Ladies and gentlemen, thank you for standing-by, and welcome to the CPSI Second Quarter 2015 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded, Thursday, July 30, 2015. Now I'd like to turn the conference over to Mr. Boyd Douglas, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Tommy. Good afternoon, everyone, and thank you for joining us. 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 risk, 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. Joining me on the call is David Dye, our Chief Financial Officer. David and I have a few minutes of prepared comments and then we'll be happy to take your questions. We continue to see weakness in the inpatient EHR market as hospitals catch their breath from the financial and operational drain of meeting meaningful use. I think it is fair to say that the resource impact of a full EHR implementation and subsequently meeting MU standards in a relatively short timeframe has felt more deeply at rural and community hospitals then at their urban counterparts. As a result, our new system sales continued to be impacted and we're certain our competitors are experiencing similar effect. I want to emphasize we are 100% confident that this is…

Thanks, Boyd, and good afternoon, everyone. In the second quarter, we installed the Thrive Financial and Patient Accounting System in six hospitals and our core clinical departmental applications at four facilities. Additionally, four hospitals implemented Thrive point-of-care documentation, 13 installed our Thrive Emergency Department Information System and five customers went live with physician applications. Thrive provider EHR was installed at 16 facilities. Add-on sales to existing clients were $7.5 million or 16% of total revenue for the quarter. At this time, we expect to install Thrive Financial and Patient Accounting Systems in four new client facilities in the third quarter. We anticipate four installations of our core clinical departmental modules, four point-of-care documentation implementations, eight installations of physician applications, and 13 ED implementations. Additionally, we expect to install Thrive provider EHR in 14 facilities. Our employee head count as of June 30th, was 1,375, and CapEx for the quarter was $125,000. Our second quarter G&A expense includes approximately $525,000 in one-time non-recurring legal expense. Now, our year-to-date G&A expense also includes approximately $500,000 in costs associated with our corporate re-branding project of which about half was expensed in the first quarter and half in the second. As of June 30th, the re-branding project was essentially complete and fully expensed. TruBridge continues to perform exceptionally well. Our record year-over-year revenue growth of 17% and gross margin performance of 39% are ahead of plan. TruBridge's sales results for the quarter were impressed as well with eight new contracts for full business, office management services and nine new customer agreements for private pay collection services. Sales for medical record coding services ahead of the ICD-10 requirement continued to be strong with 12 new customers coming on board during the quarter. Finally, as stated in the press release, we are lowering our previously issued 2015 full year revenue guidance to a range of $188 million to $192 million. And net income guidance to $23.2 million to $24.5 million. This is reflective of our lower than expected system sales performance year-to-date and anticipated to continue to weak system sales for the remainder of 2015. As Boyd detailed in his comments, we expect the system sales environment to remain challenging through the first half of 2016 at which point we believe both the replacement market and add-on sales market will improve substantially. And Tommy, if you could please open the call for questions.

Absolutely. Thank you. [Operator Instructions] And we'll proceed with our first question is from the line of Jamie Stockton with Wells Fargo. Go ahead.

Yeah. Good evening, guys. Thank you for taking my questions. I guess maybe the first one, Boyd, you talked about how the pipeline of suspects and prospects is better than you've seen it in a while. Can you just – and I think you've done this before but I forgotten. Can you go back and help us understand how you define those categories and if there is anything quantitative that you can give us on the number of hospitals that you see in those categories.

Sure. I want to recap around the quantitative part of the question, but as far as it defining a suspects are hospitals that we expect to start a sales process within the next 12 months and really most of them probably start within six months, but those are people that aren't in a process yet, but have begun with preliminary questions and we expect to be a part of that process and it should start again, certainly within 12 months. Our prospect is someone that – in most cases the way the sales process to get started was with an RFP and your prospect once an RFP is issued and we respond to it and we know we may include in the process then you're prospect. And the only color I want to add around those numbers, just for the last two quarters now those numbers have increased. So the number went up a little bit in the first quarter and it went up even more in the second quarter. So it's showing signs of life in the market that it will come back.

