Computer Programs & Systems (CPSI) Q3 2017 Results - Earnings Call Transcript

Computer Programs & Systems, Inc. (NASDAQ:CPSI) Q3 2017 Earnings Call November 2, 2017 4:30 PM ET

Executives

John Boyd Douglas - Computer Programs & Systems, Inc.

Matt J. Chambless - Computer Programs & Systems, Inc.

Christopher L. Fowler - Computer Programs & Systems, Inc.

David A. Dye - Computer Programs & Systems, Inc.

Analysts

Mohan Naidu - Oppenheimer & Co., Inc.

Jeff R. Garro - William Blair & Company, L.L.C.

Sean P. McBride - Robert W. Baird & Co.

Eugene Mannheimer - Dougherty & Company LLC

Stuart Goldberg - Litespeed Management LLC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the CPSI Third Quarter 2017 Earnings Conference Call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded on today's date, Thursday, November 2, 2017.

It is now my pleasure to turn the conference over to Boyd Douglas, President and CEO. Please go ahead, sir.

John Boyd Douglas - Computer Programs & Systems, Inc.

Thank you, Donny.

Good afternoon, 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 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 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 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 today will be Matt Chambless, our Chief Financial Officer; Chris Fowler, Chief Operating Officer; and David Dye, our Chief Growth Officer. At the conclusion of our prepared comments, we will be available to take any questions you may have.

Our third quarter concluded with solid results in revenue and bookings, putting the overall health of our business in a very good place as we head into the final quarter of 2017. Net new sales were led by another record bookings performance of $10.6 million for this quarter for our TruBridge consulting, IT services and RCM solutions. These TruBridge offerings continue to meet demand in our market and perform well as sales more than doubled year-over-year. In addition, the Rycan RCM product, BI Dashboard and MU3 packages played a large part in our attainment of just over $19 million in add-on sales bookings.

Last quarter, we were cautious following the announcement of the MU3 delay by CMS, as we cannot be certain of the impact this would have on our clients and their appetite to remain on schedule with the Meaningful Use program. We are pleased to share that not only had the majority of our clients opted to stay on track with their MU3 implementation schedule, but we've kept a decent pace with the sales of our MU3 package. At the end of the third quarter, we have closed out just over 60% of the expected MU3 opportunities, which is up from 40% last quarter.

With that said, another positive aspect of the third quarter once again is our healthy implementation schedule driven not only by MU3 installs remaining intact, but also by our net new system sales. David will provide more color regarding our sales performance this quarter and the strong pipeline. However, I will frame it up by sharing with you that our market position continues to resonate and gain traction as we closed 10 new deals in the third quarter.

We're extremely pleased with the success we're experiencing in this acute care replacement market, as we see a steady number of community hospitals choosing our solutions over the competition. Not surprising, these net new wins are a mix of hospitals choosing the CPSI family of solutions for the first time, as well as hospitals that have returned after quickly realizing the grass is not always greener with another vendor that simply does not have the same breadth of experience, track record or fully integrated solution set that the 35-plus years in community healthcare has afforded us.

The advancement of technology will always be at the forefront of successful healthcare IT vendors. It is our philosophy that technology advancements should be balanced with market demand and with what the market can bear. Delivering solutions that allow buyers the flexibility to choose what best fits their unique situation is what customers want and it's illustrated in the mix of our net new sales last quarter. Approximately 80% of our net new deals in the third quarter were sold in our TruBridge hosted environment. This hosted solution allows us to provide relief to our resource-constrained clients by managing their day-to-day IT needs.

With our operation and sales on track, we have seen our revenue remains strong and shaping up to have a positive impact on the fourth quarter. And now with the settling of our operations after the acquisition, we are dialing up our efforts in building future value across our family of companies. This resolution begins with the deleveraging of our debt through the recently announced amendment to our credit agreement and a change to our quarterly dividend policy. The amendment to our credit agreement was executed last month and is a milestone that ultimately brings us greater flexibility in the deployment of capital through covenant relief and better pricing.

In addition, after careful consideration, we have made the strategic decision to adjust the quarterly dividend payout to $0.10 per share. This dividend adjustment will allow us to deliver on our commitment to regularly pay a quarterly dividend to our shareholders, while protecting their investment with an eye to the future. While we as a company continue to evolve and adjust accordingly to ensure our continued success, the dividend payout for our shareholders remains an important part of our overall capital allocation strategy. This change in dividend strategy will put CPSI on a sustainable path to achieving our target leverage of 2.5 times in 2018.

