage 2 Meaningful Use attestations. Importantly, as a result of this success, we are experiencing an increased demand in corresponding competitive success rate within our new client hospital business.

On the TruBridge front, we remain pleased with our sales efforts, both within and outside the traditional CPSI EHR customer base. In particular, we are seeing positive results with clinical consulting and clinical documentation improvement engagements and with medical record coding services. Looking towards future growth, we remain heavily focused within the TruBridge sales group on increasing private pay collections and full business office outsourcing engagements, as those services provide significant long-term growth opportunities. Additionally, we continue to invest in the creation of new, yet to be announced, services, particularly those involving population health and data analytics.

And Suzie, if you could please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question coming from the line of Mohan Naidu from Stephens.

Mohan A. Naidu - Stephens Inc., Research Division

Quickly on the new installs in the third quarter ticked up. So I'm just wondering, are you seeing more flow into your customer base, I guess, and new wins because of replacements from other vendors or is this greenfield opportunities who don't have any EHRs right now?

J. Boyd Douglas

No, it's pretty much everybody's got an EHR now. So these are, for the most part, replacements. Every now and then you'll sprinkle in maybe a new facility, but pretty much everybody -- any existing facility has some sort of EHR.

Mohan A. Naidu - Stephens Inc., Research Division

Got it. And on the Stage 2, how are your customers reacting to the possible delay in deadline? Are they on track, continue ignoring that or are you seeing any delays at all?

David A. Dye

Mohan, if we're seeing any delays, it's only minor, I think in particular because it really wasn't a 1 year delay, it was more of a 3-month delay. If you choose to claim a hardship and not attest to stage 2 Meaningful Use in 2014 and therefore attest in 2015, it's noteworthy that to attest in 2015, you have to attest for the full year instead of just a 90-day attestation period, which means you have to begin with the requirements on October 1 of 2014. So really, for anybody that was looking to push back an implementation of some of the products that are necessary for Stage 2, at most it would have been a 3-month delay.

Mohan A. Naidu - Stephens Inc., Research Division

Okay, all right. Quickly on the ambulatory product, the physician product that we are talking about. So I guess targeting this product to go directly to the physicians, are you going through the community hospitals and then reaching the physicians?

J. Boyd Douglas

No. We did the way we've always done it, which is through the hospitals.

Mohan A. Naidu - Stephens Inc., Research Division

Hospitals. The hospitals are buying these products for the physicians, essentially?

J. Boyd Douglas

Correct, and typically these hospitals either own or manage these physician practices where we're doing this install.

Operator

Our next question coming from the line of David Larsen from Leerink partners.

Chris Abbott - Leerink Swann LLC, Research Division

This is Chris Abbott in for David today. Your system margins were flat sequentially, and it's obviously -- it's nice to see some stabilization relative to the volatility we saw last year. That being said, this quarter, it did have a little bit more of the high margin previously unrecognized revenue relative to 1Q and then it looks like the add-on sales were also up a bit, which are typically more profitable. I guess I'm just wondering was there anything else unusual or what maybe offset some of the sort of additional upside I might have expected to see and then is it the sort of mid-40% margin range probably what we should look for going forward?

David A. Dye

The one thing that was a bit different this year than every year for at least the past decade was that our national users conference occurred in the second quarter when we had it in Sandestin in April of this year, and for at least the last 10 years, probably more we've had it in third quarter. It's usually been in September traditionally, which is about a $500,000 hit from an expense standpoint. I mean, I do think it's worth noting that on the comp quarter, year-over-year, G&A is down 9% but, yes, we do have that. It's a little bit -- traditionally, it hasn't been in the second quarter and it has been in the third quarter, it's about a $0.5 million shift.

Chris Abbott - Leerink Swann LLC, Research Division

That's helpful. And so I think as far as the sort of Generation 1 Meaningful Use customers are concerned, I think you're down now to only 2. Should we -- any expectations around the sort of roll-off for those guys? Are we looking at back half of this year or is there any other holdups or concerns with that coming through?

