Computer Programs And Systems Inc (CPSI) Q2 2021 Earnings Call Transcript

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Computer Programs And Systems Inc (CPSI -0.36%)
Q2 2021 Earnings Call
Aug 3, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to CPSI Second Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Dru Anderson. Thank you. You may begin.

Drew Anderson -- Investor Relations

Good afternoon, and welcome to the CPSI Second Quarter 2021 Earnings Conference Call. During this conference call, we may make statements regarding future operating plans, expectations and performance that constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that any such forward-looking statements only reflect management expectations and predictions based upon currently available information and are not guarantees of future results or performance. Actual results might differ materially from those expressed or implied by such forward-looking statements as a result of known and unknown 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.

At this time, I will turn the call over to Mr. Boyd Douglas, President and Chief Executive Officer. Please go ahead, sir.

Boyd Douglas -- President and Chief Executive Officer

Thank you, Dru. Good afternoon, everyone, and thank you for joining us today. After my comments, I will hand the call over to Matt Chambless, our Chief Financial Officer, who will provide additional color regarding our second quarter results. At the conclusion of our prepared comments, the two of us, along with David Dye, our Chief Growth Officer; and Chris Fowler, our Chief Operating Officer, will be available to take your questions. At the midpoint of 2021, I'm extremely pleased to share that the focus, commitment and hard work across CPSI and our family of companies has delivered impressive results for the second quarter of 2021. Our three-year transformation initiative continues to guide our efforts to achieve core growth, margin optimization and tangible upside through digital innovation. The foundation we are laying through margin optimization and sustained recurring revenue growth gives us confidence in our ability to create long-term shareholder value.

I will start today by highlighting the results from our execution of core growth and margin optimization. TruBridge volumes continue to recover nicely and at a pace that has surpassed our expectations. In the second quarter, TruBridge generated $32.6 million in revenue with the newly acquired TruCode being a sizable contribution. In addition, by leveraging our established customer relationships, cross-sales of TruBridge services into our acute and post-acute EHR base improved nicely over last quarter. And while the pace of decisions for our EHR system sales did not rebound as we had hoped in the second quarter, there was a sizable improvement in EHR bookings over the first quarter. We are also encouraged by some key decisions that were recently made in our favor in both the EHR and services sales that have kicked us off to a solid booking start to the second half of the year. Another important element to our strategy is the successful execution of initiatives that modernize our business, increase our efficiency and deliver long-term cost savings. Continued progress in our offshoring efforts with the TruBridge medical coding and accounts receivable management services are contributing factors to improve margins, increase scalability and competitive pricing, giving us greater confidence and visibility in achieving a combined cost savings, as we stated last quarter, of at least $1.5 million as we exit 2021. A necessary element to our growth plan is the preservation of a healthy retention rate across our EHR base as this is critical in order to achieve TruBridge cross-sale targets. The advancement of our single solution across our EHR client base covers multiple care settings, including inpatient, ambulatory, ED and skilled nursing. And this initiative is progressing nicely.

Our latest offerings from the single solution include communication center and patient data console. In addition, the recently announced partnership with Medicomp will allow us to integrate their clinical data engine, which will deliver even greater workflow efficiency and clinical decision-making with access to patient and problem specific information at the point of care. These modules, along with our previous releases of notes and web client, will further empower clinical users as they deliver care to their patients. This combination gives providers the ability to rapidly determine a patient's picture of health, identify meaningful insights, take clinical action and efficiently alert or inform other care team members about the status of a patient with the same ease that they communicate with friends and family. The interest and acceptance we have seen with these modern communications tools that improve care coordination is encouraging. And finally, with our new Chief Innovation Officer, Wes Cronkite, on board, we are pursuing additional uplift to our core growth and margin optimization efforts through innovation. TruBridge will see a direct benefit from these initiatives, which focus on robotic process automation of core TruBridge services. From decision support to cash posting, we have identified manual processes that contribute to unnecessary employee inefficiencies that, once automated, will allow our revenue cycle teams to instead focus on real value-add activities for our customers.

