Auxilio's (AUXO) CEO Joseph Flynn on Q2 2016 Results - Earnings Call Transcript

| About: AUXILIO, Inc. (AUXO)

AUXILIO, Inc. (OTCQB:AUXO) Q2 2016 Results Earnings Conference Call August 9, 2016 4:30 PM ET

Executives

Mike Cole - MZ North America

Joseph Flynn - President and CEO

Paul Anthony - CFO

Analysts

Jeffrey Bash - General Pacific Partners

Dallas Salazar - Atlas Consulting Group, Inc.

John Gay - The Quite Investor

Operator

Good day and welcome to this Auxilio Second Quarter 2016 Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Mike Cole with MZ North America. Please go ahead, sir.

Mike Cole

Thank you, operator. I want to welcome everyone to Auxilio’s second quarter 2016 earnings call. Joining us today from the company are Mr. Joe Flynn, President and Chief Executive Officer; and Mr. Paul Anthony, Chief Financial Officer.

Before we begin the formal presentation, I'd like to remind everyone that some statements made on the call and webcast, including those regarding future financial results and industry prospects among others are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from than those described in the conference call. Certain of these risks and uncertainties are or will be described in greater detail in the company’s SEC filings.

Auxilio is under no obligation and expressly disclaims any such obligation to update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

At this time, I would now like to now turn the call over to Mr. Joe Flynn. Joe, the floor is yours.

Joseph Flynn

Thank you, Mike. Thank you everybody for joining today's call. Overall, we were pleased with our financial results for the quarter and the progress we made on a number of strategic initiatives which were laid earlier this year.

As anticipated, we delivered solid revenue growth in our services business, while margins improved substantially. Paul will go through the financial details shortly, but all things being equal, we feel great about performance.

As a company, we have built our reputation by simplifying the day-to-day operations of our customers, guaranteeing cost savings while streamlining the securing document workflow processes. We're always in search of ways to stay on the leading-edge by providing the best possible solutions and services for our client.

As hospitals are aggressively trying to drive our cost due to the changes in Medicare and Medicaid reimbursement, their leadership teams are looking for ways to remove unnecessary ways what the industry defines as inefficient processes, which has led us to find solutions that streamline these processes, improve efficiency and reduce paper.

To that end, we recently announced partnership with HealthWare Systems. Their portfolio of solutions for document workflow, patient registration, electronic signature, electronic forms and patient tracking had been white-labeled as Auxilio's iPLATFORM, while the back end will continue to be powered by HealthWare.

These solutions will help our customers automate and simplify document management and sharing functions related to the patient's electronic medical record, greatly improving the patient experience. This is a prime example of how we can leverage the Auxilio platform and make further progress towards our goal of becoming a complete end-to-end service provider across the document workflow lifecycle.

We see a number of opportunities of this nature were pervious of IP, seek partners such Auxilio due to our deep knowledge of healthcare IT and our large installed customer base of health systems across the U.S. Gaining the C-suite executive is very challenging, however, that is where we reside, entrenched on site with our customers, working with them on a daily basis.

On the operational front, we had strong improvement in margins, up 600 basis points over last year as we near the completion of the implementation phase on the larger contracts we announced last fall.

As this happens, the upfront costs associated with these implementations begin to abate and that was evident this quarter. With one of the larger contracts, we're about 75% complete, which should continue to support margins through for the balance of the year.

On the MPS, we have a robust pipeline and expect to close incremental business, although the timing is never exact. In addition, we believe our strategy to provide four end-to-end document workflow solutions and security services will further entrench us with these major health system and solidify our long-term position as a trusted partner.

By expanding our capabilities, we’re not only driving the next level of growth, but also protecting our revenue stability in the future. If this strategy continues to be successful, the end result should be not only a growing business, but also one that is more traffic to investors from a fundamental perspective, given the increased predictability of those revenue streams and associated margins.

Our Redspin Security Group continues to win both large and small contracts with hospitals, health systems, and business associates that require a stringent controls on protecting personal health information.