David A. Dye

No, we don't expect any holdups, and we do expect it to roll off by the end of the year.

Operator

Our next question coming from the line of Ryan Daniels with William Blair.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Let me ask a follow-up to Mohan's on the ambulatory platform. Can you talk a little bit, number one, about the average deal size you're seeing for those solutions? And then number two, is that typically a greenfield sale for the employed physicians who haven't been using EHRs, and also more of a replacement opportunity?

J. Boyd Douglas

In most cases, again, kind of [indiscernible] it is a replacement. Most physicians have some sort of automation, although it may not be -- have the full EMR, but certainly it's a replacement more than it is a greenfield. Again, like I said earlier, I guess, with the hospitals, you do have new practices opening; hospitals able to get a new specialist in town that might open a new practice, so you do that. In general, for a decent-sized practice, with insulation training and conversion, things like that, you're looking around $100,000.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay, and then you mentioned an increased success rate that you're seeing in the pipeline, given some of your continued Meaningful Use success. Is that actually a win rate versus your competitors on a head-to-head basis starting to tick up, or is it just that you're seeing more novel opportunities enter your pipeline for replacement opportunities?

David A. Dye

Ryan, at least in the last few months, it's been a little bit of both. Now, of course, we always like to footprint to see [ph] around comments that we make that are just a quarter in duration, but it's -- whenever something significant enough that we think is meaningful, we share it on this call. And we have -- it's also -- it also, Ryan, has to do with what customers and perspective customers in particular are saying to us as we go through this process, and it's notable that our -- the fact that we've had success with Stage 2 and had a sort of certified product much earlier than many of our competition, especially those who specialize in this small hospital space, and then we actually have been able to demonstrate successful attestations whereas others have not. That's eye-opening to some people and they're sharing that with us.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay, that's a good. On TruBridge, a pretty nice quarter there with 15 new accounts. Can you talk a little bit, maybe, number one, just about how many of those were inside the core base and then outside the core base? And then number two, in regards to outside the core basis, you've had more success and people are more aware of that. I'm curious if you've seen any of your competitors launch similar offerings, as they worry about losing some of their customer base?

David A. Dye

We're no longer going to give individual numbers on what we have inside and outside the EHR space. I will say that we continue to see significant and probably better than hoped progress outside of the space, outside of the traditional CPSI customer base. In terms of the second part of your question, I think specifically within the last 6 months or so, I think NextGen has been more vocal about trying to get into the hospital space with their back office solutions. But other than that, no, we haven't heard of any of our traditional competitors being more active in the outsourcing space.

Operator

Our next question coming from the line of Donald Hooker with KeyBanc.

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

So you look like you have some nice install activity in the third quarter, some replacements, some competitors. I'm just curious maybe for Boyd or David, kind of, so that's the installation. At what point were those -- what visibility do you have to those numbers kind of looking ahead? I mean, are you seeing installs kind of going out into the fourth quarter and early 2015 or how quick do these conversations accelerate to an installation?

J. Boyd Douglas

They're usually -- from contract signing to actual installation is typically at a minimum 90 days, 90 to 150 days, I think, is a good range with 120 being basically the norm. So in any -- pretty much have good visibility, obviously, for third quarter and then we're still -- we're filling in fourth quarter now, so we've got an idea of what we're going to do in fourth quarter, but we certainly have time to sign contracts and schedule installs before the end of the year given that it's only August 1 today.

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

Got you. That's fair. And then the other thing, and I don't, maybe I'm getting -- focusing on these numbers and seeing patterns, but for Business Management Services revenue, I guess TruBridge, is there a third quarter typical sort of a seasonal sequential downturn for some reason? I guess there's a lot of businesses in that revenue line that might be -- have different patterns. I'm just curious if there's a cadence around seasonality that we should be aware of?

