Computer Programs and Systems, Inc. (NASDAQ:CPSI) Q3 2023 Earnings Call Transcript November 8, 2023
Computer Programs and Systems, Inc. beats earnings expectations. Reported EPS is $0.45, expectations were $0.4.
Operator: 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, [Dru Anderson] (ph), Investor Relations. Thank you. You may begin.
Unidentified Company Representative: 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: 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. Pulling 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. Our 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 $0.5 million. And 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 -- 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 and 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 the 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 outsourced 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.
But 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 finetune 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 essential 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, and 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 outsourced 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 in 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 are -- 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 timeframes. And 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 mismatch 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 in 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 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 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.
And with that, I'll turn it over to Matt for a bit more color on the financials.
Matt Chambless: Thanks, Chris, and thanks to everyone for joining the call. I'm going to 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 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 acquisition. Looking forward to 2024, we believe stand-alone 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 last -- 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 on 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 growth in operating costs. Wrapping up the financials, operating cash flow for the third quarter was $3.1 million. 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 to $342 million from the previous expectation of $340 million to $350 million; reducing adjusted EBITDA expectations to a range of $47 million to $49 million from the previous expectation of $52.5 million to $54.5 million; and reducing our non-GAAP net income to a range of $24.5 million to $26.5 million from the previous expectation of $25.6 million to $27.6 million.
These new guidance ranges are inclusive of Viewgol's contribution to the fourth quarter. And with that, I'll turn the things back over to the operator for questions. Maria?
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