Streamline Health Solutions, Inc. (NASDAQ:STRM) Q2 2023 Earnings Call Transcript

Streamline Health Solutions, Inc. (NASDAQ:STRM) Q2 2023 Earnings Call Transcript September 14, 2023

Operator: Greetings. Welcome to the Streamline Health Solutions Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the prepared remarks. [Operator Instructions] As a reminder this conference is being recorded. At this time, I would like to hand the call over to Jacob Goldberger, Director of Investor Relations. Thank you. You may begin.

Jacob Goldberger: Thank you for joining us for the corporate update and financial results review of Streamline Health Solutions for the second quarter of 2023, which ended July 31st, 2023. As the conference call operator indicated, my name is Jacob Goldberger. Joining me on the call today are Tee Green, Chief Executive Officer and Chairman of the Board; Ben Stilwill, President; and Tom Gibson, Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question and answer session. If anyone participating on today's call does not have a full text copy of our press release announcing these results, you can retrieve it from the company's website at www.streamlinehealth.net or from numerous financial websites.

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Before we begin with prepared remarks, we want to be sure we are clear for everyone on the record how certain information which may be provided today, as with all of our earnings calls, should be viewed. We therefore submit for the record the following statement. Statements made on this conference call that are not historical facts are considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from these we may discuss. Please refer to the company's press releases and filings made with the US Securities and Exchange Commission, including our most recent Form 10-K and annual report, which is on file with the SEC, for more information about these risks, uncertainties and assumptions and other factors.

As always, we are presenting management's current analysis of these items as of today. Participants on this call should take into account these risks when evaluating the topics we will discuss. Please note Streamline Health is not undertaking any commitment or obligation to publicly revise any such forward-looking statements made today. On today's call, we will discuss non-GAAP financial measures such as adjusted EBITDA and booked SaaS ACV. Management uses these measures to help provide better insight into our financial performance. However, certain items of income and expense are not included in these measures, so these calculations may differ from those which another entity may utilize in calculating their own non-GAAP measures. To help you compare these amounts on consistent terms, please refer to our website at www.streamlinehealth.net and our earnings release for a reconciliation of such non-GAAP measures to the most comparable GAAP measures.

I would now like to turn the call over to Tee Green, Chief Executive Officer and Chairman of the Board. Tee?

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Q&A Session

Tee Green: Thank you, Jacob, and thank you all for joining us this morning. Following my opening remarks, our President, Ben Stilwill will provide an operations and sales review followed by a financial update from our CFO, Tom Gibson. During 2022, we began reporting a new metric, booked SaaS ACV, which is the annualized contract value for all agreements that are being recognized into revenue as well as bookings that have not been implemented. As of July 31st, 2023, booked SaaS ACV was $17.6 million as compared to $17.2 million as of January 31st, 2023. We successfully closed new bookings totaling $300, 000 of ACV. This was offset by an evaluated client, which notified us of their non-renewal during the quarter whose ACV was approximately $500, 000.

Ben will discuss these events in more detail. $14.8 million of our booked SaaS ACV is implemented and contributing to recognized revenue. We continue to make progress towards our goal of having approximately $17 million of booked SaaS ACV implemented by the end of the third quarter of fiscal 2023. As of July 31st, 2023, we had $4.1 million of cash on our balance sheet, and the balance on our term loan was $9.5 million. We believe our cash on hand is sufficient to achieve positive adjusted EBITDA, less capitalized software development. We have access to an incremental $2 million of liquidity through our non-formula line of credit. We combined Avelead and eValuator operations on November 1st, 2022. Under Ben's leadership, the integration process was smooth, and we continue to achieve significant cost savings and operational improvements.

We are working towards four corporate objectives in fiscal 2023. One, a client utilizing both of our flagship solutions, RevID and eValuator. An epic-based facility utilizing RevID, improved performance from our partner channel, and the achievement of breakeven adjusted EBITDA. We are in discussions with existing clients and remain confident we will close this fiscal year with one or more clients utilizing both RevID and eValuator. Similarly, we are in late-stage discussions about RevID with multiple epic-based prospects. Within our partner channel, we are focusing only on channel partners that can deliver strong results without unduly diverting the energy of our overall growth team. Since our alignment in November 2022, we have seen significant cost savings and expect that trend will continue and expect that this approach in combination with top line growth will deliver our profitability and cash flow goals.