David A. Dye

Not -- we certainly do not think so. The second quarter of 2013 we had a huge clinical consulting quarter, which was sort of the reason for the bump up there, maybe for a [indiscernible] And then it went down sequentially last year. So we don't think that there's any seasonality whatsoever.

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

And I'll just ask one last one, and I'll hop off, but in terms of the -- there's been a lot of changes in the hospital space with the, obviously, Health Care Reform and Medicaid expansions and what not, and I was curious if you had any year-to-year customers and prospects? How they're doing in the rural hospital space? I guess it's a market that Wall Street doesn't get good view into, in terms of their economics and health?

David A. Dye

Yes, Donald, in a nutshell they're struggling, but I can hardly think of any time in the 25 years that I've been here that I wouldn't have said the exact same thing. There certainly it's cyclical like anything else. It's, I would say, at this point, in terms of their purchasing power for IT largely irrelevant because every decision that's made and has been made, really since 2010, has been centered around Meaningful Use. We're not seeing a prevalence of hospitals shutting down or selling out or that type of thing, but I don't want to paint a rosy picture and say that they are...

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

I was just thinking that Medicaid might help them, like some of the expansions, but I'm not sure.

David A. Dye

Yes, I mean, it's certainly something that when we saw it, we all emailed around to each other and thought it was good news, but as to how significant, it remains to be seen.

Operator

Our next question coming from the line of Jamie Stockton with Wells Fargo.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

I guess on Stage 2, you have seen a little pickup in the activity of hospitals attesting with you guys. Do you have any sense, and I think, maybe David, you commented on this, but do you have any sense whether there's been any pick up at all with your primary competitors?

J. Boyd Douglas

This is Boyd. We don't know, I don't know of any because the only way we'd probably really ever know is if they press released or something along those lines and we certainly haven't seen anything and haven't heard anything.

David A. Dye

Well I do think -- CMS actually released those that had attested for the first quarter at -- for March 31, and there were -- I think there were 6 hospitals, and we had 2 of them. I think Epic, Cerner and MEDITECH maybe were the other ones. So certainly, it's debatable whether you'd count MEDITECH as a primary competitor. Certainly, they've had success with some Stage 2 Meaningful Use as well.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Okay. Do you -- I think the instinct for everyone is to say, well, we're going to try to get all of our hospitals across the finish line for Stage 2, which is totally understandable. But do you have any sense, maybe not even specific to your own customer base, but just the hospital market in general that you sell into, are we going to ultimately see about half of hospitals dropping out of the program because stuff like patient engagement is just too high of a hurdle for them to get over? Any color on that would be great.

David A. Dye

Yes, I think that remains to be seen. I will say that in conversations with customers and, in a few cases, prospects, unlike several years ago with Stage 1, I haven't heard, and I haven't heard of any of our people hearing customers say, "You know what, we're just not going to do it." We did hear that occasionally, probably back in 2010, 2011 with Stage 1 when it seems so overwhelming at that point in time for a hospital that maybe only was automated in the financial and patient accounting areas and hadn't really installed any of the clinical applications yet. So I do think, as you know and as you alluded to, and as Boyd mentioned in his comments, the patient engagement piece has proven to be challenging, more challenging than hitting the numbers on the, for example, the CPOE utilization. So is that going to prove to be a hurdle that's impossible for some hospitals to get over? We don't think so at that point, but that remains to be seen.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Okay, and then maybe my last question. You guys had a snippet in the prepared remarks about looking at other solutions over time like population health. Specifically on population health, do you have an inclination as to whether that's something that you would want to try to develop your own solution or maybe look to partner with one of these third-party vendors that is kind of EMR agnostic that seems to have a good solution?

J. Boyd Douglas

Right now, we're evaluating both options, Jamie. Certainly very interested in partner, and there's a lot of people that have made a lot of headway with that. Third parties that we'd definitely be interested in and certainly having discussions with them, but at the same time, like we've always done for the history of the company, we'll look at doing it ourselves as well. So we haven't made that decision yet, but all options are out there and on the table.

