Computer Programs & Systems Q4 2007 Earnings Call Transcript

Feb. 1.08 | About: Computer Programs (CPSI)

Computer Programs & Systems Inc. (NASDAQ:CPSI)

Q4 2007 Earnings Call

February 1, 2008 9:00 am ET

Executives

Boyd Douglas - President, CEO

Darrell West - VP of Finance and CFO

Analysts

Robert Dodd - Morgan Keegan

Jeremy Lopez - William Blair & Company

Sandy Draper - Raymond James

Bret Jones - Leerink Swann

Richard Close - Jefferies & Co.

Leo Carpio - Caris

Corey Tobin - William Blair & Co

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Computer Programs and Systems yearend Earnings Call.

During this presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded on Friday, February 1, 2008.

It's would now like to turn the conference over to Mr. Boyd Douglas, President and Chief Executive Officer at Computer Programs and Systems, Incorporated. Please go ahead, sir.

Boyd Douglas

Thank you, [Vick]. Good morning, everyone, and thank you for joining us. 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 are only predictions and are not guarantees of future performance. Actual results might differ materially from those projected in the forward-looking statements as a result of risks, uncertainties and other factors, including those described in our public releases and reports filed with the Securities and Exchange Commission, including but not limited to our recent annual report on Form 10-K. We also caution investors that the forward-looking information provided in this call represents our outlook only as of this date, and we undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call.

Joining me on the call this morning is Darrell West, our Chief Financial Officer. Darrell and I have about five minutes of prepared comments, and then we will be glad to take your questions.

In the fourth quarter, we installed our financial and patient accounting system in six hospitals, our core clinical departmental applications at nine facilities. Eight hospitals implemented nursing Point of Care, and four customers went live with ImageLink PACS. Add-on sales to existing clients made up 21% of total revenue.

At this time, we expect to install our financial and patient accounting system at six facilities in the first quarter. We anticipate seven new installations of our core clinical departmental modules, six nursing Point of Care implementations, and four ImageLink installs.

In Business Management Solutions during the fourth quarter, we executed 14 new Accounts Receivable management contracts, 11 of which were for private pay collections, and four for contract management services.

During the fourth quarter, revenue from this segment of our business grew 15% year-over-year. We anticipate around same level of breadth for the first quarter of 2008. On the sales front, there has been no significant change of the competitive landscape.

MediTech, HMS and Dairyland remain our top competitors. Competition remains fierce in our market but this is really no different of environment than what we have experienced for the last seven to eight years.

We are proud of our position in the marketplace and we feel like we have positioned ourselves well to capitalize on any opportunities that are asked.

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

Darrell West

Thanks, Boyd. Our DSOs were 47 days for the fourth quarter, up two days from the third quarter and within our range of 45 to 60 days.

Cash provided from operations for the quarter was $6.2 million, compared with $4.2 million last year. Free cash flow was $5.9 million for the quarter compared with $3.6 million for the prior year quarter. We define free cash flow as net cash provided by operating activities, less capital expenditures. CapEx for the fourth quarter was $332,000 compared with $597,000 in the prior year quarter.

Depreciation for the quarter was $480,000, compared with $527,000 last year. Cash collections remain strong at $28.5 million for the fourth quarter, compared with $28.8 million for the quarter in 2006.

We recognized stock compensation expense of $146,000 in the fourth quarter of 2007 and anticipate a charge of $229,000 in the first quarter of 2008.

Our effective tax rate for 2007 was 36%. We anticipate an effective tax rate going forward of approximately 39.5% due to the exploration of Hurricane Katrina wage and capital expenditure credit.

Our headcount at the end of the quarter was 923, a decrease of 7 for the quarter.

Rick, we would now like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Robert Dodd, Morgan Keegan. Please go ahead.

Robert Dodd - Morgan Keegan

Hi, guys. Can you give us an update on sales of the new products that you've just got certifications for what you're doing there in terms of your approach and also how the sales organization of West Coast is progressing?