The rise in both breaches and ransomware attacks in the healthcare industry continues to accelerate as hospitals and affiliated research institutions are increasingly becoming targets.

As we have seen recently with the hacking of the Democratic National Committee and the Clinton campaign, foreign governments and as well as criminal networks are outpacing the capability government and non-government organizations to protect themselves against malicious attacks, and healthcare is not immune.

Just last week, a major health system located in the Southwest reported a large scale cyberattack that comprised the records of up to 3.7 million patients, health insurance plan members, and even food and drink customer. It's believed that the hackers accessed the computer system and processed payment card data at the cafeterias and then gain access to patient health record.

Redspin has done a great work recently in identifying the vulnerabilities of their clients and recommending remedial action to fix those holes. Unfortunately, due to the sense of the nature of the work that Redspin does, we are not able to get the clients' permission to use the names in press releases. What I can say is that I continue to be very pleased with the progress I see on that front.

Going forward we have a very specific plan for how we believe shareholder value can be created across the enterprise. As many of you know, there were additions to our Board earlier in the year as we began shifting toward offering a more expensive suite of product and service solutions, spending the document workflow and security spectrum.

These changes were made to diversify expertise and add members who can help us implement our growth strategy, which includes everything from new distribution partnerships to perspective acquisition.

Our customers are increasingly looking for us to help in solving problems related to print management, document workflow, and cyber security. We're confident that our success to-date puts us in a strong position to capitalize on the trust we built. We have a lot of work to do here as the year goes on and overall, I'm very pleased with what we have achieved during the first half of 2016 as well as the progress we made investing in our future.

We have put ourselves in a great position and I'm excited for the balance of the year.

And this time, I'll turn it over to Paul to go through some of the financial details for the quarter. Paul?

Paul Anthony

Thanks Joe. For the three months ended June 30, 2016, we reported revenues of $15.2 million, a decrease of 3% when compared to $15.6 million reported in the second quarter of 2015.

The addition of $3.1 million of new recurring service revenue contracts was offset by approximately $1.8 million dropped [ph] volume reductions and some terminated services.

Equipment revenues in the second quarter were $0.9 million compared to approximately $2.7 million in the second quarter of 2015. Excluding equipment sales, that can fluctuate quarter-to-quarter, services revenue grew 11%.

Cost of revenue was $12.1 million, compared to $13.5 million in 2015. The company incurred approximately $0.1 million in additional staffing costs, including contract labor, and approximately $0.1 million in additional service and supply costs as a result of new customers.

Equipment costs decreased by approximately $1.6 million, due to decrease in equipment revenues.

Gross profit for the second quarter of 2016 was $3.1 million, or 20% of revenues, compared to $2.1 million, or 14% of revenues for the same period in 2015. The increase in gross margin is due to the maturation of the previously announced large contracts.

Operating expenses for the second quarter were $2.4 million, a decrease of $0.4 million compared to the second quarter of 2015. Sales and marketing expenses decreased by 10% due to decreased marketing spend when compared to the same period in 2015.

General and administrative expenses decreased 14% to $1.6 million. Decrease in G&A was attributed to approximately $0.3 million of fees associated with the two acquisitions that were made in 2014 and 2015.

Net income for the three months ended June 30, 2016, was $0.6 million, or $0.03 per basic and diluted share compared to a net loss of $0.6 million, or $0.03 per basic and diluted share in the same period of 2015.

The company achieved an adjusted income from operations of $0.9 million or $0.04 per basic and diluted share in the second quarter of 2016 compared to operating loss of $0.3 million or $0.01 per basic and diluted share in the second quarter of 2015 after excluding charges in both periods of $0.2 million related to stock-based comp and amortization of intangibles.

For the six months ended June 30, 2016, we reported revenues of $29.7 million, a marginal increase when compared to $29.5 million reported in the same period of 2015. The company added approximately $5.9 million of new recurring service revenue contracts, offset by a decrease of $3.2 million in equipment revenue compared to the same period in 2015.