In summary, I want to stress how proud I am of the strong start we have made to the transformation underway at CPSI in only six months. There is still much work ahead of us as we continue on our three-year journey to increase shareholder value while also advancing the interests of our employees and customers. CPSI's commitment to enhancing and empowering our clients' communities with our solutions and services is determined and relentless.

With that, I'll turn the call over to Matt for a deeper dive into the financial results.

Matt Chambless -- Chief Financial Officer

Thanks, Boyd, and good afternoon, everyone. On today's call, I'll provide a high-level overview of the quarter, including some additional detail on bookings performance and a brief walk through our second quarter financial results. Obviously, the pandemic's severe impact on patient volumes during the second quarter of 2020, coupled with the resumption of near-normal volumes in the second quarter of 2021, made for a nice headline against relatively easy comps. The comp issue aside, the second quarter stands out as a strong quarter in absolute terms with a few key themes driving the strong financial results. First, our customer base continues to surprise us in their resiliency with patient volumes once again exceeding our expectations, driving TruBridge to outperform internal top line expectations for the quarter. This resiliency has worked in tandem with improved retention of our hospital EHR customers to drive recurring revenue growth. Midway through 2021, our hospital EHR retention rates are at their highest levels since our acquisition of Healthland in 2016.

Second, during the past quarter, we worked with external subject matter experts to adopt best practices for labor capitalization in an agile software development environment, resulting in a higher capitalization rate that we feel better reflects the investments we've been making to bring incremental functionality and features to our EHR products, including progress toward our single solution. Third, the inclusion of TruCode in the second quarter numbers brought inorganic growth to our TruBridge revenue line, adding an incremental $1.6 million of revenue absent purchase accounting adjustments and $600,000 of incremental EBITDA. These amounts represent roughly 0.5 quarter's activity with the acquisition occurring in mid-May. TruCode's revenues for the full quarter were $2.8 million with year-to-date revenues of $6.6 million. TruCode's EBITDA for the full quarter was $1 million with year-to-date EBITDA of $3.1 million.

Moving on to bookings. The second quarter showed a significant improvement over the first quarter's disappointing bookings with total bookings of $16.6 million, marking an 89% sequential increase. We mentioned on our last earnings call that the pandemic's continuing impact on rural and community hospitals created a particularly stingy bookings environment during the first quarter. While that environment became more favorable during the second quarter, the decision pace is still lagging historical norms, particularly among our net new EHR decisions, resulting in bookings for the quarter that were short of our expectations and 17% below the second quarter of 2020. System sales and support bookings were up 69% sequentially behind strength in add-on bookings, but down 27% compared to the second quarter of 2020 as bookings for net new EHR sales continue to suffer from the slower decision pace. Including add-on sales, subscription arrangements made up 45% of the second quarter's total EHR bookings as we continue our efforts toward driving recurring revenue growth through greater emphasis on our SaaS offerings throughout the sales process. By steering more of our new business toward SaaS offerings, we're increasing the prevalence of recurring revenues within our top line mix, leading to enhanced predictability for revenues and cash flows.

Compared to the EHR business, TruBridge bookings fared noticeably better during the quarter with improved cross-sell success causing bookings to more than double the first quarter's amounts and showing a modest 6% increase over the second quarter of 2020. Turning to the financial results for the period. The inclusion of TruCode drove revenue to a slight sequential increase, while revenues increased 15% over the second quarter of 2020 as hospital patient volumes plummeted in the second quarter of last year, placing intense pressure on TruBridge revenues. Overall, recurring revenues increased roughly 2% sequentially and 17% over the second quarter of 2020, arriving at yet another all-time high of 91% of total revenues compared to 90% in both the first quarter of 2021 and second quarter of 2020. On the profitability front, increased labor capitalization was the main driver behind a $2.5 million or 21% sequential increase in adjusted EBITDA and a $1.7 million or 19% sequential increase in non-GAAP net income. Both non-GAAP net income and adjusted EBITDA nearly doubled from the second quarter of 2020's pandemic-weakened results. The second quarter of 2021's 15.7% non-GAAP net margin set a new CPSI record, while the period's adjusted EBITDA margin of nearly 21% missed setting another record by only 30 basis points.