The HCIT industry has experienced significant challenges in fiscal 2023 and we are no different. The administrative arms of our nation's health systems are overwhelmed, slowing their decision-making and their ability to execute. We have seen our sales and client success operations become increasingly consultative and more difficult to forecast as a result. Increased bureaucracy and understaffed IT departments have significantly slowed our bookings, and we now anticipate closing fiscal 2023 with $24 million of booked SaaS ACV. To be clear, this change in guidance has resulted a macro conditions. I believe that under the leadership of Amy Sebero, our growth team is doing the right things and that our solution's ability to ensure complete and accurate billing prior to the first bill drop is invaluable for our target market.

Our solutions offer a fundamentally better way of processing claims in the front of the revenue cycle. We are improving at identifying impact we can have on net revenue, billing volumes, denial rates and increase in available cash for our prospects. We have seen continued strong demand for our solutions and our sales team rarely hears the word no. Our implementation timelines for RevID are accelerating, which will result in a shorter lag between booking and revenue generation. We maintain our expectation of having $17 million of SaaS ARR implemented during the third quarter of fiscal 2023. With that, I'd like to turn the call over to our President, Mr. Ben Stilwell.

Ben Stilwill: Thank you, Tee. The integrated streamline team is evolving and is making significant progress towards our annual priorities, which are scaling the RevID and compare technology for growth, increasing client effectiveness through eValuator usability, enhancing delivery for RevID and compare, doubling the eValuator client outcomes through enhanced roles and expanding our reach to new logo clients. These priorities have allowed our innovation and service teams to become fully integrated, and they are close to using one seamless process on all our products. Our clients will soon be able to rely on the same world-class service set and delivery regardless of solution. Let me expand some on the progress and innovation.

Our innovation team completed the architecture scaling work on RevID and Compare ahead of schedule. As Tee mentioned, this will translate not only into a more efficient implementation process, but also a better client experience. These solutions are now truly scalable. We will continue to make improvements in system integrations, which can further enhance the improvements we've already made. The team that was focused on the architecture work is now pivoting to more traditional feature functionality development following our road map. Another result of the re-architecture is a significant cost savings as the RevID solution has moved to a serverless architecture. I am also thrilled to announce that we've introduced our first AI-based tool for eValuator.

This internal solution is being leveraged by our eValuator rules management team. It is actively reviewing the coding changes flowing through eValuator that weren't and were not suggested by our solution and find patterns that are easily overlooked by humans. The tool has already identified rules that could represent more than $20 million of annualized financial impact across our client base. This could translate into a three to five times incremental ROI for eValuator clients. The team is excited about the potential impact of these AI techniques on our revenue cycle solutions. And this is just our first step. We plan to continue to research how and where to implement these new technologies within our solutions and we'll certainly keep you updated on our progress.

Now looking at client service. As Tee mentioned, one of our eValuator clients notified us during the second quarter that they do not plan to renew their contract. This client had undergone significant management turnover and had trouble keeping enough coding and auditing staff on hand over the past year. This client was still seeing a 10 times annualized return, but as they lost staff, we saw their audits drop to less than six of the rate they were auditing at in 2021. We learned quite a bit from this relationship. This client joined us prior to the formation of our client success team, which we have made significant investment over the recent years. Today that team meets with our clients on a monthly basis to ensure they have fully optimized the solutions understand the value of the tools we provide and nurture the client relationships.

We do not expect to see non-renewals on a regular basis, but it would be arrogant to expect that we do not have some churn. Moving to growth. We expect that our bookings will continue to be lumpy, but I'm very pleased that our solutions continue to be adopted by some of the largest health care providers in the country. The growth team is leveraging new tools like our ideal client profile, our business impact analysis, which uses quantifiable values of future clients to rank their likelihood to buy and be a successful client for our solutions. Overall, the growth team has three pathways to success for fiscal 2023. The direct channel, which we have made continued investments in, our partner channel where we leverage larger sales forces to influence or resell our solutions, and lastly cross-selling within our existing client base.

