TruBridge - Q3 2023

Transcript

Operator (participant)

Greetings, and welcome to the CPSI third quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dru Anderson, Investor Relations. Thank you. You may begin.

Dru Anderson (Senior Partner)

Good afternoon, and welcome to the CPSI third quarter 2023 earnings conference call. Leading today's call are Chris Fowler, President and Chief Executive Officer, and Matt Chambless, Chief Financial Officer. This call may include 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. The company cautions 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 may 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 public releases and reports filed with the Securities and Exchange Commission, including, but not limited to, the most recent annual report on Form 10-K.

The company also cautions investors that the forward-looking information provided on this call represents their outlook only as of this date, and they 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. Chris Fowler, President and Chief Executive Officer. Please go ahead, sir.

Chris Fowler (President and CEO)

Thanks, Dru, and thank you to everyone for joining us this afternoon. Unfortunately, this was another tough quarter for CPSI, with metrics around the top line, bottom line, and growth-oriented bookings all underperforming our expectations and surely those of our shareholders. Three months ago, we acknowledged the reality of our historical tendency of allowing optimism to trump realism, and we told you those days were behind us. While our mindset and outlook have definitely shifted, it's taking time for that to flow through to our operations. Boiling this all down, what it means for the third quarter is that our results came in below our expectations on the top and bottom line, as well as soft on bookings. A revenue of $84.7 million was about $2 million short of our plan.

Adjusted EBITDA of $9.7 million was light as a result of revenue mix, as well as some unexpected out-of-period vendor expenses of around $500,000. Bookings in the third quarter came in at $16.2 million, also well below our target. Finally, the growth of our RCM business continues to be sluggish. However, our RCM—excuse me, however, our EHR business performed slightly better than expected, and we saw continued strength in our existing customer base, with retention coming in above our expectations for the quarter. This gives us optimism around our right to win in those cross-sell opportunities for RCM.

Let me start by saying that over the course of this year, revenue has come in slower than we anticipated, and at the same time, as we discussed last quarter, we did not scale back the additional investments we have been making in our future. With that backdrop, we have increased our vigor in making the operational adjustments in the core business that will serve to increase profitability once sales emerge from what has been a more elongated cycle than originally expected. I'll get into more of the operational initiatives in a moment, but I also want to comment on some external pressures we're facing as an organization as we continue to shepherd our sales opportunities to close.

Externally, hospitals, especially the smaller ones with less than 100 beds, where we have identified cross-sell opportunities, are under tremendous cost pressure related to labor, and many of them have simply paused making decisions on non-clinical spending, like new technology solutions and RCM services. While this is not a new pressure on our end market, we did experience an uptick in prospective deals where no decision was made this quarter. As we strategically move upstream to large hospitals with 100 to 400 beds, the decision-making process in those institutions just takes longer due to the greater complexity and involvement of multiple decision makers. We're managing the challenging environment and staying in front of these opportunities. I have spent the last few weeks meeting with existing customers and new targets. These meetings have reinforced our belief that eventually all providers will move to an outsource model.

As I have met with dozens of CEOs, what I have found is that they tend to fall into one of two camps: Either their hospitals are underperforming and they know they need help now, or they're performing okay, but could be doing a little bit better, and they typically have employees, key employees, that they just aren't ready to outsource yet. The headline here is that they all agree that it's a foregone conclusion they will ultimately need to outsource and in time will become prospects for us. As all this unfolds, we will be laser focused internally, improving the efficiency of our operations, which will also ensure that we'll be in a position to take advantage of future opportunities. Operationally, we're actively working to fine-tune or accelerate the following initiatives that we laid out for ourselves in the beginning of the year.

First, availability of domestic and global resources have put pressure on timely deliveries and performance in our RCM business. This isn't really anything new to us, as the scarcity of domestic resources was a central motivation behind our global workforce strategy. What's incremental, however, over the last 90 days, has been the inconsistent resourcing from our global partners, which has led to some delayed go lives for RCM services. Global partners will continue to be an important contributor to our workforce strategy, however, they are now part of a broader solution for us. Our sole reliance on partners put us at a disadvantage as we were working to scale our global workforce. With the acquisition of Viewgol, I am confident that we are on a better path to eliminate this bottleneck.