Cost of revenue was $24.3 million compared to $25.2 million in 2015, representing a decrease of 4%, or $0.9 million. Gross profit for the six months ended June 30, 2016 was $5.4 million, or 18% of revenues compared to $4.2 million, or 14% of revenues for the same period in 2015.

Operating expenses for the six months ended June 30, 2016 were $4.8 million, a decrease of 1% from $4.9 million in the same period of 2015. Sales and marketing expenses decreased by 10% due to lower comp expense and reduced marketing spend. And general and administrative expenses increased 3% to $3.4 million due to higher amortization expenses from the acquisition of Redspin.

Net income for the six months ended June 30, 2016 was $0.5 million, or $0.02 per basic and diluted share compared to a net loss of $0.7 million, or $0.03 per basic and diluted share in the same period of 2015.

The company achieved an adjusted income from operations of $1 million or $0.04 per basic and diluted share for the six months ended June 30, 2016 compared to an adjusted loss from operations of $0.2 million or $0.01 per basic and diluted share after excluding charges, again, in both periods of $0.4 million related to stock-based comp and amortization of intangibles.

At June 30, 2016, the company had $4.4 million of cash and cash equivalents and working capital of $3.8 million.

That concludes the financial overview. Joe?

Joseph Flynn

Thank you, Paul. I just briefly wanted to say thank you to all our dedicated employees who made this quarter possible, and of course, to our shareholders, for your continued support. We have a lot to be excited about going forward and we will continue to communicate our progress as events develop.

And with that, I will hand it back to the operator for Q&A. Operator?

Question-and-Answer Session

Operator

Absolutely. [Operator Instructions]

And we'll first go to Jeff Bash with General Pacific Partners.

Jeffrey Bash

Hi, Joe, Paul.

Joseph Flynn

Hi, Jeff, how are you?

Jeffrey Bash

Good really excellent quarter. Paul, will it be fair to say that the six point improvement in gross margins from year ago maybe 2% of it is due to the $1.8 million drop in low margin equipment business? Would that be reasonable?

Joseph Flynn

At least a good point that equipment revenue given it's I guess smaller contribution during the period actually would have -- had dragged down margins. We actually would have seen a higher increase in margin if you just looked at the services business, because the equipment margin -- equipment revenue -- equipment business, in general, is so low and it even had a lower margin this quarter than compared to last year. So,--

Jeffrey Bash

No, but my point was -- there was $12.7 million of equipment last year and 14% gross margin, only $900,000 this quarter and 20%. So, I assume that one of the reasons the 14% was as low as it was with the heavy contribution of four gross margin product.

Joseph Flynn

[Indiscernible] in the equipment -- I'll tell you what, the equipment margin was actually lower this quarter than the previous year Jeff. So, I don't if we -- I can touch base with you on that analysis, but actually start drop in margin this year.

I think also this time last year, we had some heavy implementations going on and we were just in the middle of the entire Trinity really in the beginning of the Trinity rule out this time last year and so there was probably a lot of expense going out as we were dialing up specifically that Michigan region with the largest region.

Jeffrey Bash

Okay, that's fine. I do want add that the equipment revenue actually went up a little from the first quarter and yet your margins still went up four points, which shows what a fantastic improvement you made between Q1 and Q2.

Joseph Flynn

Thank you.

Jeffrey Bash

Next I'd like to ask about security acquisitions on the recent calls you've talked about making opportunistic security acquisitions and I seem to recall that you have one in particular in mind that you were very enthusiastic about, yet this time, you didn’t talk about the security acquisitions at all, so could you update us on that?

Joseph Flynn

I mean the only thing I can say Jeff is that there are a number of great opportunities in the marketplace, specifically around healthcare that we're certainly exploring. But I think I would be getting ahead of myself to say that we're down the road one way or the other down there.