Okay. And then, David, on the TruBridge business, eight for back office outsourcing clients, is a very healthy quarter. I know you – that business seems to be humming fairly well. Can you talk about – is it ICD-10 that's really driving lot of that hospitals are kind of panicking ahead of the deadline and feeling they have to do something. I think, MedAssets talked about on their call last night that that was helping their revenue cycle business.

Yeah.

Go ahead.

I'm sorry, Jamie. I think with regard to the full business office outsourcing, we run the entire operation. I don't know if ICD-10 much of a contributor there. It certainly is with the ICD with the coding. And I would say is probably the primary reason that we have so many hospitals that have signed up recently and are continued to be actively engaged and looking at us potentially taking over that service forum. I think with regard to both the private pay and the full business office outsourcing, it has more with us to do with the fact that we're really now getting some major traction in the non-Evident EHR customers. Those that are using competitive systems. This – we started this as you know almost 2.5 years ago now where – we went out with the TruBridge brand and with the goal of trying to be successful, not just within Evident customers but within all the small hospitals. And we're really starting to see success there, which is why we're optimistic that success can continue for a while.

Okay. My last question is just on the cash. We're taking the guidance down, is there any update on where your expectation is as far as where the cash flow and the year, I think before you guys had said that you thought you'd probably generate some cash this year, is that still the case?

Yeah. We still do based on the status of our ARE and what's left in the Gen-2 contracts that we still expect to end the year with roughly a little more than $40 million in cash. And I think when looking at cash as well one of the things we look at as a positive is that while paying the dividend that we paid for the second half of 2014 and the first half of 2015, our cash and investment balance is up about $13 million year-over-year. So, we feel very good about it.

Okay. Thank you.

Thanks, Jamie.

Thank you very much. We'll go to our next is from the line of George Hill with Deutsche Bank. Go ahead.

Hey, good evening, guys, and thanks for taking the question. I know you guys don't like to give guidance beyond the one year, but you mentioned kind of the longer term 2019 outlook in the release. I guess would you be willing to give any guidance churn, what you think the longer term growth expectations are for the business, services business? And what do we think the steady state or the normalized system sales kind of whether it's a number or whether it's a growth rate looks like or maybe just you guys put the line in there about the recurring revenue being 80% of the business, just kind of talk us through the thought process on that?

Yeah. On the TruBridge side, I think we're comfortable with mid-teen growth. I think on the system sales side and I'll get back to the reason why that was in the release, there's really two reasons. One is, as we do because of Stage 3, we're not a 100% sure of the timing, as I'm sure you're aware there is some chatter about extending it a little bit, but there is a – will be a definite increase in demand certainly with our customers, that's given for add-on sales but then in the replacement market as well, we are aware of some sunsets and I'm sure you are as well that are going to occur that will stir up that market. We are now as a company and as a management team thinking a lot about 2019 because we feel as though the second half of 2016 through the first half of 2018 should be really good from a system sales standpoint. But we feel like in 2019, we're likely to be in a situation similar to what we're in right now. So, another reason why is that we think and this has been something that we've been talking about for about a decade is called ASPs and then SaaS and now cloud and the technology is a little different, but it is still the same concept of a monthly recurring payment for access to a system. But we feel like that percentage of new client business that's going to go in that direction is increasing and it will continue to increase and that is probably here to stay at this time. And so that's why by 2019 we feel that a much greater percentage of our overall revenue will be recurring than has been historically. So, I think hopefully that answers your question.

No, that's a good color. I guess maybe then one other thing I'd ask, can you just remind us the ASP on the ambulatory product? And is there an ASP because with the app product and I guess what I'm trying to just figure out is, do you guys feel like you sell enough for them to move the needle from a revenue or an earnings perspective?

Yeah, I mean the ASP is about $100,000 each on average maybe a little bit higher than that and certainly 10 to 15 a quarter is enough to move the needle for us. If we get back to where with Stage 3, where we've got some significant add-on sales in the some other areas and some more new systems sales as well, and then neutral that on top of it we look – we would have some significant system sales growth at that time.

Okay. I'll hop back in the queue. Thanks, guys.

Thanks, George.

Thank you very much. We'll get to our next question. It is from the line of David Larsen with Leerink Partners. Go ahead.