For context, we expect to have 400 global resources by the end of this year, and a total of 800 global resources by the end of 2024. We anticipate 30% at a minimum of these global resources to be CPSI employees, thanks to this acquisition. This deal also provides some wow factor margin expansion potential by bringing these efforts in-house. Initially, our offshore partners helped us lower our labor expense by 41% for each FTE, but the Viewgol transaction will enable us to bring offshore capabilities in-house, bringing the savings opportunity closer to 75% per FTE. Lastly, beyond the improved access to global resources and the margin expansion that comes with Viewgol, it's also opening up a new market for us in ambulatory RCM services.

Second, as noted in our 8-K last week, we made another push towards the ramping of our enterprise-wide offshoring initiatives by shifting 2% of our current domestic workforce to the global or outsource model. This is an additional $2 million in cost savings to the voluntary retirement program that kickstarted our efforts to streamline our organization, leading to the roughly $3 million in savings this year and $6 million on an annualized basis. Third, while the quarter's bookings results are disappointing, the visibility we have into the pipeline gives me confidence that this team is curating an impressive set of opportunities. There's good reason to believe that our deal flow will likely pick up, and longer term, we can achieve the consistency in sales performance needed to take advantage of this finite window for RCM market share gains.

Our total three-month weighted pipeline has increased 20% from the third quarter of 2022, and we have also closed several significant deals in the first month of the fourth quarter, which are both promising indicators. Make no mistake, we are bullish on the RCM opportunity ahead of us. However, there is a real nuance in how we must manage the current fluctuation in market demand. Our recently reorganized sales team must balance being assertive with a stronger, consultative, even educational approach with buyers. Motivating hospitals that are performing okay, but could be doing better, takes time and comes with a variety of complexities, especially when people's jobs are potentially impacted. We've been aggressively deploying a successful land and expand strategy of pursuing short-term contracts and AR work down opportunities.

While we continue to see this as an effective foot-in-the-door strategy, these opportunities have greater risk compared to our long-term full service model, where we manage the hospital's entire net patient revenue. While we're very motivated to perform well against short-term contracts and in turn, convert them to long-term deals, it is never a guarantee, and therefore creates risk of lumpy revenue recognition due to the potential one-time nature of these project-based arrangements. Lastly, while overall bookings for our Encoder solution came in near expected levels, these wins were heavily weighted toward the last week of the quarter, with a high mix of SaaS and roughly half of the wins not expected to go live until 2025, creating real challenges versus historical bookings to revenue conversion time frames.

Finally, as our business has evolved, our pace of acquisition has picked up, our workforce has become more global, and our financial infrastructure needs to be modernized, we've obviously struggled with our cost structure and budgeting. We've been operating with dated financial software and some mismatched skill sets that haven't served us well during our dynamic transformation over the last 12 months. To address the former issue, we will be updating our financial operating system to Microsoft Dynamics with a planned go-live of September 2024, and on the latter point, recognizing that the skill set of our financial team needs to evolve over time, we're pleased to announce that Vinay Bassi will be assuming the role of CFO effective January 1st.

Vinay brings much needed maturity to our FP&A function, including the experience from his tenure at Nielsen, that will benefit our own transformation journey, and his deep experience in offshore operations that has become a key need with our acquisition of Viewgol. We're confident Vinay's background and proven pedigree will bring our budgeting and financial operations to the next level, holding us accountable, not allowing us to get ahead of ourselves, and ensuring that there is a business case to support us and not work against us. As you'd expect, our third quarter financial results and our booking performance is going to have an impact on our outlook for the year. We're lowering our 2023 guidance to account for these factors and now expect revenue of between $337 million and $342 million, and adjusted EBITDA to be between $47 million and $49 million.