I believe we have the right strategy for each of these pathways. As Tee stated, we're disappointed that the health care market has not recovered from post-COVID impacts as quickly as we had anticipated but feel strongly about our growth prospects in fiscal 2023 and beyond. Before I turn the call over to Tom, I would like to thank all of our hard-working team members who are supporting our mission to ensure our health care provider clients are paid for all the care they provide. I'm very excited to lead our talented team and believe strongly that our innovation plus service equals growth formula will yield tremendous results for all of us as we continue to execute and expand. With that, I'll hand the call over to our CFO, Tom Gibson.

Tom Gibson: Thank you, Ben. At the end of fiscal 2022, the company changed its categories for reporting revenue. SaaS revenue is now the headline of our income statement. For the quarter ended July 31, 2023, total revenue was $5.8 million compared to $6 million during the prior year period. And for the six months ended July 31, 2023, total revenue was $11.1 million compared to $11.9 million for the first six months of 2022. As previously reported, the company had a large professional services contract that did not renew at the end of its 2022 fiscal year. These professional services contracts are not part of the company's core business going forward. SaaS revenue grew 13% in the second quarter and first half of 2023 compared to the prior year period.

We expect to see growth on the SaaS revenue line in the coming quarters as the company has successfully implemented its solution. We maintain our expectation of 30% SaaS revenue growth in fiscal 2023 compared to fiscal 2022. The company has approximately $3.4 million of unimplemented booked SaaS ACV as of July 31, 2023. Total operating expense was $8.4 million during the second quarter of 2023, down 3% compared to $8.6 million for the second quarter of 2022. For the first half of fiscal 2023, operating expense totaled $16.7 million, down 6% compared to $17.8 million during the first half of fiscal 2022. The lower operating expense was attributable to lower head count associated with the non-renewal of the large professional services contract as well as the cost savings achieved through the integration of Avelead and eValuator businesses discussed by Tee earlier in this call.

Second quarter 2023 net loss totaled $2.5 million compared to a loss of $3.3 million in fiscal 2022. For the six months, for the first six months of 2023, net loss totaled $5.4 million compared to a loss of $6.1 million during the first six months of 2022. The smaller net loss on lower revenues demonstrates the value of growing our high-margin SaaS revenue as compared to the professional services contract that was not renewed. Second quarter 2023 adjusted EBITDA was a loss of $0.9 million compared to a loss of $1.1 million during the second quarter of fiscal 2022. For the first six months of 2023, adjusted EBITDA was a loss of $2.2 million, compared to a loss of $2.4 million for the year ago period. The company expects that its adjusted EBITDA loss will continue to narrow and anticipates reaching near breakeven adjusted EBITDA in the third quarter of fiscal 2023.

Moving to the balance sheet. As of July 31, 2023, we had $4.1 million of cash on hand compared to $6.6 million at January 31, 2023. Under the Avelead acquisition agreement, the company has contracted to provide additional consideration on each of the first to twelve monthly anniversaries of the closing date. The first of these payments were paid in the fourth quarter of fiscal 2022. The second payment will be paid in cash and stock and is valued on the balance sheet at approximately $3 million. Of this amount, it is estimated that we will pay $1.2 million in cash on -- in November 2023. The liability is referred to as acquisition earn-out liability on the company's balance sheet. The company's accounts receivable was $2.8 million at July 31, 2023, substantially lower than January 31, 2023.

The lower accounts receivable is partially attributable to recently implemented eValuator contracts with performance guarantees that are not invoiced until the guarantee is met. The company has historically met these guarantees within two to three months of implementation. The balance of our term loan as of July 31, 2023 was $9.5 million. As of September 1, 2023, we are in the third 12-month period of the loan and will make $1 million of principal payments over the course of the next 12 months. We have access to a $2 million line of credit, which we can draw if necessary. Based on our current forecast, we may need additional financing to fund our ongoing operations without sacrificing future growth. Our current bank debt of $9.5 million is approximately 0.5 times our annual recurring revenue or ARR.