Operator

Our next question coming from the line of Dave Francis with RBC Capital Markets.

David K. Francis - RBC Capital Markets, LLC, Research Division

First on the ED products, it appears as though you guys are back to the original timeline, having gone GA and already implemented a couple of sites. Can you talk about kind of the dynamics around what happened there from the development and roll-out perspective, and what your expectations might be as you look out a little bit beyond Q3 in terms of the installations that you got planned and what the demand environment looks through the rest of this year?

J. Boyd Douglas

The demand environment looks great as far as on the development front, I'm not sure a whole lot changed. Certainly, like we always do, cautious we're rolling it out and conservative in doing that and conservative with what we've put out there for people like yourselves to make sure. But the installations that we have done have gone extremely well. The ones that are coming up, all the preparations have been done, and they're looking good as well, physicians are all on board. So we're excited about it. Where the challenge, I guess, if you will, and that's probably too strong of a word, but the installation teams that we have to install those are the ones that are installing the Physician Documentation and the CPOE, all of our physician installation teams. So that will all go hand-in-hand installing ED and MPM along with the CPOE and Physician Documentation. So we've just got to work out all that, all the scheduling things and a matter of resources and making sure we got enough, and we do presently. But we're excited about where we are and looking forward to doing it through the rest of the year, doing lots of installations, not that I have a specific number, but we're ready to roll with it.

David K. Francis - RBC Capital Markets, LLC, Research Division

And Boyd, that's a good segue into my follow-up. You guys have always managed headcount very tightly and with the headcount going down closer to 1,350 rather than 1,400, with these new products coming out and emergency department and the medical practice EHR roll out, do you feel as though you're staffed appropriately to meet demand? Is there going to be a need to start moving headcount back in a positive direction or where are you in that whole process?

J. Boyd Douglas

We're very comfortable with where we are headcount-wise. Ultimately, where we end up, I'm not sure either one of us could tell you right this second, but I don't expect any significant changes in the headcount. What we're doing a considerable amount of, and you've seen it over the last several quarters, where we're doing the less of the clinical applications, less of the Point of Care applications. We're transitioning those people over and training them on the physicians applications which really works out well because they've got all that experience that they did of installing the Point of Care and the clinicals, and now they're working with the physicians. So it's working out quite well and we expect to continue to do that. So that's why you hadn't necessarily seen a significant increase in the headcount or that we're having to hire a lot of physician-type application people that -- a lot of these people are transitioning over, and we feel like we're doing a great job at that.

David K. Francis - RBC Capital Markets, LLC, Research Division

Last question, I'll get out of the box, kind of a follow-up on Jamie's question. This is the first time that you guys have started talking about population health relative to your customer base and I guess I'm curious given the multiple definitions and ways people look at population health and care coordination, what is, in your mind, population health as it relates to your customer base specifically? And what are some of the specific things that you might be looking at to roll into that group?

David A. Dye

Well, first of all, Dave, we don't have all the answers either. But we do know that, we think we're in a unique position competitively, and a unique position to benefit rural and community hospitals, both our existing EHR customers and all community hospitals because of our potential access to -- more than any other vendor that's out there -- to clinical data within rural communities, both within the hospital but also within the physician clinics, the home health agencies, the nursing homes, et cetera. So if we can figure out a way to pull out that together to help with predictive patient care and outcomes, et cetera, we really got something that can help benefit them, obviously, from a patient care perspective and help us as a company as well. So we've spent a great deal of time around this in the last 6 months or so, and it's going to be one of our core focuses going forward. So we are in the process of figuring out what that means for us and our customers and obviously we're including engagement with our customer base in that in those discussions. So it's going to be a moving target but we're down the road.