Before turning things back over to Matt, I want to reiterate that there's a lot for us to be excited about, but we're also realistic about the frustrations from the shareholder community around the lack of growth and what seems like a terrific RCM opportunity, and the need for greater scrutiny on the cost side of the P&L. We believe that patience is a virtue as the RCM opportunity market for community hospitals continues to develop, and we're pursuing cost strategies that are both intentional and surgical, ensuring that we have the organizational health necessary to deliver on the needs of our loyal customer base. The continued execution of our voluntary early retirement program, the continued transition to a global workforce and outsourced workforce, and the recent acquisition of Viewgol, have all been with a keen focus on improving profitability in advance of any revenue gains.

We're evolving and adapting our leadership team to the changing needs of the organization as we continue down this path of transformation. We look forward to showing you what this team of now more than 3,000 people across multiple countries can accomplish, and we thank everyone for their willingness to endure this bumpy road to success. We believe in the future of community healthcare and remain convicted that community hospitals need a robust and healthy CPSI to help them thrive in delivering care to their communities, and we're dedicated to returning to operational excellence and making the tough decisions necessary to ensure that a vibrant, healthy CPSI is here to shepherd community healthcare into a bright future. With that, I'll turn it over to Matt for a bit more color on the financials.

Matt Chambless (CFO)

Thanks, Chris, and thanks to everyone for joining the call. I'm gonna quickly cover the Viewgol transaction and then dive into the third quarter's results. The purchase price for Viewgol included upfront cash consideration of $36 million, using amounts available under our $160 million revolver. The purchase agreement includes additional earn-out incentives of up to $31.5 million based on a combination of a minimum 2024 EBITDA contribution threshold and Viewgol's ability to provide offshore employees dedicated to our existing RCM services within TruBridge. For the full year 2023, Viewgol should ride a roughly 45% annual revenue increase to generate a top line of about $17 million and roughly $3 million in adjusted EBITDA.

With the acquisition taking place in the fourth quarter, we expect our financials to see incremental revenues of around $3.9 million and $1 million of EBITDA for 2023 as a result of the acquisition. Looking forward to 2024, we believe standalone Viewgol should deliver at least $4.5 million of EBITDA, and that's without the synergies of transitioning our offshore workforce to the combined business. Moving on to the quarter's results, net patient revenue, which represents our total NPR of just our end-to-end RCM customers, was just shy of $3.5 billion, an increase of 17% year-over-year. Total bookings in the quarter were $16.2 million.

RCM bookings of $9.1 million comprised 56% of total bookings, but underperformed versus internal expectations and year-over-year as the cross-sell decision pace has slowed, which Chris touched on earlier. Total revenue of $82.7 million was effectively flat compared to last year. For the quarter, RCM represented 56% of total revenue, EHR was 42%, and patient engagement rounded out the remaining 2%. While revenues were flat, our cost of revenues increased by $600,000 as the RCM margin headwinds we discussed on the last call offset most of the cost reductions we've achieved within our EHR business through our Scaled Agile implementation and the voluntary early retirement program we announced on the last call.

Outside of cost of revenues, we saw operating expenses increase by $9.5 million to 53.3% of total revenues, compared to only 41.7% in the third quarter of last year. Roughly 70% of that increase came from EBITDA-neutral, non-recurring acquisition costs and severance costs associated with cost-cutting efforts like the voluntary early retirement program. Other major cost increases were seen in product development, as costs associated with our Microsoft Azure cloud migration and other workplace modernization efforts increased $1.4 million, while G&A costs saw a combined $1.3 million increase in benefits costs and bad debt expense. These all resulted in adjusted EBITDA of $9.7 million, compared to $13.3 million a year ago.

Adjusted EBITDA margin of 11.8% was down 440 basis points due to the growth in operating costs. Wrapping up the financials, operating cash flow for the third quarter was $3.1 million. And turning to guidance, while we certainly didn't want to be in a position to adjust guidance again following the third quarter, the top-line challenges that have unfolded in the back half of the year have us adjusting guidance yet again, with the details as follows: We're reducing our expected revenue range to a range of $337 million-$342 million from the previous expectation of $340 million-$350 million.