At that point in time, our capital allocation strategy may expand to include other more opportunistic uses of capital, such as further expanding R&D investment, share repurchases or tuck-in acquisitions. Our new capital allocation strategy will allow us to increase our investment in the solutions across our family of companies. First and foremost, we will advance our new approach of developing once and sharing products across our acute, post-acute and ambulatory systems.

Secondly, we are taking the necessary steps to work directly with the end users, including providers across our family of companies to ensure we protect the integrity of our function and feature-rich products that our customers have clearly indicated they value. And finally, we are aggressively preparing for growth opportunity in the post-acute market that we believe is yet to encounter the level of maturity as we have seen in the acute care space over the last 10 years, driven primarily by the government mandates and subsidies that originated with the ARRA.

With that, I will turn things over to Matt.

Matt J. Chambless - Computer Programs & Systems, Inc.

Thanks, Boyd, and good afternoon, everyone.

We're certainly eager to dive into the details of what we feel was a fairly strong third quarter income statement, but it's probably worth spending a bit of time on capital allocation first, as the solidifying of our strategy during the past three months marks a significant pivot point for CPSI.

Boyd made a hint at this a bit, but as we have an eye to the future, we place an ever-increasing value on creating flexibility within our capital structure to allow for greater discretion in capital allocation down the road. Creating that flexibility means placing a keen eye on our two biggest uses of the $22.5 million of free cash flow we've generated in the trailing 12 months, debt and dividend payments.

With regard to debt, we just used (08:20) nearly $12 million of our free cash flow in the trailing 12 months. It's been obvious to everyone following our story that the covenant requirements in the previous credit agreement limited our flexibility in capital allocation decisions, as we've been operating on relatively thin margins versus our leverage covenant. That coupled with a further step down and maximum leverage at year end and increased term loan amortization in 2018, motivated us to work with our terrific banking partners to create a credit arrangement that provides the flexibility we're looking for.

We were able to secure this flexibility through the recent amendment, while at the same time reducing our interest rates. We feel that the ability to execute such an amendment which we forecast will pay for itself within five quarters of reaching leverage below 3 times is indicative of the confidence that our banking partners have in the stability of CPSI and the strength of our banking relationships.

Aside from the improved pricing and greater covenant flexibility, the other major win for CPSI with this credit agreement is the reset of the term loan amortization, which alleviates $3.5 million of cash for 2018, $5.9 million of cash for 2019 and $6.9 million of cash for 2020 versus the previous credit agreement. While this amendment creates immediate flexibility, we are committed to enhancing that flexibility further by deleveraging to a target leverage of 2.5 times in order to maximize the flexibility provided by the current credit agreement, while creating adequate additional capacity for debt capital, should the need arise. To that end, we view deleveraging as synonymous with the flexibility we value so highly and our reformed dividend strategy is a direct result of our commitment to achieving that flexibility on an expedited timeframe.

As for the dividend to which we've allocated $13.5 million of free cash flow during the trailing 12 months, we have clearly and consistently voiced our commitment to returning capital to our shareholders through the dividend. That commitment has not changed. The move last August to a variable dividend was a prudent move by our board considering the volatility injected into our earnings from movements in non-recurring revenues. That policy has served us well as we've navigated through the internal and external noise of the past year, but the generous payout ratio is at odds with the value we place on creating flexibility within our capital structure.

Fixing the dividend at $0.10 per share allows us to aggressively delever to our target leverage, while at the same time freeing up cash flow for reinvestment in our solutions and services and provides a sustainable dividend payout as we remain competitive with the solution financing we've been able to offer to our customers.

And now finally, on to the third quarter's results. The past quarter showed a continuation of the top line trends that we highlighted on the last call, namely the healthy Thrive implementation schedule and continued TruBridge momentum. Sequentially, this resulted in a relatively flat quarter in terms of revenues, adjusted EBITDA and non-GAAP EPS. When compared to last year, however, the momentum created by our pipeline conversion over the past 12 months has resulted in top line growth of nearly 4% that when coupled with effective cost management has translated into adjusted EBITDA growth in excess of 10% and non-GAAP EPS growth in excess of 26%.

Whether it be SaaS or finance arrangements for perpetual license sales, the competitive landscape has certainly moved towards payment arrangements that limit the hospitals' initial capital outlay. The result of this new market dynamic on our balance sheet is continued expansion of our financing receivables, as nearly all of our new Thrive implementations are either SaaS or self-financed. As a result, financing receivables have expanded $4.2 million during the third quarter and $8.4 million year-to-date placing downward pressure on operating cash flows and furthering the delta between non-GAAP EPS and free cash flow.