Operator

Our next question coming from the line of Richard Close with Avondale Partners.

Richard C. Close - Avondale Partners, LLC, Research Division

Yes. Follow-up on the headcount. With that decreasing, can you talk a little bit about it decreasing in terms of, is that just normal attrition?

David A. Dye

Yes, that's 100% normal attrition.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay, and talk a little bit about with respect to TruBridge, I would think that, that would be actually, as you're growing that business, that would actually lead to additional headcount and maybe walk us through that?

David A. Dye

I don't have the specific numbers, but the headcount in TruBridge has been going up and the headcount in terms of software implementation folks has been trending down, which is what we've been saying was going to happen, really since 2009, 2010 is that we would hire aggressively sort of into Meaningful Use and then let the number stagnate a little bit. I mean there's the possibility that within the next 6 to 12 months that we will need to hire some software classes to make up for the normal attrition. That remains to be seen.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay, with respect to the success rate or win rate that you were talking about and the competitive environment, are you seeing Cerner dip in a little bit? They highlighted some sizable gains, I guess, and expectations for the remainder of the year of their community works offering. Are you running into Cerner at all?

J. Boyd Douglas

To say we're not running to them at all would be incorrect. We do continue to see them occasionally, but no, in any significant way, we have not noticed their presence increasing in the last quarter. And we were very open. I think it was about either 3 or 4 quarters when we did feel like we had seen an uptick from them in a given period of time and then that sort of decreased. So we'll certainly share that with you again if and when we do see that in the future. But the answer at this point is no.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay, and then just refresh me, I guess, on the emergency department system, have you guys talked about price points there or what the market opportunity is within your base, the total addressable market?

David A. Dye

Yes, average price of about $125,000, and we feel the addressable market's about half of our client base, so somewhere between 300 and 350 community hospitals.

Richard C. Close - Avondale Partners, LLC, Research Division

And then just a follow-up on the ambulatory, trying to size that up as well. I think Boyd had said something like $100,000 for a decent-sized practice, if I'm not mistaken. Within your base there, I guess, what is a decent size practice and addressable market on the ambulatory side?

J. Boyd Douglas

As far as a decent size practice, I would say 3 or 4 physicians in that practice seeing patients on a daily basis. And then as far as the addressable market, certainly, the vast majority of hospitals -- of our hospitals, either own or manage most of the clinics in town or at least half of the clinics in their little town or community. And so we thought those were all an opportunity really because of the integration between the systems. I mean, you truly end up with one electronic medical record for each patient and clearly, that's superior to trying to maintain an enterprise with whatever practice system that you installed previously.

Richard C. Close - Avondale Partners, LLC, Research Division

How penetrated are you currently within the 700 or so hospitals that you have in terms of -- on the ambulatory side?

J. Boyd Douglas

On the ambulatory side, on the clinical side and everything, around 100 clinics.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay, great. And just my final question is in and around the patient engagement, and you're talking about Meaningful Use Stage 2 and struggles on the patient engagement side for hospitals. How have you addressed this? Obviously, you've been successful so far in the early parts of Stage 2, but how are you helping your customers deal with the patient engagement hurdles?

David A. Dye

For one thing, we're keeping up -- helping them keep up with their statistics on really a daily basis during their attestation period and pointing it out and helping them with ways that we've seen our successful hospitals, with ways that they discussed this and presented to their patients upon discharge and sharing those positive experiences, either by having hospitals talk to other hospitals that have been successful or by us being sort of the middle man in sharing those successful experiences with the hospitals that are trying to accomplish this task, to help them get over the hurdle. But I mean, for the most part, it's just us, in some cases probably overdoing, berating them with, "Hey, you're falling below the line here. You're 1/3 of the way through the attestation period. And here are some ways that we think that you can increase that number." I mean, we're very -- as we have been in Stage 1 and as we continue to be and probably even more so now with Stage 2, and I think it's one of the reasons why we've been more successful than the competition with Meaningful Use success is that we are actively involved with every site as they're in their -- prior to and as they're in their attestation period.