Boyd Douglas

Sure. As far as our products, of course, we've only got one lot of products, our system which became CCHIT Certified in November. That has been a shot in the arm force because some of our competitors do not have that certification yet. So certainly, that's been a positive force.

As far as the West Coast, we remain pleased with our progress out there, we do have a lot of interest our there and we decided to submit significant amount of money by having our sales people look at it up there instead of flying from MOBILE as we've talked about every week.

Robert Dodd - Morgan Keegan

And then just one follow-up on the outsourcing services up 15%, what's the deconversion or anything like that in there this quarter?

Boyd Douglas

Say that again, Robert.

Robert Dodd - Morgan Keegan

Did you have any contracts that rolled off on the outsourcing services side, in terms of -- the growth was a bit slower than I was expecting.

Boyd Douglas

No. And it was a little bit lower than we're expecting too, but if you recall on the last call or maybe even the last two calls, I have talked about at some point, we're going to become a victim of the bigger numbers. And that's why we're certainly adding people and adding capacity. But as we add those contracts, it didn't grow as much as we wanted, again, mostly because of the bigger numbers. But no we did not have any roll off.

Robert Dodd - Morgan Keegan

Okay. Thank you.

Operator

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

Jeremy Lopez - William Blair & Company

Hi, good morning, gentlemen. It's Jeremy for Corey. Boyd, I know you've talked in the past about just sort of a law in the end markets, I'm wondering if you can kind of give us some thoughts on -- update us there. And whether or not your customers are seeing any challenges with respect to the financial and stability to market on the municipal level given some of the things we've seen in the headlines with MBIA and MBAC and what not?

Boyd Douglas

Sure. As far as the law in the market, certainly, based on these numbers you can tell -- we are still in the middle of it. We're certainly proud of how we're operating, doing this with our cash flow being where it is and remaining to pay the dividend.

And I think, hopefully, that demonstrates to the investment community, how we can run this operation very efficiently in times like this. And we were poised and ready, and have a good position in the marketplace when it does take back up.

As far as, how they're doing. I don't know that I want to speak towards that. Certainly, money is tight at facilities. Facilities that do have access to capital, what we're seeing a lot of is building expansions whether its adding on to merger stream or adding a few different services here and there, not necessarily bids. As you know, over 200 of our hospitals have critical access. They are limited to 25 beds.

So we don't see necessary bed capacity expanding in, that's probably reducing overall. But certainly, they are expanding their services, expanding their physical plan in-ways and frankly a lot of other IT spending has taken a back seat to those type projects.

Jeremy Lopez - William Blair & Company

Okay. Very good. And with the respect to the headcount, I know you were down 7, is your strategy just to, kind of, to let attrition take its course or are you guys going to make, maybe take a more sort of hand with the headcount?

Darrell West

No, we're certainly going let attrition take its course. This is a normal business for us. We've done that in these times and certainly our work force again. So we're confident that that's all that will be necessary in order for us to maintain the dividend and the cash flow and everything else. We'll let attrition take itself.

It's little misleading that number down because we're growing outsourcing, so are hiring in the outsourcing areas but attrition has taken place in the support and installation areas. And so that is, it's a little bit of a misleading number there if you just look at the headcount.

Jeremy Lopez - William Blair & Company

Okay. And with respect to, kind of, I know you don't provide revenue guidance more than a quarter out, but is there anything we should be thinking about in terms of revenue linearity of the next couple of quarters, to the upside of downside that we should be thinking about?

Darrell West

No.

Jeremy Lopez - William Blair & Company

Okay. Thank you.

Operator

Ladies and gentlemen (Operator Instruction).Our next question comes from the line of Sandy Draper from Raymond James. Please, proceed with your question.

Sandy Draper - Raymond James

Thanks. I've a couple quick questions. Boyd, on the expense side the G&A number dropped, sales and marketing dropped, I am assuming sales and marketing is just function of lower sales, but was there any specific focus on bringing those costs down or --? I don't recall a seasonal drop off and expenses in the fourth quarter.