Lastly, consolidated bookings came in at $31.1 million, slightly below last quarter's consolidated record of $13.7 million (12:38), but well ahead of the previous high mark of $30.6 million set in the fourth quarter of 2016. Perhaps the most exciting development for the quarter, however, was TruBridge bookings performance. With $10.6 million in third quarter bookings, this marks the third time in the past four quarters that we've achieved record bookings at TruBridge and a 22% increase from the previous record of $8.7 million set just last quarter. This sustained momentum at TruBridge justifies our view that this portion of our business will continue to be a growth agent for CPSI, further stabilizing our top line and adding to a recurring revenue base that currently accounts for 81% of year-to-date revenues.

Of the $21 million in new system sales and support bookings, roughly $1 million is included in our third quarter revenues, $19.4 million represents non-subscription sales that should trickle into revenue over the next 12 months, with an average lag between booking and install a five to six months, $800,000 represents EHR subscription revenue to be recorded over a weighted average period of five years, with the start date in the next 12 months, and similar to our non-subscription sales, an average lag between booking and install of five to six months. Our $10.6 million of bookings from TruBridge are mostly made up of recurring revenues to be recorded over a one-year period starting in the next four to six months.

For some added depth on our healthy implementation schedule, nine customer sites went live with our Thrive financial and patient accounting systems compared to 10 in the second quarter. As for licensing mix, one of this quarter's nine go-lives went to a cloud or subscription model compared to one out of 10 during the second quarter. At this time, we expect 10 new client facilities to go live with our Thrive financial and patient accounting systems in the fourth quarter of 2017, with none expected to go live in a cloud environment.

Our employee head count as of September 30 was roughly 2,058, an increase of 19 from the end of the second quarter, that's again mostly related to expanding TruBridge capacity.

Moving on to the income statement, system sales and support revenues saw a $1.1 million or 2.4% sequential decline, as non-recurring revenues were hampered by a slowdown in post-acute new deal flow and the sequential decline in Thrive new system go-lives from 10 in the second quarter to 9 in the third quarter. Year-over-year system sales and support revenues were essentially flat, as the increase in Thrive new system implementations from 5 in the third quarter of 2016 to 9 in the third quarter of 2017 and improved add-on sales at Evident have been sufficient to offset any decreases related to Healthland revenues.

On the costs side, system sales and support margins of 56% represented a slight decline from the second quarter, as costs remained flat with a slight decline in non-recurring revenues. And while year-over-year revenues for system sales and support were flat, incremental synergies and other cost containment measures drove cost down 9% year-over-year, allowing for expansion from the 53% margins earned during the third quarter of 2016.

TruBridge continues to serve as the growth agent that we expected entering 2017, posting another solid quarter with 2.5% top line growth from the second quarter and nearly 11% top line growth year-over-year. This growth was achieved without reaching our full quarterly run rate on the record $3.1 million contract that Chris had mentioned on the past couple of calls. This contract was included in our second quarter bookings and went live with the respective services late in the third quarter, not hitting its full monthly stride until September of 2017.

Considering that dynamic along with continued conversion of past bookings to revenues, we certainly see upward trajectory for TruBridge. With the customer volumes that we've added to TruBridge and the anticipated need for additional capacity to support the current quarter's record bookings, the third quarter was marked by another round of capacity investment. Payroll costs drove overall TruBridge costs up 7% sequentially and 14.5% year-over-year, outpacing the revenue gains and driving margins down to 43.7% in the third quarter of 2017 compared to last quarter's 46.3% and the third quarter of 2016's 45.6%.

Product development costs were relatively flat sequentially and up $948,000 year-over-year as we've expanded our consolidated development team. Leveraging our unique position in the market continues to be our priority as we remain committed to improving provider adoption, clinical workflow and increasing the integration of our acute and post-acute EHR products.

Sales and marketing costs increased both sequentially and year-over-year due to some dramatic increases in our commission costs. Commission costs during the third quarter of 2017 were heavily influenced by commission payouts on TruBridge service contracts, which are certainly at elevated levels given our recent bookings success. Our longstanding accounting policy election has been to report the expense on these commissions when paid with payments based on annualized revenue assumptions. The result is that TruBridge commissions can be lumpy and hit our P&L well in advance of the associated revenues.

Partially due to the largest contract in the history of the company going live on TruBridge during the third quarter, we saw commission expense increase sequentially from $1.7 million to $3 million, an increase of $1.3 million or nearly 80%. The year-over-year impact was even more pronounced increasing by $1.6 million or 110%.

General and administrative costs decreased $3.5 million or 27% from the second quarter, driven mostly by a $1.5 million decrease in severance costs and a $1.1 million decrease in costs related to our National Client Conference, which was held during the second quarter. Improved vacation utilization and a drop in health claims were the other major drivers in the sequential decline.