Looking deeper at our segments. TruBridge revenues increased 3% sequentially as the incremental $1.6 million of TruCode revenue balanced out temporary revenue declines in other areas as patient volumes expectedly backed off their first quarter pace, while gross margins compressed to 47% compared to 50% in the first quarter due to increased cloud hosting expenses. Unsurprisingly, TruBridge revenues grew significantly over the second quarter of 2020, showing a 31% top line improvement and a 260 basis point improvement in gross margin. Next, system sales and support revenues saw a slight decrease in revenues sequentially that, combined with flat cost of sales, brought gross margins down slightly from 52% in the first quarter to 51.5% in the second quarter. Compared to the second quarter of 2020, overall system sales and support revenues were up $1.2 million or 4% as acute care SaaS revenues increased $1.6 million or 75%. Despite the increase in revenues, gross margins decreased from the second quarter of 2020's 55% as costs related to pre-revenue projects outpaced revenue gains. We currently anticipate six new client facilities going live with our Thrive solution in the third quarter of 2021 with three expected to go live in a cloud or SaaS environment.

Moving on to operating expenses. Product development costs decreased roughly $2 million and 23%, both sequentially and year-over-year due to the aforementioned increased labor capitalization. Excluding GAAP labor capitalization, cash spend for product development was relatively flat sequentially and increased nearly 5% from the second quarter of 2020. Sales and marketing costs were flat sequentially and year-over-year as efficiencies resulting from our business transformation initiatives were balanced by increased commissions and travel costs. General and administrative costs decreased $2.2 million from the first quarter of 2021 as severance costs associated with the reduction in force we announced in our February nine eight-K filing decreased $1.9 million, while the period's $700,000 of costs associated with the TruCode acquisition were offset by improved health claims and bad debt experience. Year-over-year costs were flat as improved health claims and bad debt experience were balanced for the cost of the TruCode acquisition. The second quarter saw uncharacteristically low levels of both bad debt and health claims related to our self-insured health benefit plans. And we conservatively expect those amounts to normalize in the third quarter, creating some incremental headwinds to EBITDA growth.

Closing out the income statement, our effective tax rate during the quarter was 14% compared to a benefit of 4% in the second quarter of 2020 as the benefit from R-and-D tax credits normalized this quarter after having an outsized impact on the second quarter of 2020. We now expect a full year 2021 effective rate of 17% to 18%. From a cash flow standpoint, operating cash flows of $19.4 million set another CPSI record and marked a 13% improvement over the second quarter of 2020, driving trailing 12-month operating cash flow to a record $57 million, a 13% increase over trailing 12-month operating cash flows from a year ago. This strength in operating cash flows has allowed CPSI to limit our year-over-year increase in bank debt to less than $14 million despite funding the entire $61 million purchase price for TruCode using revolver proceeds. From a free cash flow perspective, the second quarter's $16.1 million of cash flow marked the second highest in company history.

On capital allocation, our strategy prioritizes flexibility to have CPSI optimally positioned to opportunistically deploy capital through a combination of M-and-A, internal investment and value-based share repurchases. The most notable capital allocation event for CPSI during the second quarter was the acquisition of TruCode for an initial cash purchase price of $61 million. As we mentioned during the May 13 call to announce the deal, TruCode checks all the boxes on our ideal M-and-A target profile. The company has an impressive history of responsible growth with a five-year revenue CAGR of 8%. Nearly all of the revenues are recurring, which pairs nicely with our renewed emphasis over the past few years of driving recurring revenue growth, reaping the benefits of enhanced visibility and predictability. TruCode's historical customer retention rates are in excess of 95%. So the revenue is both recurring and sticky. And at around 45%, the historical EBITDA margins are robust. The initial purchase price of $61 million versus 2020's total EBITDA of $5.9 million works out to an initial valuation of 10.3 times with a forward multiple of around 9.7 times. The potential $15 million earnout value incremental EBITDA at five times. And if the maximum earnout is achieved, the overall EBITDA multiple decreases to 8.4 times. This opportunistic acquisition was aided by our conservative leverage position driven by our target leverage ratio of 2.5 times debt to EBITDA. Leverage currently sits at 2.3 times after the TruCode transaction, which has CPSI well positioned to respond quickly to other opportunities that may arise.