Hey, guys, can you just talk about who you are seeing in the market. I mean, who you're competing with, is it still sort of same cast of characters like MEDITECH and couple of other vendors and just sort of the competitive environment description, would be great. Thanks.

Sure. Certainly, the traditional competitors are all still there. So we haven't seen significant change there, probably the only change we've seen we're seeing the center again more if you all remember back several quarters ago, we saw sold them that seemed to kind of be one kind of time thing, but we definitely run into them more recently than we have historically.

Okay. And then, can you talk about sort of the competitive advantages that TruBridge brings to your hospital customers, just sort of remind us sort of the value prop that TruBridge brings and how they can basically improve cash flows or rev cycle operations with you guys where maybe they can't do with themselves. Thanks.

Yeah. With our most popular revenue cycle services, private pay collections and like most community hospitals in Italy would say that they do either at something between a non-existing and a poor job at that. It's very cumbersome and labor-intensive to go after relatively small balances, and they don't necessarily have the staff to be there after hours to do the dialing for dollars that we are able to do with our efficient call centers and our software. So that I would think it would be the easiest one and the one that we have – therefore we have the most customers. On the full business office, our outsourcing service, generally speaking as well, there is a lot of hospitals out there where they struggle to keep good people in rural areas and to do a good job keeping their AR days down, keeping up with the regulations and so forth. The biggest think that we struggled with competitively there still is competing with the concept of the hospitals keeping it in-house, because those jobs are valuable to the community and they can be anywhere from 2 to 12 FTEs in a rural communities is very important. So they're very hesitant to let go those jobs in order to let us take over that for them and we do have competition out there today, but generally speaking there still isn't national competitor – focuses on the rural hospital market.

Great. Thanks very much. And then just one last quick one. I think it was 400,000 of meaningful use Gen 1 revenue is still outstanding. Did you collect that?

I think as you know last quarter the number was 300,000 and we are collecting 15,000 a month. So the number was no longer material, so we removed it from the press release.

Okay, great. Thanks a lot.

Thank you, Dave.

Thank you very much. And we'll get to our next question, it is from the line of Jeff Garro with William Blair & Company. Go ahead.

Good afternoon, guys. And thanks for taking the question. I want to ask a little bit more about systems bookings. And in particular the ambulatory and EDIS products, you've talked about the number of installs for the last couple of quarters, but as we look out the next 6 months to 12 months. Do you still see a robust demand environment for those price given that they are not tied to specific meaningful use mandates?

I think, I don't see a big change in the domain, I think, it's still there and we are still targeting 10 to 15 per quarter for both of those applications.

Great. And then, looking at some other newer products that you've discussed, I was hoping you could frame the revenue opportunity around the Mobile Rounding product and the new Thrive UX?

Yeah. With the Rounding product is on a per seat basis, so if a hospital wants to do it for just a couple of docs, it can be as low as about $5,000 initially plus support and the idea being is that a couple of docs will start using it and the other docs will see it and then it will takeoff from there. If you – it can go as high as say $50,000 if you have a hospital that rolls it out to the majority of other docs. So that one – lot of this is just remains to seen but that's the range if that can be. On the Thrive User Experience, we think the average there will be about $70,000 per site.

Great. And then, one final question. I know as the tax rate seem to come in a little bit lower again on the quarter, I want to see if there's any change to your expectations for tax rate for the remainder of the year?

No, it's not our expectations about 35% for the remainder of the year. We had an additional reversal of some previous FIN 48 reserves for R&D tax credits that based on new information were reversed.

Great. Thanks again, guys.

Thanks, Jeff.

And we'll get to our next question is from the line of Donald Hooker with KeyBanc. Go ahead.

Hey. Good afternoon. So I guess my question, I'm trying to understand some of the revenue lines just sort of you can sort of levels as we start thinking about 2016. So the support maintenance was flat sequentially, it looks like in flat year-over-year. I think they were some catch-up payments from prior installations that were coming through, should we still expect that in the second half of 2015?

Yeah, there were some catch-up payments in at the end of last year. A lot of that's attributable to our weak system sales. And as Gen-2 contracts payoff in full, that increases our support maintenance a little bit as well. Additionally, we had gone for a period of a couple of years without increasing the support and maintenance on our – going up on our normal rates. And we started to do that again in the spring of this year, so that will – impacted positively as well.