Year-over-year G&A costs were down $1.3 million or 12%, with the largest contributing factors being improved health claims and the consolidation of our three separate client conferences in 2016, spanning the second and third quarters. This consolidated conference now brings together both our acute and post-acute customers into one large client event in the second quarter of 2017. Combining these three key conferences into a single event not only adds great value to our clients, but it's also allowed us to scale and achieve overall efficiency in our annual spend in this area.

Interest expense increased both sequentially and year-over-year as market conditions have led to increases in the underlying rates paid on our variable rate debt. And the quarter's effective tax rate of 37.5% was a slight reduction from the second quarter's 38.5%, with the improvement mostly due to beneficial adjustments to tax credit assumptions. Year-over-year, our effective tax rate decreased slightly from 38% to 37.5%.

And with that, I'll now turn things over to Chris Fowler, our Chief Operating Officer.

Christopher L. Fowler - Computer Programs & Systems, Inc.

Thank you, Matt, and good afternoon, everyone.

Q3 was a strong quarter for TruBridge on multiple fronts. As we advance the opportunity across the CPSI client base, progress made outside of our family of companies is also proving to be quite promising, resulting in another record in bookings this quarter of $10.6 million as stated earlier.

We view TruBridge add-on sales within the CPSI client base as our leading performance indicator, not only because it is proven to be a natural sales channel for us, but also because our offerings deliver added value to our acute and post-acute EHR platforms that we believe will help increase client stickiness for our entire family of companies, especially during times of market change and competitive pressures.

While the Rycan RCM product is not the largest in terms of bookings value under the TruBridge umbrella, it consistently delivers high levels of client satisfaction and makes a real difference for our clients in terms of financial performance. Third quarter add-on sales for the Rycan RCM product came in at $1.3 million, which is right in the range of what we have steadily seen each quarter, bringing the total add-on sales for TruBridge to $6.6 million this quarter.

Additionally, while still in the early stages of its release, our BI Dashboard has sparked the interest of our client base. Initial feedback on our first release, which was focused on financial analytics, has been positive. We now have 10 clients live and we'll have another seven live by the end of the year. This early progress has provided very valuable feedback and input towards our next wave of analytics that will be more patient care focused. We are taking a phased approach to the development and release of specific analytical insights for the clinical and ancillary departments. We expect to deliver emergency room content later this year along with chronic care management support.

TruBridge bookings that came from outside our family of companies continue to gain traction coming in just over $4 million in the third quarter. As part of that $4 million, we booked a $3.1 million deal for our our accounts receivable management and coding services. These type of larger more involved deals tend to mirror the longer sales cycle we experienced in the acute care market. However, based on the activity we are managing in the pipeline, we are optimistic about this continued trend.

TruBridge sales that come from outside our family of companies are also having a positive impact on our revenue. This quarter, they generated 11% of Q3 revenue for TruBridge, and as we continue to build our footprint outside of the CPSI EHR customer base, we will see that percentage grow.

We continue to progress nicely in terms of transitioning our newest EHR customers to the CPSI family of companies to the TruBridge Cloud services. While this offering contributes to the stickiness of our CPSI clients, we are also pleased with the internal efficiencies we are picking up as an outcome of this process. We have completed the transition of the American HealthTech client base and we have finished approximately 50% of the transitions within the Centriq client base. We fully expect this consolidation to be completed by the end of the year, which will be accompanied by an annual $2.4 million in savings beginning in January of 2018.

And finally, we are awaiting the final number of covered lives from CMS that will fall under the CPSI ACO program that we launched earlier this year in a partnership with Caravan Health. As this information becomes available closer to the end of the year, we will be able to better assess the financial impact for CPSI and the ACOs we will support.

Most exciting to us is the opportunity to work side by side with the ACO hospital members and with Caravan Health, who has already helped drive impressive results on previous value-based programs by measurably improving quality measures and generating meaningful cost savings. We're very proud to be an active partner in this transition to value-based care in small and rural communities. Helping map a path that will shift healthcare services offered in a traditional inpatient setting to a more proactive delivery method in an outpatient setting will ultimately help ensure the financial health of the hospital, as well as the health of many communities across the country.

With that, I'll turn it over to David.

David A. Dye - Computer Programs & Systems, Inc.

Thanks, Chris.

The solid execution of our sales team over the last several quarters is now translating into revenue and earnings growth. We fully expect this bookings to revenue conversion to continue and to lead to more meaningful growth beginning with the fourth quarter and throughout 2018. The $31.9 million of total CPSI bookings for the third quarter is a 53% increase over the same period last year. Year-to-date through September 30, combined Evident, Healthland and AHT EHR bookings are up 18% year-over-year; TruBridge, including Rycan 79%; and total CPSI bookings across all companies, 31%.