Operator

Our next question coming from the line of Sandy Draper with SunTrust.

Sari Newman - SunTrust Robinson Humphrey, Inc., Research Division

This is Sari Newman in for Sandy. I also had a quick follow up to your comments regarding offering new population health tools. In your initial discussions with your customer base, what seems to be their level of interest and ability to adopt these types of tools in the near versus the long term?

David A. Dye

It's across the board. Some are so knee-deep focused on whatever stage that they're working on for Meaningful Use, and in some, this is their main initiative. And it certainly was a topic of discussion at the National Users Conference we had at Sandestin in April. There was a group of customers that were very interested in discussing with us and us with them how that initiative should move forward. So I mean, I think the honest answer to your question is it's across the board. I think like everything else, it will increase over time, so that at some point in the future that's undetermined it will be at the forefront of everybody's mind, but we're working towards that.

Operator

Our next question coming from the line of Sean Wieland with Piper Jaffray.

Sean W. Wieland - Piper Jaffray Companies, Research Division

Can you educate us on the impact that bundled payments are going to have within the critical access hospital market? Is there anything worth calling out there that's unique?

J. Boyd Douglas

I don't, from our perspective, I'm not sure that there's anything unique about that. Obviously, the impact, just like really every other change that comes down from CMS remains to be seen, but no, I can't really give you any more color than that.

David A. Dye

I think with the critical access hospitals that have installed our system recently, they've all been under some sort of Meaningful Use type of contract, where the payment was tied to Meaningful Use, and then beyond that their payments are monthly support payments. So I think the broad question with the bundled payments is how is it going to affect their overall financial health and their ability to invest in IT going forward. And that remains to be seen.

Sean W. Wieland - Piper Jaffray Companies, Research Division

Yes, I mean I was thinking about it more from the lines of it's more of a cost-plus reimbursement scenario in that market, but are they -- is it -- under this bundled payment, are they kind of under the same reimbursement program as kind of the rest of the hospital market?

David A. Dye

We're no expert on it at this point, but it seems to us that it's more, more leaning towards the traditional reimbursement perspective, from the perspective payment systems for other hospitals. But, it again remains to be seen.

Operator

Our next question coming from the line of Gene Mannheimer with Topeka.

Eugene Mark Mannheimer - Topeka Capital Markets Inc., Research Division

Most of my questions have been answered, notably the one about the timing of maybe client readiness to embrace the population health tools. So what is -- let me ask this. What is your best guess on the timing of your rolling out that solution? When should be sort of look for GA on some of these applications?

David A. Dye

I think, one, because we don't really know, and two, because for competitive reasons, we're not prepared to give you a timeline at this point.

Eugene Mark Mannheimer - Topeka Capital Markets Inc., Research Division

Okay, all right. Fair enough. Let me ask, just switching gears to TruBridge, David, how big can those margins get over time as the business scales?

David A. Dye

We'd certainly like to see the gross margins get back into the low 40s. I think, as I've said, on a previous call or 2, I don't want to say that at this point we don't care. We do always care, but more so than normal, we're sort of throwing caution in the wind and we're investing both on the personnel resources and the technology resources and everything else to grow that business because as we've very publicly stated, we think that's a big growth vehicle and we're excited about its future. So we're not as cautious as we might normally be in the decisions that we make around that business right now. But the specific answer to your question is, is that eventually we feel like it'll get back to where it was before, in the low 40s.

Operator

Our next question as from Bret Jones from Oppenheimer.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

I wanted to drill down on system sales a little bit. They're flat sequentially, yet add-on sales were about $3 million higher. You had an extra approximately $1 million of the generation 1 Meaningful Use recognition, and I'm just trying to figure out, obviously core systems were down 4, but I don't -- wouldn't see that offsetting $4 million of additional revenue through add-on in the Meaningful Use. So is it just a matter of lower hardware or am I missing something?