Reducing adjusted EBITDA expectations to a range of $47 million-$49 million from the previous expectation of $52.5 million-$54.5 million. And reducing our non-GAAP net income to a range of $24.5 million-$26.5 million, from the previous expectation of $25.6 million-$27.6 million. These new guidance ranges are inclusive of Viewgol's contribution to the fourth quarter. And with that, I'll turn things back over to the operator for questions. Maria?

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Our first question comes from George Hill with Deutsche Bank. Please proceed with your question.

George Hill (Managing Director)

Hey, guys, and good afternoon for taking the questions. I guess, Chris, I'll probably start off with the one that's on the top of everybody's mind right now. I know you guys are not in a position to talk about 2024 guidance yet, but I guess maybe can you talk about, given how you guys see the market environment right now, what might be the big puts and takes or the big moving pieces as we think about 2024? And I know you talked about some of the new wins not going on until 2025, so there's clearly some pushout, but kind of any early color you can give, I think, will be super helpful.

Chris Fowler (President and CEO)

Yeah. And obviously, we want to be really mindful as we continue to sharpen our pencil a little bit here, George, and thinking about 2024, again, also not falling into some of the traps that we have up to this point. But with that said, you know, as I said in the prepared remarks, you know, we're thinking about this from a, "Let's make sure that we've got the business healthy as we prepare for the revenue to unlock." We have been very intentional about the moves that we've made to prepare the business to be ready to take on these opportunities and to address the margin compression that we've seen happen over the last 24-18 months. And I think that we're going to see those come through nicely in 2024.

On the revenue side, on the bookings opportunity, you know, as I said, I've been on the road the last couple of weeks. I intend to continue to be on the road in front of these opportunities, where I think that I can be helpful from the CEO level, the CEO at the facility, to help push them a little bit over the edge of understanding that this is an eventuality. You know, I had five one-on-one meetings over the last week with CEOs, where, again, the posture, the position is that this is going to happen. Whether they're operating well today or whether they're not, is really kind of the throttle on how that's going to shake out.

Again, we continue to look for opportunities for us to show them ease of the strain of managing this operation by themselves, and also areas of opportunity where we can bring along new revenues for them through either better efficiencies, better processes, or whether it's through programs that we can bring in. And so, you know, what I continue to hear more and more from these hospitals is, and the CEOs, is that the cash collections, while it's vital to their operation, it's not their mission, and it's not their focus, and it is ours. And so where we're going and where they are as well, I think lines up nicely.

And so, you know, as we continue to work over the last part of this year, as we onboard Vinay in January, you know, we'll look forward to providing what 2024 looks like then.

Matt Chambless (CFO)

Yeah, and then, George—

George Hill (Managing Director)

Okay.

Matt Chambless (CFO)

I'll just hop in quick. I'll, George, I was just going to hop in quickly.

George Hill (Managing Director)

Nope, go for it, Matt.

Matt Chambless (CFO)

Kind of, yeah, tack on to that just a little bit. You know, we've been decisioning items throughout the year, really to make sure the cost structure is in order, you know, and, and that the decisions are being made in 2023, so that in 2024, we're not as reliant on growth to drive margin expansion. So trying to do what we can now, make the smart decisions, get lean, get fit, get in shape, so we can grow margins next year, and not be so dependent upon top-line trajectory.

George Hill (Managing Director)

Okay, that's helpful. I had a couple more I'll hop in on real quick. On the core RCM business, I know that you guys are disappointed by kind of the pace of new business wins. Can you talk about what's going on in that business from a same-store sales basis, and kind of how should we think about what same-store billings volume looks like and kind of your ability to achieve operating leverage there?