Boyd Douglas

No. I'll take a shot at that first and then let Darrell add. Certainly, more of it is just a drop in sales and commission is probably the biggest piece of that number. I'll let Darrell, if you've got anything to add to that.

Darrell West

That's part of as well as our travel expenses were down somewhat as we've seen from moving some of our guys out west. They are not spending as much on air fares as they were previously.

Sandy Draper - Raymond James

Okay. And then the second question is a follow-up on the earlier question about outsourcing and the growth slowdown, but I also noticed the gross margin came down on the outsourcing. And just wondering were there any incremental investments or as, I mean, at what point would you expect to start seeing some leverage on the gross margin line there?

Boyd Douglas

Certainly, the investments they were making that I have just mentioned are the people and so, now certainly I'll see any leverage on the near future because we are growing that. And one reason you're seeing those outsourcing margins go down, keep in mind that the statement outsourcing, electronic billing outsourcing, but we're fairly well saturated there. So the outsourcing is growing as the business of it outsourcing.

In particular, what we're seeing and you can tell from the contract, the private pay is going really, really well for us. The downside of that or the bad side of that is, that requires people. Its very labor intensive, there is not a lot of efficiencies there. So that's the part of the businesses grow and it is a lower margin. So that's why you see the degradation in the margins.

Sandy Draper - Raymond James

Along this line, have you guys ever thought about or would you ever consider moving any of that offshore or does that not make sense for you?

Boyd Douglas

That would not make sense for us at all.

Sandy Draper - Raymond James

Okay. Thanks.

Boyd Douglas

Sure.

Operator

Our next question comes from the line of Bret Jones from Leerink Swann. Please proceed with your question.

Bret Jones - Leerink Swann

Good morning, gentlemen. Just a couple of quick questions. I was wondering if you could talk about the attrition. I was wondering if you had a goal of what you are trying to get down to, since you lost seven heads and you said you're going to let attrition kind of take its course going forward. But is there a target headcount that you are trying to achieve?

Boyd Douglas

There is not a specific target. We know what our normal attrition rates are and assuming those, then, we're comfortable with that and we think that's the way it will go over the next several quarters.

Bret Jones - Leerink Swann

Okay. And you said that the personnel are coming -- the attrition is coming in the place of, I think you said deployment teams and also service, I was wondering can you update us? Do you still have three for deployment teams? I believe it's three.

Boyd Douglas

Actually four…

Bret Jones - Leerink Swann

Four. Okay.

Boyd Douglas

…five installation teams for the financial area. I believe at one time we had five, but we've basically got four now.

Bret Jones - Leerink Swann

Okay. So four deployment teams and then the capacity would be a maximum of 12 systems a quarter, is that right?

Boyd Douglas

That's correct.

Bret Jones - Leerink Swann

Okay. Great. Thank you very much.

Boyd Douglas

Sure.

Operator

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

Richard Close - Jefferies & Co.

Good morning and thank you. Boyd, I was wondering maybe longer-term, I guess Jeremy asked the question about revenue on an going out and whether there is anything that would necessarily impact it, but if we look really more longer-term, is there any type of legislation or anything in the marketplace that might generate renewed interest from your customers or your target market?

Boyd Douglas

I don't know of any pending on legislation. With that being said, we've seen it happen before. It can happen at a moments notice. It can happen anytime. It can get tacked on. Typically, what we've seen in the past is help for rural hospitals tacked on to. Most recently, obviously, with the end of 2004, it was tacked on to the end of the Medicare prescription drug bill.

So, it certainly can happen with the election coming up, who really knows. It really just takes a Senator or someone like that to take an interest in it realize that these outsource going to needs some funding to achieve the CMR that everybody is talking about. And we certainly have complete confidence that that's going to happen at some point. Obviously, the big question is when and we certainly don't know anymore about it than anybody does at this point, unfortunately.

Richard Close - Jefferies & Company

Okay. And then, do you guys do any reaching out to the political leaders in terms of to push that agenda at all or?