David A. Dye

I mean, our average sales price to a new client is $1 million.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

For the entire system though, right, not just for the core? I'm just looking at core installs being down 4.

David A. Dye

Well, when we report a new install, that's essentially everything now because generally speaking when somebody goes in, they go in with everything upfront because the reason they are buying our system in the first place is to get to Meaningful Use.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Yes, but you don't -- you're not seeing like the nurse care down 4, and physician -- sorry, the CPOE or I'm just trying to think of the individual modules, they weren't all down 4, it was the core financial that significantly down. So it was just of the core system that was the only answer?

J. Boyd Douglas

Well, the core systems, typically what happens is if we don't install as many core systems, we can do more add-ons of the Point of Care, the Clinical or whatever because we've got more teams available.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Okay, and then I just wanted to also ask in terms of TruBridge, and Gene touched on this in terms of the margin. You've talked about adding more clinical type of personnel, nurse practitioners, physicians' assistants and that does have an impact on the margin, but what I was wondering is, I assume those -- that labor pool is being added really to address more on the coding side, obviously than the outsourcing of AR and things like that. Are you assuming any liability when you take over medical coding?

David A. Dye

Great question. I think you're assuming liability when you take over anything, and we -- certainly, that is a question that we thought of when we do it. But essentially, no more so than normal because you're just coding what the doctor presents to you.

Operator

[Operator Instructions] Our next question coming from the line of George Hill with Deutsche Bank.

George Hill - Deutsche Bank AG, Research Division

Just some of the trade research groups have recently highlighted an increased level of churn amongst the CPSI core customer base. So I guess, maybe if you could tell us either over the last 6 or 12 months, what does client retention look like? And kind of what is the expectation for that going forward? Or maybe just some comments on what you're seeing there.

David A. Dye

Yes, I would say that it's been insignificant over the last 6 months or so, and the churn rate's actually down, somewhat significantly from what it was in the 2010, 2011 and the 2012 years and for good reason. It's because at this point, anybody that's decided to invest $1 million plus or what have you in CPSI, has already successfully staged [ph] Stage 1 Meaningful Use or certified for Stage 2. At this point, why would there be churn and we're seeing that. Whereas before, us along with everybody else, all the traditional folks in the space, were having to play a lot of defense because back in 2011, say, timeframe when you had several hundred hospitals that were faced with spending $0.5 million plus in order to invest in the clinical applications to get ready to attest to Stage 1 Meaningful Use, their boards asked them to take a look at the entire market and see what else was out there before they outlaid that type of cash. So those were obviously good times for us because we had that situation where hospitals needed to purchase the applications for Meaningful Use and you had a lot of greenfield opportunity that was sort of pressed forward because of Meaningful Use. It was also a time we had to play a lot of defense. So we're playing a heck of a lot less defense now than we were then.

Operator

Our next question coming from the line of Garen Serafian with Citigroup.

Garen Sarafian - Citigroup Inc, Research Division

Couple loose ends at this point, one, similar to the prior question, there's also been a little bit of chatter on perhaps CPSI not being as successful on the displacement opportunities as before. Maybe I hopped on late so maybe you'd already addressed this. But could you just discuss maybe what you're displacement hit rate has been, if there are any segments you have done better or worse and just elaborate on that a little bit.

David A. Dye

Yes, Gary, thanks. We did mention in our prepared comments that you must have missed, that we've seen an increase there. We think it's in our competitive replacement success. And also sort of among prospects, we're seeing a positive impact on the fact that we've had -- we're essentially the only vendor that specializes in rural hospitals who's had any successful Meaningful Use Stage 2 attestation. So we don't quantify that and never have and probably never will, but what we have, we think been very candid on a quarterly basis. We're sort of sharing with you where we are and we're feeling good about it at this point.