Certainly, we have to look at all possibilities and all opportunities, but we remain very enthusiastic about the security business, because the demand is very, very high in that area and we see some opportunities there that we like to go after, that we're continuing to do evaluate when we get the opportunity and looking at that as -- I would say as a priority has potential acquisition target.

Jeffrey Bash

Now, you did reference in your announcement, volume reduction in addition to the cancelation which was mentioned last quarter. In the past when we've discussed this volume reduction, which I guess, is the amount of paper that you're managing through your system, that reduction was considered to be relatively small. Year or two ago, if my memory serves me correctly, is that increasing or is it still relatively small?

Paul Anthony

I think -- at least at this point, the amount of volume reduction is still pretty small as it relates to individual customers, but with the recent addition of Trinity and its sheer size, when we start to see those reductions come to our normal implementation as they start to get visibility, it just has a more material effect on us as a result of the size that new account had. But outside of that I think--

Jeffrey Bash

Sorry you were saying -- that that's an -- temporary effect over and above the minor historical amount because of--

Paul Anthony

That's right. Yes, that's correct. And then we did have some volume reduction just from the loss of the account that we talked about as well. But specifically what we're referring to here is more of that short-term that came about with regards to the large new accounts, but we're seeing the reductions are pretty similar to what we've seen in the past.

Joseph Flynn

Yes. And as you know Jeff, you've been following us for a while, it's very cyclical -- volumes are cyclical throughout the year. So, we have not seen a permanent drop in any major accounts from the standpoint of where we would have a material effect, but certainly we're always looking at that and of course, we're always been asked to drive volume out and so it's a constant sort of push and pull.

Jeffrey Bash

That's great to hear because as you know I've enthusiastic about the company for years and I think one of the reasons people may have a concern from time-to-time is that you're service paper and its really incorrect the things that you're bugging with business.

Paul Anthony

Right. And Jeff, that's one of the main reasons why you're starting to see some of the additional efforts around the software solutions as well is that if we're going to see volume drops come about, Auxilio wants to be the one to benefit from those within our customer base.

So, we recognize that we're going to lose over time some of that revenue, so we're looking to try to replace that revenue with some form of -- whether its software-as-a-service solution or some other recurring revenue solution that's going to bring value, that's going to bring revenue that isn't tied to a piece of paper, it's going to be tied to a transaction with an electronic method of transacting business through like a HealthWare Systems and other things.

Jeffrey Bash

Okay. My last question has to do with the buyback. You announced that income [ph] at the end of April or end of the quite period wasn’t over till the middle of May. So, that gave you a few weeks where you could have executed some purchases and evidently, you didn’t.

So, my question regarding that, was that a strategic reason that you didn't do anything at that time, or was it just more tactical, you didn’t have your act together to get going with the brokerage or whatever?

Paul Anthony

Yes, the tactical explanation that you had there absolutely right. We had to get certain signoffs -- certain Board authorizations and such, necessary as we got into with the broker that we ended up choosing and so by the time, we got all the -- I's dotted and T's crossed, we'd already fallen back into the second quarter blackout period.

Jeffrey Bash

Okay, great. Thanks very much and congratulations again on a really excellent quarter.

Joseph Flynn

Thanks for your kind words Jeff.

Operator

[Operator Instructions]

We'll now go to Dallas Salazar from Atlas Consulting.

Dallas Salazar

Hey guys, congrats on the quarter. Thanks again for taking questions. I just two. The first question offset, if you will, is kind of beyond the document workflow solution. It's a two-parter. One, outside of -- like you're saying, wanting to sort of be in control -- having element of control into the paper reduction usage, was there something that -- or conversations that you were holding with clients across the Brexit prompted [ph] the one to kind of go out and sort of get these over the top capacity to your platform?

And then number two, of the document workflow solutions, what do you think is going to be, maybe the biggest or top two drivers for kind of synergies between your platform and now the over-the-top capacity that exist there?