Boyd Douglas

We do not. We do not.

Richard Close - Jefferies & Company

Okay. I guess moving on to a different question. About a year or so ago, Dairyland I guess was sold or recapped and we recently had that with HMS here in Nashville. Are you seeing any change on the competitive environment, I know you talked a little bit about in your opening remarks, but there is some capital behind those guys. Are you seeing any change from that standpoint?

Boyd Douglas

We have not. Really not at all.

Richard Close - Jefferies & Company

And then, clearly, I guess a couple of quarters ago or some time during '07, there was lot chatter about McKesson and you came back pretty strongly that you're not necessarily seeing them. Is that still the case?

Boyd Douglas

That is definitely still the case. Can't tell you where we are at McKesson. We certainly see them early on a lot. There are in a lot of deals early. But typically, when it comes downs and they start cutting it, it cuts down to us MediTech, HMS and Dairyland, the vast majority of the size.

Richard Close - Jefferies & Company

And then, with respect to your target market, what do you think the penetration rate is with the various systems, I guess use a blended penetration rate of your various products.

Boyd Douglas

Of our products within the market?

Richard Close - Jefferies & Company

Well, the products that you offer in terms of, if you looked at your target client base, what do you think that penetration rate is of the market I guess?

Boyd Douglas

Okay. First of all let me talk about just in the financial arena with us, HMS, MediTech and Dairlyland, I would say roughly probably 60% of the hospitals have one of the four of us and 40% down, 45% maybe somewhere in there, roughly a little over 2,000 hospitals, probably 2,000 to 2,500 hospitals.

So at a global picture that that's where that stands as far as you get into some of the more advanced application to clinical applications, I think about half of our market is running clinical applications. Nursing Point of Care is probably around 30% -- 30%, 35%.

Richard Close - Jefferies & Company

Okay. And is there any new products out and I apologize if I'm asking a question second time over here but are there any new products out there on the horizon that you think might be applicable to your market. I know you had the ImageLink several years ago that you began offering.

So anything like that that you can bring into your fold, either from a developing standpoint or maybe purchase? I know you haven't really done acquisitions but anything where you see maybe a growth opportunity that you don't necessarily have in your bag right now?

Boyd Douglas

The two areas we seek for growth right now as far as that's concerned, really one is with the physicians. Our physicians typically, EMRs in physician clinics is severely under -- you've read in articles and things, 20% to 25% physicians have an EMR which I'm assuming 75% do not.

So we think there is tremendous potential there. We feel like we've got an advantage over most of the competition because we have our own physician package, our own physician clinical package and obviously our hospital package. And we thought we can integrate that.

Our history has been and what gives us a leg up on everybody is, we're fully integrated and those products are fully integrated as well. So that really -- we don't like to put some sort of competitive advantage, to take advantage of the physicians in automating and moving towards an EMR across the country.

Another area of growth, clearly, is our services area. We're trying to grow our services as fast as we can. And they are not just limited to financial outsourcing services. We're looking at all kind of areas where we can add additional revenues strings for the company.

Richard Close - Jefferies & Company

Okay. And I guess then just a couple of more questions here. I know you don't give the number of new customers that you added in a particular quarter. But previously, you talked a little bit about the trends and decisions I believe, has there been any major shifts in the number of decisions in the quarter versus, I guess, the third quarter?

How has that trended over the last couple of quarters? I'm not looking at my notes but if we could get a feeling there. And then in competitive situations, maybe why you win and maybe why you've lost in the last quarter?

Darrell West

Okay. As far as the number of decisions, the sales process as I mentioned before here over the last couple of quarters has certainly lengthened. I mean it's -- I had used the word stagnant because they are certainly not stagnant and not moving at all, but it's not as best as it was, for example, 18 months ago or 24 months ago.

The pipeline remains healthy. There are plenty of hospitals there. There is not as many being added but there's not as many coming out the back end either. So that has stayed relatively stable for the last, what we see in the last really the last five to six quarters. That hasn't changed much.