For the acute care EHR portion of our business, in the third quarter, we signed 10 Evident Thrive contracts. Based on our current sales pipeline, execution quarter-to-date and the current status of the market, we expect similar sales performance for new system sales in the fourth quarter. As Boyd, Matt and Chris all mentioned, our TruBridge sales success continues to build with three of the last four quarters producing record TruBridge bookings. And again, the success is both within the CPSI family of EHR solutions and in facilities with non-CPSI solutions. We expect these bookings to translate to year-over-year TruBridge revenue growth of approximately 20% for the next several quarters.

In summary, CPSI's growth story for the remainder of 2017 and full year 2018 is largely a combination of new system sales, MU3 implementations and accelerated TruBridge growth. For 2019 and beyond, we believe TruBridge growth will continue to accelerate as the acute and post-acute healthcare models move to value-based delivery. New system sales are poised to continue to grow as the pipeline increases with hospitals looking to replace legacy products from major vendors. Add-on software sales will be aided by our Business Intelligence, Analytics and Pop Health offerings. And we believe our AHT solution will experience sales growth as the post-acute marketplace catch up to the post-Meaningful Use acute care world.

We continue to believe significant opportunity exists for Evident in the English-speaking international markets in particular within several Canadian provinces and in the Caribbean.

Donny, please open the call for questions.

Question-and-Answer Session

Operator

Certainly. Looks like our first question comes from the line of Mohan Naidu with Oppenheimer. Your line is open, please proceed.

Mohan Naidu - Oppenheimer & Co., Inc.

Thanks for taking my questions. Boyd, on the TruBridge bookings, which product line are you guys seeing the biggest demand for? I know, you guys have pretty strong, I guess, growing penetration between Rycan, private pay and also receivables. But, if you look at these three products, which ones are you seeing the biggest demand and what's the driver for those?

Christopher L. Fowler - Computer Programs & Systems, Inc.

Hey, Mohan, this is Chris. The Rycan product, as I said in the comments, has been very steady at that $1.5 million (28:10), plus or minus a couple of hundred thousand dollars quarter-to-quarter for the last several quarters, as we look back. But the real increase we've seen lately is through the ARM service. And I think that the driver for that is just the complications that continue and the complexities for these small hospitals to stay staffed and keep up with the ever-changing regulations as it relates to billing and just stay on top of their cash. So, that's the – if I have to pick one, it would definitely be the accounts receivable service, and that's reflected in the bookings, the big deal we got this quarter, the $3.1 million, that was ARMs and coding.

Mohan Naidu - Oppenheimer & Co., Inc.

Okay. And I think you guys disclosed that the penetration within that segment was about 10%, 12%, is that still in that range?

Christopher L. Fowler - Computer Programs & Systems, Inc.

Yeah, that's pretty consistent.

Mohan Naidu - Oppenheimer & Co., Inc.

How should we think about the margin profile with TruBridge and as you add new clients, you also need to add some resources, but can you give us a sense of what's the mature margins that you can look at within a client?

Matt J. Chambless - Computer Programs & Systems, Inc.

Yeah, Mohan, this is Matt. And I think this would play out, if you look historically at TruBridge margins, it's a slight roller-coaster ride, right? So, in periods where we're investing in capacity, we'll see margins dip down in the lower 40s. And then once volumes catch up with that capacity, margins can exceed that kind of 45%, getting to the 46%, 47% range. But we expect to continue on that kind of up and down between, say, 42% and 47% depending on whether it's a growth quarter or a investment quarter.

Mohan Naidu - Oppenheimer & Co., Inc.

Okay. Thanks, Matt.

Matt J. Chambless - Computer Programs & Systems, Inc.

Yeah.

Operator

Thank you for your question. Our next question comes from the line of Jeff Garry (sic) [Jeff Garro] (30:00) with William Blair & Co. Please go ahead.

Jeff R. Garro - William Blair & Company, L.L.C.

Yeah. Good afternoon, guys, and thanks for taking the questions. It sounds like in the discussion today, some talk of growth going forward, David speaking some on 2018 and 2019, and also the discussion of hitting that 2.5 times ratio relative to the – (30:24) in spite of the amendment of the debt financing. So, the stronger growth discussion, hitting that 2.5 times ratio, that's going to require some acceleration of growth. Could you speak a little bit to when we see the timing of that inflection in growth going forward?

David A. Dye - Computer Programs & Systems, Inc.