Matt Chambless (CFO)

Yeah. So, you know, we do typically see some changes from time to time and what happens in the same-store sales side of things. You know, sometimes what we see in the same-store sales part of the business is a function of kind of pending attrition, which does happen from time to time. We do see real, like, actual, like, volume changes from period to period that hit us as well. We can also have same-store declines or same-store changes, depending on the nature of the contract. So if it's a short-term contract or project related, those can obviously have a long tail on them. But, as time goes on, the revenue opportunity and the revenue profile decreases.

And this same-store change, you know, it's one of the dynamics that has impacted us here in the past couple of quarters. And, you know, we do think that part of the reason for that and the lack of visibility that we've had into that has been the prevalence of these kind of project-oriented, you know, short-term nature contracts that aren't quite CPSI taking over the entire book of business for the hospital, but focusing on only a small slice, and that certainly increases forecast risk for us.

George Hill (Managing Director)

Okay, two more, and then I'll stop being selfish and get off the line. Any change in the competitive environment in RCM? And I guess, are you seeing any new competitors show up, which you guys think could be elongating the sales cycle or impacting your win rate?

Chris Fowler (President and CEO)

No, again, you know, George, the dynamic here is super fascinating from that respect, and that, the competition still wildly remains to be the hospital themselves. And, you know, the analogy, for good or for bad, is, you know, we're moving through two different phases here of sales cycles. We're doing the education and selling the benefit of outsourcing in the first place, and then we're selling TruBridge by itself. And, you know, the beauty of having this captive audience of customers on the EHR is that we have an open door into them to have these conversations. And so while it may be middle to bottom of their list of priorities, we have the ability, through our conversations, through our continued education of what we can deliver for them, moving that up the priority list.

But from a competitive landscape standpoint, I would say by and large, we're still more fighting against the hospital themselves than we are competition, especially in the space that we play.

George Hill (Managing Director)

Helpful. And my last one is on the Viewgol deal, and I'll say I get the outsourcing aspect of the deal, but I was a little confused as to why you guys would target a company with such a strong ambulatory footprint as opposed to your legacy hospital footprint. So I guess, could you kind of talk about the ability to achieve synergies and whether or not there's a cross-sell opportunity as a result of that transaction? And then I'll hop back in the queue. Thanks, guys.

Chris Fowler (President and CEO)

Yeah. You know, I don't know if I look at it as, as so much of a cross-sell opportunity. I think there is that, but, but it's really opening up a whole new market. I mean, we have been very much focused in the acute space, you know, for 40+ years. We've dabbled, we've dabbled in ambulatory. Through the acquisition of Healthland, we bought our way into post-acute. But, the nature of healthcare seems to be moving in the direction towards outside the four walls of the hospital. So this was an opportunity for us to marry up two things that we were looking to solve for: one, creating our own workforce globally, and also, how do we break into that ambulatory market where we see opportunities going forward?

Where we think that there is a cross-sell opportunity is some of the analytics, the analytics platform that Viewgol developed and, you know, really started as a tech company, bringing some of those tech services opportunities into either our TruBridge only business line or even some of our hospitals where they may have disparate PMs for their providers that are connected to their network. And so that's where those two things start to marry up. But again, you know, really, as over the last 18, 24 months, as we've gone down this journey of the expansion of the global workforce, we very quickly realized that we needed to have our own operation where we could create the opportunity and have the rigor around the delivery of the service for our customers.

That was really at the forefront of this, that the ambulatory market was a very nice secondary component to how we thought about the deal.

George Hill (Managing Director)

That's helpful, guys. Thank you.

Chris Fowler (President and CEO)

Thank you, George.

Operator (participant)

Our next question comes from Jeff Garro with Stephens. Please proceed with your question.

Jeff Garro (Managing Director)

Yeah, good afternoon, and thanks for taking the questions. I'll start on the demand side of things. Just want to get any further color from you guys on what might catalyze customer or prospect decisions from here. And then the second part of it is, while you're trying to create some urgency with these prospects, how do you simultaneously set the appropriate expectations on, you know, cash collection performance as one metric, and, you know, your ability to deliver the resources necessary to improve their financial outlook? So you just don't want to overpromise while trying to get them over the line, and, you know, you've talked about some of the operational hiccups that you've seen over the last six to nine months. Thanks.