We believe the industry average debt to ARR ratio for companies similarly situated to ours is 1 to 1.25. This gives us some $10 million in debt capacity if refinanced. We believe that the venture-backed credit markets are improving, and we could successfully refinance our bank debt with a credit facility in the range of 1.0 times to 1.25 times ARR. On its current cost structure, we believe our overall business will achieve adjusted breakeven at a SaaS revenue rate of $17 million. We achieved this level of bookings in Q4 of 2022 and expect to have this revenue fully implemented during the third quarter of 2023. The company is realizing incremental SaaS gross margins above 80%. I am proud of the progress this company continues to make and want to commend our staff.

That concludes my comments. I will now turn the call back to Tee Green for his closing remarks. Tee?

Tee Green: Thank you, Tom. We continue to enable health care providers to proactively address revenue leakage and improve financial performance and have taken major steps forward to drive reoccurring revenue streams that better position our company for growth and to deliver significant shareholder value over the long-term. While the macro environment remains more challenging than previously expected, we see strong demand for our prebuild revenue cycle methodology and our solutions. We believe our ability to be self-sustaining and generate cash from operations is a significant next step in our life cycle. I am proud of our team for making the necessary changes and executing on this milestone for our business. Before we begin our Q&A session, I'd like to thank the entire Streamline team once again for all the hard work and dedication.

Their contributions are essential for us to support our health care providing clients and ensure they have the necessary tools to free up time and resources to provide quality care for the communities they serve. Thank you all for your support of Streamline Health and our vision. Now I'd like to open the call up to your questions. Operator?

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Matt Hewitt with Craig-Hallum. Please proceed with your questions.

Matt Hewitt: Good morning and thank you for taking the questions. Maybe first off, I'd like to dig in a little bit more on the current selling environment. Obviously, you commented a little bit on some of the challenges that you're seeing. I know you had a 2.5 year period with COVID weighing on hospital's decision-making process. We started to see this spring, we started to see some of the procedure volumes improving which I think expectations were that you would see some of that increased revenue flowing to software and equipment purchases and whatnot. But what -- where are we right now? I mean, if hospitals are seeing a little bit of improvement there, what's kind of the gating factor to kind of the lift off that I think many are expecting as we get through this fiscal year for you guys?

Tee Green: Yes, Matt, thanks. This is Tee here. Yes, it's -- can you hear me okay?

Matt Hewitt: Absolutely.

Tee Green: Okay, good. Yes. I mean the first half of '23 has been fairly slow, I think, industry-wide. The coming out of the administration's office when I mean the CFO and legal, those seem to have been starting to fall or make its way through the pipeline. I think IT we still have some real struggles, getting the priority in the IT departments, but that's even beginning to thaw as well. If you look at Q2, we did four transactions, which is really, really encouraging. They were smaller, they weren't maybe average like 130 ACV. One of them was with Oracle, though is super encouraging because, we had this relationship with Cerner, and then we all know what happened and it's taken four or five months for all of the management and the strategy to shut themselves out.

So we're really encouraged. We have, in fact, we have like 34 booked meetings with Oracle clients, and we're their prebuilt technology solutions. So that's really encouraging. We didn't close -- we've got seven other deals that are in the kind of targeted quarter and the ACV 600. So we didn't get the big ones, but it looks like they're coming through the system. And then you look at Q4, the ACV jumped to 900. So all the things that we've been working towards it feels like these things are starting to open up. Like I said four already on the smaller side, but again, one on Oracle. So this is -- these are good green lights for us. We're still cautious. We do think, as Ben mentioned that the bookings is going to be lumpy. Because when we sell -- we closed $1 million ACV deal versus a $250,000 ACV deal, obviously, that's vastly different.

But if you look at where the deals in our pipeline that are red lines. I mean that -- the contracts of redline going back and forth between our team and their team, you look at the back half of this border and going into Q4, really, really, really impressive transactions in front of us. So not a lot of great press releases from us in the last quarter or two, but I think those are coming again. So we're excited about that.

Matt Hewitt: That's very encouraging. Thank you. And then maybe a separate question. So congratulations on the new AI or jumping into the AI for -- was this a product that was requested by customers? Was this something that you guys have been working on and realize that now is the time. What is feedback? And I realize it's just launched. But what is the feedback -- initial feedback been from customers? Any additional color on that would be helpful. Thank you.