Joseph Flynn

It’s a good question. So, there were mainly two drivers to this move into this partnership with HealthWare, which is a great little company based out of Chicago. The first one was we looked at the reality of the 2 billion documents that we managed on a yearly basis. 10% is still fax, so I don't know how many people on the phone actually -- have actually sent the fax in the last two or three years, but I can tell you, we're managing 200 million -- sorry -- yes about 200 million faxes every year.

So, it's just amazing how much the faxing is still done in hospital and the hospitals are pulling their -- hospital IT guys are pulling their hair out of the head saying, how can we get rid of fax, how can we make sure the fax goes way.

And so we were looking in the marketplace for solution, this is really what generated this. We're looking for -- in the marketplace for solutions tool to really drive out that fax volume, so we get rid of the fax machines, as well as get rid of that volume on behalf of our customers and we came across HealthWare.

So, we have a solution as it relates to faxing that really was able to have an impact just on specific departments within a hospital where heavy -- where faxing was still very heavy. Pharmaceutical being one.

Second driver of this was when we looked around -- when our operations people looked around, certain processes within a hospital because our customers are tasking us with this that are still very paper-intensive. A lot of hospitals are implementing kind of six-sigma programs or Toyota type programs and saying how can we do this with less paper, how can we do this more efficiently, how can we get people through the emergency room quicker?

We were trying to find ways to automate that process and to make it less paper-intensive. And, so again, when we looked in the marketplace, we found this company HealthWare and they had a similar solution.

So, the relationship there was driven really by our customers coming to us saying, hey, we need to operate more efficiently, we want to see more paper reduction, we want to see more patients coming through the door faster, so we can drive revenues.

And instead of us just saying well we'll try to figure out paperless solutions and then that revenue goes way for us. We try to figure out way to do that. So, that we could also make money, help our customers operate more efficiently.

And we found this relationship with HealthWare because they have a number of modules that not only reduce paper -- reduce fax volume within pharmaceutical -- within the pharmacy, but also they have this entire emergency room vetting [ph] -- sorry, admission processes that's automated and a number of other automated workflow processes that are very simple, that you would think are very simple to the easy eye, but when you look at how it's currently done, it's quite cumbersome.

So, we were excited about that, we were excited about this relationship. We're in the process of our teams, our insight identifying those areas where there's an opportunity for us to plug in the HealthWare solution. We got a guy dedicated to do in this for us, driving the business development of that. So, we're excited about it as a new opportunity for us.

I think that answers your first question, maybe you can repeat the second question.

Dallas Salazar

Yes. No, that was really comprehensive answer, actually to my first one. And you did conveniently skipped get my second one, so I would re-ask that one

Joseph Flynn

Okay.

Dallas Salazar

So, maybe I can ask it in a better way. So, what solutions -- it sounds like you did -- you kind of answered part of it like when it came to the solutions, that you saw that you can leverage most -- create the most synergies, but the natural question from me would be -- and then I just have one last follow-up, would be is -- does this -- is this a scenario where this dynamic creates Auxilio as the base platform?

For instance if you have a customer that I guess -- are the ancillary capacity providers, right, whomever they maybe and I know you're not here to make forward-looking statements, but whomever they maybe in the future whatever, are they -- is the Auxilio-based platform necessary for them to exist, or this is a situation where they could come on and then Auxilio two years, three years rolls by and there's a non-contract renewal and they get to keep the ancillary capacity.

So, just around about whatever I'm asking is does this build a big moat? Does this -- should this drive longer term retention, which you guys already had the fantastic retention, but does this make Auxilio for your space sort of the Microsoft's Office suite, right, of your space?

Joseph Flynn

Well, I think -- I mean, it would be nice to be the Microsoft Office, but I think to answer your question, most definitely as it relates to the stickiness of our programs in a hospital. We view this relationship and we view this opportunity as a major benefit to driving deeper into the customer from the standpoint of us being a needed and wanted partner to stay long-term.

