Computer Programs and Systems, Inc. (NASDAQ:CPSI) Q1 2023 Earnings Call Transcript May 12, 2023
Dru Anderson: Good morning and welcome to the CPSI First 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 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 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 in 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 now turn the call over to Chris Fowler, President and Chief Executive Officer. Please go ahead, sir.
Christopher Fowler: Thank you Dru, and good morning everyone and thank you for joining the call with us today. I’m pleased to be reporting a solid start to the year with the first quarter performance that sets us up to achieve our full year expectations. First quarter revenue of $86.2 million came in slightly ahead of what we anticipated and was driven by our RCM business, which represented 56% of total revenue in the quarter. Our EHR revenue was up just a tick on a year-over-year basis, which supports our previously stated belief that 2023 will be the year this portion of our business stabilizes after absorbing the end of meaningful use subsidies to our customers in transitioning to SaaS contracts, both of which we believe are largely behind us.
Our adjusted EBITDA for the quarter of $14.6 million was also in line with our expectations. On the bookings front, earlier this year, we outlined how we continue to migrate to an RCM-focused business, and I’m thrilled to report that this quarter our RCM bookings were up 41% year-over-year. This is important not only as a proof point that our shift to RCM is underway, but also because of the increased quality of these bookings. RCM bookings equate to 1 full year’s worth of revenue versus EHR bookings, which come in ratably over the course of the contract, which is typically five years. To use a simplified example, RCM bookings of $1 million is worth $1 million in revenue annually, whereas a $1 million bookings order for EHR equates to $200,000 per year of revenue for a five-year contract.
Bottom line, while total bookings growth year-over-year is fairly flat, the higher-quality RCM bookings growth grew meaningfully and will translate into the company’s ability to achieve our goal of double-digit growth by 2024. Digging a bit deeper on the RCM bookings, 47% was a result of cross-selling our RCM solution into our large and loyal EHR customer base. In the majority of these cases, the customer knows they need an RCM solution and choosing to move forward with CPSI as their provider is an easy one given the existing relationship. Of particular note, we signed a nearly $2 million nTrust contract, which — nTrust, which bundles together our full RCM services along with our EHR solutions. The $2 million contract was for four hospitals with one of our longest-standing and largest EHR partners.
This continues to represent a meaningful opportunity for us with a dollar amount of cross-sell bookings in the quarter being just a small percentage of the $400 million annual revenue cross-sell opportunity. The remaining 53% of our RCM bookings in the quarter came from new opportunities. Of particular note, we signed a roughly $1 million deal for full business office outsourcing, which we label as CBO or Central Business Office services, where we will be working alongside another EHR vendor. Just another good reminder that our RCM solutions are vendor agnostic and can be utilized by customers with a wide range of existing EHR solutions. While our bookings are still relatively lumpy throughout the year and highly dependent on timing, we have a very strong RCM pipeline more than doubling from a year ago, and our outperformance in the first quarter further reassures us of our ability to deliver on our full year outlook.
Taking a step back from the numbers, in the first quarter, we filled several senior positions inside the organization including two new sales leaders heading up our RCM and patient engagement sales teams, deepening our breadth and experience across the organization. These individuals come to CPSI with extensive industry experience and strong backgrounds. We see this as another step towards reinvigorating CPSI from the top down. We look forward to integrating these new team members and seeing their contributions in the organization over the coming months. Last week, we hosted our National Client Conference in Orlando. And while we’re not quite back to pre-COVID levels, we did see an increase in attendance this year where nearly 700 EHR customers joined us in Florida with C-suite attendance doubling to an all-time high.
I believe this turnout reflects our focus and investment on building partnerships and fostering relations with our customers as I took over as CEO. Our client conference also represents another great opportunity to highlight the value our RCM solution can bring to our existing EHR customers. With workforce issues still prevalent and budget type for rural hospitals, attending events like this aren’t easy for our customers, and I genuinely appreciate everyone who is able to participate. This quarter’s financial results were straight down the middle of the fairway and have set us on the right foot for 2023. Our current position in the market, our current momentum in our RCM business, and growing success in our cross-selling efforts, and our improvements in customer retention positions us well to achieve our annual guidance.