Chris Fowler (President and CEO)

Yeah. Let's see, where to start with that? Let's see. I guess on the end, if I look at it from the operational standpoint, you know, obviously, you know, we've got the Viewgol team in here this week talking through what the integration plan looks like and how we can rapidly onboard staff inside of their operation to start delivering to the TruBridge operations. We've also expanded our partner set from the outsource model to where we're not reliant on not a single, but not being quite so single-threaded on where that delivery comes from. And again, you know, continuing to push hard on exactly what our expectations there are.

I think the entrance of our own operation is gonna create some urgency from those organizations as well to deliver to make sure that they're still partners with us going forward. So that's one part of it. I guess the catalyst again, I'll go back to Jeff. You know, from my perspective, there's a couple of pieces of this. One, you've got the hospitals that probably their house is, I would say, a little bit on fire from the perspective of they're not collecting the cash that's available to go get. You know, they're in the high 80% of net cash collections, maybe low 90s, and there is plenty of meat on the bone for us to jump in and immediately be able to deliver that return for them.

I think the other thing really is just the distraction of things. When I think about, you know, specifically at our hospitals, you know, 400 beds and under, if I'm the CEO there, and I've got 400 priorities on my desk, very few of those am I able to outsource or give to somebody else. There are things that have to be dealt with inside the facility, whether it's, you know, new providers, new nurses, new facilities, new services, upgrades of facilities, you know, going on and on and on, negotiation of contracts. A lot of that has to be done internally. This piece of work, this RCM work on the back end, is something that can be given away and can be very, you know, metric-driven to make sure that we're delivering on what it is.

And now with this component of us being able to get the cost structure even better related to our own workforce offshore, where it's not, maybe it's not quite so cost prohibitive for them to go forward with it. So I think those are the catalysts as we think about going forward is, you know, driving home for our providers and our facilities, what is your mission? Give yourself more bandwidth to be able to focus there. Let us focus on the things that we are great at as well, and we continue to expand our partnership.

Jeff Garro (Managing Director)

Well, makes sense. I appreciate those comments. Well, one more from me. I want to ask about the revised guidance then. Just want, you know, to get a sense of your visibility into the rest of the year. You know, Q4, usually a seasonally strong quarter and would expect quarter-over-quarter increases in revenue and profitability. But if you talk about specific drivers that would lead to those typical seasonal trends this year, I think it'd be helpful.

Matt Chambless (CFO)

Yeah. So, you know, the visibility into the next 90 days is generally going to be, you know, fairly strong. You know, from a bookings-to-revenue conversion time frame, we don't have a lot of bookings that we expect to convert to revenues in that short of a period of time. So it's really, you know, the expectations with the existing book of business for the top line revenue. So that visibility, we feel like, is there. And the cost side of the P&L is where we do see some subjectivity and some seasonality. You know, Jeff, most of that's gonna be seen down in the benefits area, where, you know, seasonality of people taking vacations can, you know, throw some noise into the P&L, but it's usually to the benefit.

So, I'd say that, you know, from a seasonality standpoint, benefits primarily in G&A is where we expect to see the most movement.

Jeff Garro (Managing Director)

Got it. I'll hop back in the queue. Thanks for taking the questions.

Operator (participant)

There are no further questions at this time. I would now like to turn the floor back over to Chris Fowler for closing comments.

Chris Fowler (President and CEO)

Thank you, Maria, and thank you everyone for your time this afternoon. Real quickly in closing, I'd like to acknowledge the hard work and passion that the people of CPSI bring each day to our company, our clients, and the communities we serve. Clearing the way for care is not always a straight line nor an easy path, but we are driven to overcome challenges so that together we can make a difference. Thanks again, and I hope everyone has a wonderful weekend.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.