Sure. Generally speaking, we can. We've got to – obviously, we feel like we're going to close out the year strong. I think, in summary, we said that – I certainly said that, we've got – we're scheduled for a good bit of new installed business in the fourth quarter and then, we were a little bit cautious/conservative with the MU3 delay and thinking that the majority of that would now come in maybe in 2018 or even in late 2019.

We've been encouraged by our customers that have decided to go ahead and proceed with that, I mean, there are some benefits to them from a functionality standpoint and a user interface standpoint that they get with MU3 and we've been encouraged by the amount of folks that wanted to keep their install dates or even and maybe moving forward, so that we're going to have a lot of that beginning in the fourth quarter as well and certainly through the first three quarters and through the entire year 2019.

So I think, in summary, we can say we look for that to begin now with the fourth quarter of this year, at least, if that answers your question sort of when we look to see the growth accelerate.

Jeff R. Garro - William Blair & Company, L.L.C.

That's very helpful. Anything, Dave, to call out in terms of TruBridge that certainly has seen continued momentum, but is there anything in the pipeline or the implementation schedule that we should be aware of in terms of timing?

David A. Dye - Computer Programs & Systems, Inc.

Yeah. Matt mentioned, we've done a lot, we did a lot in the third quarter and specifically late in the third quarter with that one big ramp up for TruBridge, and certainly with all we booked – three of the last four quarters have obviously been pretty big there within TruBridge, so we've got a lot of it that continues to go live and we have a lot in the fourth quarter as well.

But certainly, with my prepared comments about the 20% growth beginning in the fourth quarter, I mean, with the tail that we had in the third quarter and with what we have starting beginning in the fourth quarter, we think you'll see a noticeable uptick in TruBridge again, sort of beginning now with the fourth quarter.

Christopher L. Fowler - Computer Programs & Systems, Inc.

Hi, and Jeff, one other thing, this is Chris, that the deal that we booked in this past quarter, the $3.1 million, it's going to get started in December too (33:12). So, the conversion on these is pretty quick, but obviously it's got the 12-month tail on it. So, we're excited about seeing that convert into the fourth quarter.

Jeff R. Garro - William Blair & Company, L.L.C.

Got it. Great to see those bigger deals. And one more question from me, would love to hear a little bit more discussion on the competitive environment. Interested to hear about the various competitors that you've talked about on previous calls, who you're seeing more often than not over the last three to six months, and how your win rates have changed and maybe even some comments on with the company seemingly again a little bit more vocal about their wins in the marketplace. How is that impacting not just the sales team, but maybe the broader company as a whole with that little bit of cultural shift?

David A. Dye - Computer Programs & Systems, Inc.

I'll say, we definitely over the last even few months have entered a time where the market is valuing stable products that work and that's us, every field (34:22). And I think that's where you're seeing an uptick with us in terms of the deals that we're signing. Obviously, every deal is competitive, it's competitive as hell. I've been here for 27 years, it always has been, the names have changed a little bit, especially recently and we've talked about this on previous calls.

Some of the traditional vendors that focus on the small market space for the last several decades are either don't exist anymore, or they've moved upstream or they've moved on to different things, and we remain virtually in every deal now. We obviously compete with athenahealth, we compete on a regular basis with Cerner as well. We've made note of that over the last several calls as well that we're seeing increasing competitive pressure from them and we think that'll continue. Occasionally, MEDITECH, occasionally MEDHOST, that's essentially it.

Jeff R. Garro - William Blair & Company, L.L.C.

And, again, Boyd, any comments on just being a little bit more vocal about all your wins and whether that is having any kind of positive cultural shift within the company, within R&D, within the customer delivery teams?

John Boyd Douglas - Computer Programs & Systems, Inc.

Yeah. We're pretty fired up right now.

Jeff R. Garro - William Blair & Company, L.L.C.

That helps (35:42). Thanks for taking the questions, guys.

John Boyd Douglas - Computer Programs & Systems, Inc.

Thanks, Jeff.

Operator

Thank you for your question. Our next question comes from the line of Sean McBride with Baird. Please go ahead.

Sean P. McBride - Robert W. Baird & Co.

Hey, thanks for taking the questions and congrats on the continued sales success. So, I want to ask a question on the conversions. So, you have already gone through and converted more hospitals than you've done in, basically, the previous two years. So, can you just give some color on how these hospitals are doing following the go-live process, especially considering how you've highlighted the considerable financial issues that some of these hospitals have been going through?

John Boyd Douglas - Computer Programs & Systems, Inc.

I'm not sure, (36:28) doubled the number, certainly, our number of new – if you're talking about net new or new go-live installs, they're going extremely well. Certainly, some of these hospitals have financial challenges, but that's really, frankly, nothing new to us, we've always dealt with that. But we're real pleased with our installation teams, our conversion teams and installation teams, those are actually going quite well.