Before turning the call over to Matt, I want to sincerely thank all of our team members for their hard work and dedication to our mission and welcome all the new team members into the fold. With that, I look forward to updating you all on our progress throughout the year and I’ll now turn the call over to Matt to review the numbers. Matt?
Matt Chambless: Thanks, Chris, and thank you all for your continued interest. As Chris shared our first quarter was largely in line with our expectations, and I’ll provide some additional details on the results. Net patient revenue from our RCM clients was $3 billion this quarter, up 5.3% year-over-year and marking the first time that we’ve reached the $3 billion threshold. Next, while total bookings of $21 million were relatively flat year-over-year, as Chris shared, the real story is that RCM bookings grew 41% with cross-selling efforts making up 47% of total RCM bookings. Turning to the income statement, first quarter revenue of $86.2 million increased 11% compared to $77.9 million last year. RCM contributed $48.6 million, representing 56% of total revenue.
EHR was $35.2 million and patient engagement made up the remaining $2.4 million. Our gross margins of 49% for the first quarter decreased 300 basis points year-over-year as a result of our revenue mix shift where our more service-oriented RCM offerings gained traction. We believe that our offshoring initiative will be able to offset potential gross margin declines from mix shifts once we are at scale. For the rest of 2023, we oversee overall gross margins staying at around 49% before increasing to 50% in the fourth quarter as we reach scale in offshore and the EHR business shows modest but sustained improvement. Our operating expenses as a percentage of revenue were 41% in the quarter, which is relatively consistent with last year. Adjusted EBITDA of $14.6 million decreased by $1.5 million year-over-year.
The year-over-year decline was primarily a result of elevated benefits costs and recent investments to both generate and accommodate growth. Specific areas of growth investment include our ongoing Azure migration, investments in marketing and branding to bring CPSI to the forefront of the RCM space and building out the internal infrastructure necessary to accommodate continued growth of our RCM services business. Turning to the rest of the financials, operating cash flows for the quarter were $9.5 million. As I mentioned last quarter, our relatively low cash flow at the end of 2022 was a direct result of collections-related timing issues associated with the integration of our recent acquisition. We’re trending in the right direction in regards to our progress on these issues, and we continue to anticipate full resolution in the second quarter.
Finally, I’ll conclude my remarks officially by reiterating our 2023 outlook. For full year 2023, we expect revenue to be in the range of $340 million to $350 million and adjusted EBITDA to be between $59 million and $63 million. As it relates to adjusted EBITDA, a friendly reminder that the second quarter gets an extra dose of OpEx. Chris mentioned our National Client Conference, which was held in May, and that’s good for an incremental $1 million to $1.2 million of OpEx, resulting in the second quarter adjusted EBITDA being down sequentially from the first quarter. From a full year perspective, adjusted EBITDA will see a skew towards the second half of this year, roughly 46% in the first half and 54% in the back half due to our globalization efforts.
Finally, an update on our offshoring progress. We started the year with 100 Oxford team members in RCM and as of the close of the first quarter, we were at 146 and remain on track in our goal of 400 by the end of this year. All of these factors are included in our full year guidance. To close out remarks today, we’re pleased with this in-line quarter and feel comfortable about our position for the remainder of the year. Thank you all for joining us and continuing to follow along as we evolve this business. We’d now like to open the call to your questions. Karen?
Q&A Session
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Operator: Thank you. [Operator Instructions] We’ll take our first question from Stephanie Davis from SVB. Please go ahead Stephanie.
Operator: Thank you. And we’ll take our next question from Jeff Garro from Stephens. Please go ahead Jeff.
Operator: [Operator Instructions] The next question comes from George Hill from Deutsche Bank. Please go ahead.
Operator: And that was our last question. I’d like to turn the floor back to Mr. Fowler for closing remarks.
Christopher Fowler: Thanks, Karen, and thanks everybody for joining us this morning. I hope you have a wonderful rest of your Tuesday and look forward to staying in touch and reporting on how we continue to progress as we go forward. Have a great day.
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