As far what makes us win or lose, it's interesting to me, I think I've said this before. We will win a site based on the financials and we'll lose to one of our competitors, let's just, for example, say HMS. They may say, we'll we picked you because we loved your financials. We really -- your financials were what put us over the top. We are not as excited about your clinicals compared to HMS, but we think it give us the best fit.

We can turn right around and a week later have a decision from our hospital that picked HMS because of their financials. And they tell us they really loved their clinicals. Where we tried to set ourselves apart is our support. Clearly, all of our competitors and including us have systems that work well and can run a hospital. We've all get several hundred customers.

So we feel like support is key, the quality or the comparison, and the quality of the installation. Those are sometimes hard to measure, but we certainly do the best. And at the end of the day really when it comes down to is references and word-of-mouth.

I've said it plenty times before, we're in the word-of-mouth business here, that's why you don't see us advertising a lot in modern healthcare and things like that. It boils down to word-of-mouth and references and the support we give, it's ultimately what makes the decision.

Richard Close - Jefferies & Company

Okay. And one final one, I am sorry. Has your retention rate changed at all? Have you been able to keep customers -- I would assume some of the business out there as someone that maybe looking to change out an HMS or change out a Dairlyland, or change out a CPSI for that matter. How was your retention rate been?

Boyd Douglas

It's been exactly the same and best we can tell with our competitors, about the same there. We are all very good at retaining our customers. It's a very sticky market.

Richard Close - Jefferies & Company

Okay. Thank you very much. Congratulations.

Boyd Douglas

Thank you.

Operator

Our next question comes from the line of Leo Carpio from Caris. Please proceed with your questions.

Leo Carpio - Caris

Good morning Boyd, it's Leo Carpio from Caris & Company. I had two quick questions. First, looking at your new system sales book here, it looks like you saw about $7.1 million this quarter, is that correct?

Darrell West

Above $7.7 million.

Leo Carpio - Caris

Okay. Thanks. And then the second question is regarding the Medicare environment. The upcoming 2009 propose in PPS rules, do you have any hope that perhaps Medicare may provide a little extra funding to the rural hospital this year? Or I have seen that MedPac is talking about, trying more to tie closely tight Medicare compensation with quality metrics and quality data points, and thought maybe that could be like somebody to help you in terms of drive your growth?

Boyd Douglas

Absolutely. Obviously, Medicare has talked a lot of about quality initiatives and tying that to reimbursement and that's something that we have to see. I think that would definitely be good for our business, because we do provide those metrics. And obviously, as that program grows with Medicare they're going to want more and more quality metrics to be submitted, so that they can decide on reimbursement issues. So, certainly that would help us and certainly we have hopes that they move forward with that.

Leo Carpio - Caris

Okay. And just one last follow-up question. Regarding the outsourcing market, who do you face there in terms of competition, is there any one or two competitors you have when you are competing [for these] beds?

Boyd Douglas

There isn't any major competitors that we know -- regionally there are some operations that we had in different parts of the country, but as far as across the board, no there really isn't.

Leo Carpio - Caris

Okay. Well, thanks.

Boyd Douglas

Sure.

Operator

We have a follow-up question coming from the line of Mr. Corey Tobin, William Blair & Co. Please proceed with your question.

Corey Tobin - William Blair & Co

Hi guys just a one quick follow-up there, what was there, can you provide the breakdown of stock comp between cost of sales, G&A and sales and marketing please? Did you get that?

Darrell West

I don't have that right in front of me.

Corey Tobin - William Blair & Co

Okay, thanks.

Darrell West

But, we saw a decrease in the quarter, due to forfeiture of some restricted stock and that change was all in the G&A section.

Corey Tobin - William Blair & Co

Okay. Thank you.

Darrell West

Okay.

Operator

There are no further questions at this time. I'll now turn the call back to you.

Boyd Douglas

Thank you everyone for your time and have a great weekend.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!