One of the things we've done on some recent – we've changed some of our implementation procedures and we've gotten more efficient with those both from a conversion perspective and from the number of people we send on site and how we approach that, and that's been well received by our customers as well. So, we're really pleased with our implementation teams at this point.

Sean P. McBride - Robert W. Baird & Co.

Okay. Thanks. And then, just want to touch on the post-acute space. I know that much more white space and much earlier there, but from an interest there, what are you looking at in terms of timeline and market appetite and then how is the competitive environment there a little bit different than the in-patient space?

David A. Dye - Computer Programs & Systems, Inc.

Yeah. The market appetite there now, I would say, equates to kind of where the acute care market was a couple of years ago, it's not very active. And we're taking advantage of that opportunity by virtually (37:50) doubling down on our R&D investment in that product because we think it's going to accelerate quickly. We don't know exactly when that will occur. Our guesstimate at that point is that we're about two years or so away from that market sort of being in a market similar to what we were in when the acute care world was (38:10) Meaningful Use.

So, we got a very stable customer base, where AHT is known for its support and we continue to do a great job there. And as I said, we're using this downtime from a new sales standpoint to double down the product. It's extremely competitive as well. The primary competitor there obviously is PointClickCare. There are several others, MatrixCare, and a few others, but I would say that's just sort of a summary of the market as we see it right now.

Sean P. McBride - Robert W. Baird & Co.

Great. Thanks for taking the questions.

David A. Dye - Computer Programs & Systems, Inc.

Yeah. Thanks, Sean.

Operator

Thank you for your question. Our next question comes from the line of Gene Mannheimer with Dougherty & Co. Please go ahead.

Eugene Mannheimer - Dougherty & Company LLC

Thanks. Good afternoon, and congrats on all the good progress this quarter. Just a follow-up on the last question, in the post-acute market, I appreciate that you're making investments there in anticipation of some acceleration of growth, but if you're not sure of the timing, I mean, is there some risk here that that doesn't happen? I mean, are there any catalysts or guidance to suggest that that market is going to heat up?

David A. Dye - Computer Programs & Systems, Inc.

Yeah. I guess, there's always risk, Gene. But I think that the way we look at it is that these facilities in terms of their documentation processes are borderline light-years behind where we are in the inventory and in the acute care world, right? So, they're going to be fully automated at some point in the relatively near future, and we're thinking long-term here. So, if it happens in a year, it happens in two years, it happens in four years, it's going to happen.

I think in terms of where we are with our investment and development, we're kind of planning on and thinking it'll be about two years from now, but if it's a little longer than that, we're thinking long-term, we don't really care.

Eugene Mannheimer - Dougherty & Company LLC

Okay. Very good.

Christopher L. Fowler - Computer Programs & Systems, Inc.

Hey, Gene, it's Chris. Just to add to that, another thing that kind of takes away some of the risk there is just if you think about the reimbursements going forward and how the communities are going to be valued and the time from the acute to the post-acute, we're also looking at it from a add-on play as well. So from that standpoint, while we are making that investment to attract net new, I do think there's also going to be huge opportunity for us inside the EHR – the acute space going forward.

Eugene Mannheimer - Dougherty & Company LLC

Makes good sense. Thanks ,Chris. And on the topic of TruBridge sales outside of the CPSI family, what's the most common EHR platform outside of yours, where you're seeing success selling TruBridge?

Christopher L. Fowler - Computer Programs & Systems, Inc.

Right now, it's MEDITECH.

Eugene Mannheimer - Dougherty & Company LLC

Okay. Okay. Excellent. And Matt, can you quantify, for us, the EPS impact, if any, that the refinancing does on your EPS?

Matt J. Chambless - Computer Programs & Systems, Inc.

Yeah. Gene, so there was no impact. Well, so I guess, are you asking from the actual cost of the credit amendment itself or the softening of the rate card in the amendment?

Eugene Mannheimer - Dougherty & Company LLC

Changing the rate and mostly going forward.

Matt J. Chambless - Computer Programs & Systems, Inc.

Yeah. The changing in the rate, once we can delever to below 3 times where we really start taking advantage of the reduced pricing, and it shakes out to just under $0.01 a share quarter.

Eugene Mannheimer - Dougherty & Company LLC

Okay. Perfect. Thank you.

John Boyd Douglas - Computer Programs & Systems, Inc.

Thanks, Gene.

Operator

Thank you for your question. Our next question comes from the line of Stuart Goldberg with Litespeed Partners. Please go ahead.