Garen Sarafian - Citigroup Inc, Research Division

I guess, then did you also address maybe the steps taken to -- that gives you more confidence, and comfortable that the situation has sort of been remediated?

David A. Dye

I don't know that we felt like we had a situation.

Garen Sarafian - Citigroup Inc, Research Division

Okay, all right. Fair enough. No in the sense, fair enough. I'll go through the prepared remarks. And then secondly, on the population health commentary that you've made, you said that you were certainly looking at partnerships. But I'm just wondering, is building an in-house a viable option only because it just seems to me that it takes years on years to build a system that people are still building, that to get to a point of functionality that's of use to your clients? So is it just a matter of who you partner with or is it a buy situation or are you truly developing it in-house as well?

David A. Dye

I think Boyd was very candid in saying we're looking at both. And we have actively been and continue to be in discussions with third parties. We also have -- we continue to aggressively evaluate what it would take to do it ourselves. And I think, as you're probably aware, we've never acquired anybody, not to say that we wouldn't in the future, but I doubt it. And that every product we sell, we have written ourselves at this point. It would be a bit of an outlay for us to partner with somebody on a significant product, but we are open to doing it if it's the right decision. Certainly, there's some complexity to this that would be unique, which makes the idea of partnering with somebody that is an expert on the field more palatable than maybe some other things in the past. I mean I would compare it to the decision to do a PAC system a few years ago, that was a very difficult decision. We did ultimately decide to do it ourselves. So it remains to be seen what we'll do. We are, to be transparent, we are at this point open to both possibilities.

Garen Sarafian - Citigroup Inc, Research Division

Just a quick follow-up to that, curious if you do build it in-house, how long do you think it would take to get to 1.0 GA?

J. Boyd Douglas

We had said earlier, we're really not going to discuss timelines there for competitive reasons and everything else. But I will say, just if you look at it historically, again, what we do with PACS and everything else, we've always been fairly quick to get things like that to market and certainly that will be a factor going into whether we actually do it ourselves. Can we get it done in time to meet the demand that clearly is going to be there? So I wouldn't feel comfortable giving you a timeframe right now. We certainly don't know all the ins and outs and what the product would do, but we're confident in our ability to develop things like that, should that be the decision we make.

Operator

Our next question coming from the line of Nicholas Jansen with Raymond James.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Most of my questions have been answered, but maybe just one final one on guidance in our discussion here. I know you guys don't really like to say anything unless something has necessarily changed. But maybe just your views on what the key drivers of the meaningful earnings acceleration that you're expecting in the back half of the year associated to just reach the low end of the range. I know you have some more higher margin contingent revenue coming in, but just trying to get a sense of some of the key puts and takes as we look at the margin trends year-to-date.

David A. Dye

Well, you're right. We certainly, as a practice, we do not comment on our guidance unless we think there's a material change one way or the other. Obviously, we don't at this time. So I don't really have much to say about the back half of the year. I mean, obviously, for us, it always revolves around how many installs we're doing and how much stuff we're selling to our current customers, and that's been the case for a long time now and continues to be the case.

Operator

And our last question is a follow-up question coming from the line of Mohan Naidu.

Mohan A. Naidu - Stephens Inc., Research Division

David, did you split out, for the new installs that you're doing in Q3, how many of them were Gen 2 and SaaS contracts?

David A. Dye

I didn't, but if you give me a second, I think I have that. Yes, it's roughly 3 Gen 2, I think 1 is SaaS and the others are traditional.

Operator

Thank you. Mr. Douglas, I will now turn the call back to you. Please continue with your presentation or closing remarks.

J. Boyd Douglas

Great. Thank you, Suzie. Just want to thank everyone for being on the call this morning. Thank you for your interest in CPSI, and I hope everyone has a great weekend. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.

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Source: Computer Programs & Systems' (CPSI) CEO Boyd Douglas on Q2 2014 Results - Earnings Call Transcript
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