To wrap up my prepared remarks, the second quarter proved to be an all-around success for CPSI, and we're excited for what the rest of the year holds with TruCode now fully in the fold. On the May 13 call to announce the addition of TruCode, we increased our annual revenue guidance to between $275 million and $285 million and adjusted EBITDA margins between 17% and 18%. With the second quarter behind us, we remain confident in the top line guidance, while revised expectations around labor capitalization raise our full year adjusted EBITDA margin expectations to between 18% and 19%.

And with that, we'd like to open the line up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Jeff Garro with Piper Sandler. Please proceed with your question.

Jeff Garro -- Piper Sandler -- Analyst

Yes. Good afternoon. Congrats on the quarter. And thanks for taking the questions. I want to ask a little bit more about the shift toward recurring revenue. I guess for starters, would like to know what the specific percentage of recurring revenue was in the quarter out of the total? And then noticing the year-to-date installs leaning heavily toward implementations. I was hoping we could get some further commentary on what's in the pipeline, what the prospective mix is of license and SaaS for the rest of the year in terms of new installs and, again, the sales pipeline decision?

Boyd Douglas -- President and Chief Executive Officer

Yes. So Jeff, thanks for the question. And I think we mentioned in the prepared comments that the mix of recurring revenue versus -- or recurring revenue as a percentage of total, it's about 91% for the second quarter. So that's an all-time high for CPSI. I'll turn it over to David to talk kind of about the license mix that's sitting in the pipeline right now.

David Dye -- Chief Growth Officer

Jeff, David here. In the pipeline for net new EHR, it's looking about 80-20 for 80% SaaS versus 20% license. And then in addition to that, as we continue to endeavor to sell nTrust into the existing client base, we hope to see that number increase as well.

Jeff Garro -- Piper Sandler -- Analyst

Excellent. That helps. And also a little bit more about the end market. In the release, some positive comments on the pipeline and the start to the second half of the year and also in there a reference to the three-year targets and the expectation that bookings will pick up in the second half. So any more comments that you could offer on the type of performance that you need in the second half to stay on track to achieve those three-year targets? And any areas where you're expecting outsized strength, whether it's both net new EHR prospects or maybe with TruBridge success going upmarket and outside the base? Thanks.

David Dye -- Chief Growth Officer

Sure, Jeff. David again. I -- we certainly have a lot of work left to do for the rest of the year, but we did get off to a good start to the third quarter. Backing up for just a second, our pipeline -- our six-month pipeline as of June 30 of this year was up sequentially 33%. So that was certainly a positive sign. In particular, it's up in the net new EHR segment of the business. And then as we alluded to in the press release, we did have a good July. We signed three net new EHR deals, and we also got a large competitive TruBridge takeaway from a non-EHR hospital for TruBridge accounts receivable management services. So that was very positive as well.

Jeff Garro -- Piper Sandler -- Analyst

Excellent. Thanks for taking the question.

David Dye -- Chief Growth Officer

Thanks, Jeff.

Operator

Our next question is from Steve Halper with Cantor Fitzgerald. Please proceed with your question.

Steve Halper -- Cantor Fitzgerald -- Analyst

Hi. Could you just go through the revised guidance again because I missed it?

Boyd Douglas -- President and Chief Executive Officer

Yes. So Steven, on the May 13 call, where we announced the TruCode deal, we adjusted the top line guidance at that time to between $275 million and $285 million. And we still feel comfortable with that range. But we are revising upward our EBITDA margin expectations to between 18% and 19% for the year.

Steve Halper -- Cantor Fitzgerald -- Analyst

Is that because of the higher software capitalization rate now?

Boyd Douglas -- President and Chief Executive Officer

That's right.

Steve Halper -- Cantor Fitzgerald -- Analyst

Okay. Yes. On the contribution from TruCode, you said it was $1.6 million. Is that net of the deferred revenue -- the deferred revenue item?

Boyd Douglas -- President and Chief Executive Officer

Yes. So there -- that is before any purchase price -- any purchasing -- purchase accounting adjustments. So there was about $158,000 deferred revenue haircut impact for the first quarter. So 1.6 minus 158. So about 1.45 would be the GAAP number that's showing up in the financials this quarter.