Tee Green: Yes. Thanks, Matt. This is Tee again. I'm going to let Ben opine as well. But you can't go into a customer or client prospect meetings without the word AI being asked about even if the questioner doesn't really understand what they're asking, right? It's in every conversation if you're in technology. We started working on the AIML technology here at Stream well over 1.5 years ago, defining what we could do, how we could use it. And so what we've done is we've rolled it out internally in our rules division. So where most of rules in the health care world or in the RCM world are being written by humans, right? And so now we're able to introduce technology that's able to find things that were wrong with rules, but also find things that weren't even written by humans.

And we've just started this process. And as Ben mentioned, we've already down $20 million of additional revenue capture for our clients. And this just -- we just rolled this out in the last month. And so clients haven't seen it yet. They're not touching it yet. It's only our internal team. So we're kind of eating our own dog food, if you will. Ben, do you want to make any further comments on that?

Ben Stilwill: Yes. We've hyped it up a little bit with our clients already, and so they knew it was coming and it's somewhat intuitive. The process that we go through today is having individuals do a lot of this research on their own, a lot of reporting, a lot of data mining on their own. And it just cuts out that whole initial research step and give us very intelligent findings right off the bat. And I think the users themselves, our internal users are excited about it. But then our technologists are just thinking and very excited about how that's going to expand into a variety of areas and eventually be client-facing and do all sorts of things, but we're already talking about it with current clients are already hyping it up with our prospects as well.

Matt Hewitt: That's great. All right. Thank you very much.

Operator: Thank you. Our next questions come from the line of Aaron Wukmir with Lake Street Capital. Please proceed with your questions.

Aaron Wukmir: Hey, good morning, guys. This is Aaron on the line for Brooks this morning. So just last quarter, you mentioned a couple of goals towards making progress towards sort of your annual priorities. Are you comfortable with where you're at in terms of sort of scaling the RevID and maybe increasing client effectiveness through the eValuator usability. And if you could just give a little bit more color on progress there? And if there's sort of a higher priority that you guys are focusing on going into the back half of the year here?

Tee Green: Yes. Thanks, Aaron. This is Tee, and I'll start and let Ben opine as well. But RevID, major, major progress. And we knew going into it, there was the re-architecture that was going to have to be done on the platform. Not unlike any innovation projects, it was probably a little larger than we envisioned. But that tech has been -- it is wrapping up and glad it has wrapped up for the cloud -- and it's now a true cloud-based platform. We have -- I don't know -- don't hold me to the exact numbers, Ben. But what is -- I think we've lowered our infrastructure cost almost like $40,000 a month something like that. I mean just major. And now it can scale to the enterprise because everything we've talked about, it has to be in our class.

It has to be enterprise class. And so that's been really cool. It's going to increase our velocity and how we tackle future projects on the platform now. We've actually, for the first time, we have a project-based road map for RevID. So we know what we're building in every sprint. You couldn't do that until you had the architecture ready. So the architecture is ready to go -- on eValuator, it is enterprise class. I mean it's an exciting tool that is continuing to grow and create opportunities for Streamline. So technology-wise, the biggest things right now on -- like a eValuator is really getting the epic, I mean not epic, but getting the defined road map for eValuator, it's really making sure that, that two-year road map that we have in front of us is just continually been evaluated with our clients.

We can go really, really fast on the eValuator side. So that's exciting. I don't see anything other than the introduction of AI and ML on that platform. That's obviously the biggest thing we've done and clients are going to receive the benefit of that in the next several quarters. So that will be cool. But Ben anything specific about these two platforms?

Ben Stilwill: No, I think you were right on the cost decline on going to server list. But I think like you said, the most important part is prospects and current clients don't find the architecture stuff too exciting other than it's more reliable. What they find exciting is that now we're going to start rolling out a lot more features that will affect them. And then, yes, I agree with your comments with eValuator as well.

Aaron Wukmir: Great. Yeah, that is super helpful and encouraging. I'm excited to see the progress there. Thanks for taking the questions.

Ben Stilwill: Thank you.

Operator: Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Jacob Goldberger for any closing comments.

Jacob Goldberger: Thank you all again for your interest and support of Streamline Health. If you have any additional questions or need more information, please contact me at jacob.goldberger @ streamlinehealth.net. We look forward to speaking with you all again when we discuss our third quarter financial performance. Good day.

Operator: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.