Stuart Goldberg - Litespeed Management LLC

Good afternoon, gentlemen. Thank you very much. A couple of housekeeping questions for you. It looks like you borrowed money, I guess, against the revolver this quarter. How do we translate that going forward in the fourth quarter and 2018? Are we going to be doing borrowing more money with the new dividend strategy, I guess, maybe we don't have to? Can we address that? And then, I have one other question.

Matt J. Chambless - Computer Programs & Systems, Inc.

Yeah. So, I think, we touched on it somewhat, Stuart, a little bit in the prepared commentary when we mentioned that trailing 12-month free cash flow was somewhere at what, 22.5%, 23.5% and if you add up the amount that we paid on debt commitments, and you add up the dividends, they've outpaced that somewhat. So, the heavy dividend that we paid out in the third quarter or that we paid out during the third quarter, we announced on the last call, it kind of did put a short-term crunch on cash. So, it did require a step into the revolver during the past quarter. And so that's what we meant when we are referencing taking a keen look at both the two largest uses of our free cash flow of the debt payments and the dividend payments, and tweak those somewhat and you're talking about freeing up a significant amount of cash going forward.

Stuart Goldberg - Litespeed Management LLC

Right. And if I understand it correctly though, you're going to have a – under the new agreement, you're going to have a mandatory excess cash flow at 75% or payout 75% of excess cash flow. So, as you cut this dividend, you are going to be paying more down in debt though, because your – the amendment includes dividend payments as part of your excess cash flow. So, it's kind of one hand washes the other to some degree, at rate of 75%, do I have that fairly accurately?

Matt J. Chambless - Computer Programs & Systems, Inc.

Well, so the 70% – the gist of that free cash flow repayment is really just to incentivize or, I guess, to de-incentivize us from just stacking up cash on the balance sheet. So, the intention there is that if we're stacking up cash on the balance sheet that there is a requirement to prepay the banks. And if you notice the formula, which is spelled out in the 8-K or in the exhibits in the 8-K that we filed on the 17th, that's calculated after dividend. So, it doesn't place any further restriction on dividends. The spirit of that is simply to sweep balance sheet cash.

Stuart Goldberg - Litespeed Management LLC

Okay. But it was my understanding that it's a mandatory payment. So, if you're cutting the dividend and, let's say, you have free cash flow of X and your dividend is now half of Y, instead of Y, you're going to have to pay 75% of that difference into the sweep, is that fair?

Matt J. Chambless - Computer Programs & Systems, Inc.

I mean, it's in keeping with our first priority in our capital allocation strategy which is to delever.

Stuart Goldberg - Litespeed Management LLC

Okay. And then the other question I have is, moving forward, I'm trying to figure out at fourth quarter and going forward with 2018, once again, the financing receivables were a use of cash by $4.2 million this quarter, they were $4.1 million last quarter. Are we going to see that kind of level or is it going higher? I mean, because that's going to be – that's, obviously, one of the strains on cash as well. So, you've cut the dividend, but you got financing receivables. So, how should we look at that financing receivable going forward as far as cash flows go?

Matt J. Chambless - Computer Programs & Systems, Inc.

Well, so, the financing receivables are going to build up for a short period of time until the cash collections start kind of flowing in on the back end. And it's probably worth mentioning that this is a relatively new market dynamic, where some new entrants into our market have really created a demand, kind of a pull of demand from the customer base for financing of solutions, whether it'd be in the SaaS arrangement or some sort of financing of perpetual license model, financing arrangements that limit that initial capital outlay. And so, that's a relatively new phenomenon, which is sparking a lot of our new system sales on the balance sheet without as much volume collected on the back end.

So, once those collections start catching up with the additions we're seeing into financing receivables, particularly as we start collecting heavily on our Meaningful Use Stage 3 applications in the back end of 2018, you should see that dynamic starts swinging the other way.

Stuart Goldberg - Litespeed Management LLC

Okay. Fair enough. And then last question, so, Matt, I've talked about this before, the Q is not out, but what about on those receivables, are we seeing any increase or decrease in bad debt expense or anything in the provisions?

Matt J. Chambless - Computer Programs & Systems, Inc.

I'd say that, I mean, nothing material.

Stuart Goldberg - Litespeed Management LLC

Okay. Great. Thank you. Thank you for the cleanup.

Matt J. Chambless - Computer Programs & Systems, Inc.

Yeah. Appreciate it, Stuart.

Operator

Thank you for your question. And, Mr. Douglas, it appears we have no further questions. So, I'll turn it over to you.

John Boyd Douglas - Computer Programs & Systems, Inc.

Great. Thank you. We appreciate everyone being on the call today. Thanks for your interest in CPSI and hope everyone has a good Friday and a good weekend. Thank you.

Operator

Thank you, 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.