So, as it relates to our existing customers, we're trying to roll it out as quickly as we can, as it relates to any RFPs that we're participating in or new sales pitches that we're doing in the marketplace, in every single one of those, we're including this as part of our suite of services.

So, while we haven't yet seen -- we've definitely seeing some progress in this area. We were looking forward to seeing the direct results of it. We're certainly seeing progress in the senses getting invited to the finals on RFPs and certainly, get a number of customers who teed-up to get involve with -- to actually contract with us on these services and we're definitely viewing it as a bigger moat around our business for sure.

Dallas Salazar

I appreciate that. And just the last question here short one, presumably with the timing, obviously your sale cycles maybe a little bit longer whatever case maybe, when should we as investors expect something sort of quantifiable to come from this first partnership?

And if there were partnerships in the future, how long do you think it's going to take from ink on paper of the partnership to actually seeing some type of uplift across any other categories or just something quantifiable, right, that we can say, this is a direct consequence of them going out and getting this type of partnership. And I'll take that question in the queue. Thank you.

Joseph Flynn

I mean, I -- listen, we hope to have something this year if we can, but certainly within 12 months, we hope for that to happen with something we can tangibly point to. We're certainly putting a lot of effort into it from a marketing and sales standpoint right now, but anybody that has been involved in healthcare and watching Auxilio for a long time.

Every time I thought something is going to close quickly, it takes a lot longer; it's just a nature of the beast [ph]. And that -- those sales cycles and those decision making processes within healthcare are only getting more -- only getting more lengthy given the financial constraints that hospitals have. So, we hope to see some tangible results within the first 12 months of the relationship.

Paul Anthony

And it's also a little bit different from perspective that it's traditionally not going to be -- it's going to be more on a 12-month contract basis, it's going to be smaller contracts per deal.

And so it's going to be more of a transactional model we hope than the MPS where you're -- you got a long sales cycle with an extended lifecycle to the contract. And it takes a long time to get it through the customer. We're hoping this is a little more transactional.

Joseph Flynn

And with a significantly higher margin.

Operator

[Operator Instructions]

We'll now go to John Gay with The Quite Investor.

John Gay

Hey, guys. Doing nice job. It's good to see the results of your efforts that have fallen [ph] to the bottom-line. With respect to that as the expenses of taking down these last two big contracts have diminished and the supposition that you have now large amount of database of future contracts done in [Indiscernible] the bottom-line as much, can we presume that as you add new contracts that you will still be able to put black marks on bottom-line despite the expenses?

Paul Anthony

Yes, that's still the expectation assuming that -- again, we don’t close one of those monster deals like we see with the two recent transactions. We don't -- individual deals to necessary drag us back into that red [Indiscernible].

We may still have some seasonality effects, which we know always impacts the first quarter little bit, but -- so we'll still see some of that, but we don't anticipate in the short-term anything that would put us in that position to be in the red.

John Gay

Very good. Second thing can you tell us how many customers you have for Redspin and the original group of hospitals for the print services, how many of them are now in Redspin?

Joseph Flynn

Yes, we're closing in on our major deal with -- [Indiscernible] inside health systems, that's a MPS customer. Redspin probably does, on an annual basis -- remember Redspin is a transactional business. So, they probably do upwards of about 50 to 100 -- and probably more like 50 to 75 healthcare-related customers on an annual basis. I think maybe this year they'll do.

What we'll see in the Redspin is larger contracts than normal where the size of the deals are coming in a little bit bigger, but the number of deals isn't as many. But that's okay because that's same revenue for the -- about much more revenue for same amount of work. So, that's what we're seeing so far.

John Gay

Very good. Once again, congratulations on a great quarter. Thank you.

Joseph Flynn

Thank you.

Operator

And as it appears there are no further questions, I'll turn the conference back over to our presenters for any additional or closing remarks.

Joseph Flynn

I just want to thank everybody for joining today and look forward to having you on our next upcoming quarterly conference call. Thank you very much and have a great rest of the summer.

Operator

This concludes today's presentation. Thank you for your participation.

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