Steve Halper -- Cantor Fitzgerald -- Analyst

Got it. Okay. That's what I need to know. And then the other thing is, at one point, if I recall correctly, you were talking about share repurchase. Is that on hold? Or will that -- is that contemplated going forward?

Matt Chambless -- Chief Financial Officer

Yes. So as we've mentioned on past calls, we definitely want to be opportunistic as we deploy our multifaceted capital allocation strategy. And maximizing that flexibility obviously means that we're not going to -- we don't necessarily want to tie ourselves to some sort of arbitrary goal on what we think annual share repurchases are going to look like because we don't necessarily know what the value of the option set is going to look like on the M-and-A side. So I'd say that there's probably a lean somewhat toward using capital to fund growth. And the quality and maturity of our M-and-A pipeline is going to dictate a lot. So stay tuned there on the share repurchase side. So it's -- it goes hand-in-hand with what happens on the M-and-A pipeline.

Steve Halper -- Cantor Fitzgerald -- Analyst

Got it. Okay. Thank you.

Operator

[Operator Instructions] Our next question comes from Joy Zhang with SVB Leerink.

Joy Zhang -- SVB Leerink -- Analyst

Hi, guys. Congrats on the quarter. And thank you for taking my question.

Boyd Douglas -- President and Chief Executive Officer

Thanks, Joy.

Joy Zhang -- SVB Leerink -- Analyst

I guess I'll start with TruCode. Can you provide any sort of early color on how the cross-sell pipeline has been trending? And is it sort of more geared toward the stand-alone cross-sell outside? Or are they more sort of bundled with the other TruBridge offering?

David Dye -- Chief Growth Officer

Joy, for the first part of your question, I think the deal closed on May 12 or somewhere in the middle of May, and we were really happy. We got four cross-sell deals into the EHR base close between that and the end of the quarter. So that was certainly very positive. I didn't get the second part of your question. Chris may have.

Chris Fowler -- Chief Operating Officer and President of TruBridge

Yes. I think -- Joy, this is Chris. I think the question is as it relates to whether it's TruCode stand-alone into the base or whether we're bundling it with other services. Is that correct?

Joy Zhang -- SVB Leerink -- Analyst

Exactly, yes.

Chris Fowler -- Chief Operating Officer and President of TruBridge

Okay. Yes. I would say right now, obviously, the four deals point to the fact that it's stand-alone. But obviously, as we continue to enable the sales force we want to continue to leverage the overall goal, which is to move as many customers to nTrust as possible. And obviously, this is just another part of that strategy.

Joy Zhang -- SVB Leerink -- Analyst

Got it. That's very helpful. And one more housekeeping question for me on what sort of volume assumptions are baked in the guidance. Is it still at the 90% of pre-COVID level as in your prior guidance? Or has that increased, given that volumes have trended above expectations earlier this year?

Matt Chambless -- Chief Financial Officer

Yes. So Joy, I'd say that we've increased it based on kind of the new information that we've gotten from our patients or from our hospital customers. So I'd say we've elevated it somewhat above the 90% range and more reflective of what we're seeing right now.

Joy Zhang -- SVB Leerink -- Analyst

That's helpful. Thank you.

David Dye -- Chief Growth Officer

Thanks, Joy.

Operator

We've reached the end of the question-and-answer session. I'd now like to turn the call back over to Boyd Douglas for closing comments.

Boyd Douglas -- President and Chief Executive Officer

Great. Thank you. I certainly want to thank everyone for their time and for being on the call today and your interest in CPSI. Clearly, we're excited about the -- our strategic direction and our execution in the first six months on that. And so certainly look forward to more to come. But thank you for your time, and I hope everyone has a good rest of your week.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Drew Anderson -- Investor Relations

Boyd Douglas -- President and Chief Executive Officer

Matt Chambless -- Chief Financial Officer

David Dye -- Chief Growth Officer

Chris Fowler -- Chief Operating Officer and President of TruBridge

Jeff Garro -- Piper Sandler -- Analyst

Steve Halper -- Cantor Fitzgerald -- Analyst

Joy Zhang -- SVB Leerink -- Analyst

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