Okay. Got you. So that will increase in the second half I guess?

Yes.

And in – okay, got you. And then the other – so I guess, also I'll just ask one more and jump off, trying again, kind of trying to level set here on the gross margin for TruBridge, is this sort of a pretty sizable bounce back there? And is this sort of a normal level? And again, I realize this is an area you want to grow. So you might choose to have that go down, but just wanted to get in your head in terms of where we should plan for that margin to go forward to levels of expectation?

Yeah, I think over, I think going forward over any 12 month period, at this point, I would say between 38% and 39%. It can vary by quarter, but on an annual basis going forward from here, that's what we're looking at.

Got you. I will leave it to that. Thank you.

Thanks, Don.

Thank you very much. Our next question from the line of Garen Sarafian from Citi Research. Go ahead.

Good afternoon guys. First, a quick follow up to Don's question, what's the average price increase pass through and supporting maintenance in the spring?

About 4%.

Got it. And then on visibility, just curious, is there specific catalyst mid 216 related incentive or any catalyst that you're thinking of or is it more just on how your pipeline is shaping up now?

It's a combination of the fact that the new prospects that we have now would convert into revenue conservatively in the second half of 2016. And the fact that the more aggressive hospitals if you will in the community hospital market space, will be reacting to Stage 3 in the second half of 2016. Those are awaited to the last minute, we'll be reacting to it in the very first half of 2018. The full year that looks to benefit the most from Stage 3 obviously is 2017. So it's a combination of those two things.

Got it. And then, results – in your prepared remarks, you mentioned results in Canada within a year. Could you elaborate on that a little bit more, is that – is that having one pilot or is it more of a meaningful contribution to financials?

I think it'd probably be more than one pilot, but I don't think it'd be meaningful at that point, but ideally or my goals would be to have two to three by then.

Got it. And just lastly, if you could just repeat is your success rate in displacements increasing? And if you could elaborate a little bit on that RFP flow for the quarter? Thank you.

On the win rates – basically the way we calculate win rate because that can be a funny thing, but I think just to make sure that we're all on the same page. The way we calculate win rate is if we get to demonstrate our software, and then if there is a decision made by the hospital, whether it's for Evident or not for Evident then we count that as either a win or a loss and that rate is at an all-time high right now.

I think, the second part of your question in terms of the number of actual prospects since the last quarter is up about 50%.

50%, okay. Great. I'll hop off. Thank you.

Thanks, Garen.

Thank you very much. And we'll get to our next question is from the line of Matthew Gillmor with Robert Baird. Go ahead.

Hey, thanks for taking the question. I wanted to ask a follow up about the Canadian opportunity, can you give us a sense for how that market is structured, is this more a replacement or Greenfield? And then is the ownership structure similar to the U.S., where it's mostly non-profit in government hospitals?

Yeah, it's mostly replacement of an existing financial and patient accounting piece along with some clinicals. It's – we would equate it to the U.S. market five years to seven years ago, where there is not a full EHR but they've got a financial patient accounting plus lab radiology may be nursing order entry, but not nursing point of care and CPOE and that type of thing. Of course I'm generalizing here. And yes, it is very similar, a lot of the hospitals operate in what I called lends local hospitals networks. And so, there are more, there and some lends are in a situation where a decision is made for all the community hospitals and is dictated and some allow for more independents and each individual hospital can make a decision. So, there are some traditional U.S. companies that you would be very familiar with that have approximately 75% of the market now, recent terms of financial patient accounting and then about 25% have some Canadian-based software for their core. And we're primarily targeting Ontario at this point, primarily English-speaking and has most community hospitals.

And then just one other quick at, another backlog conversion for system sales can bounce around, but it seems like that ratio has come down a little bit. Is there anything kind of to call out or has there been any delays in implementation, just a kind of curious about that ratio?

Yeah. We had one new install push in the second quarter but other than that nothing.

Okay. Thanks a lot.

Thank you, Matt.

Thank you very much. And we'll go to our question is from the line of Mohan Naidu with Oppenheimer. Go ahead.

Good afternoon, Boyd and David. Thanks for taking my questions. This is actually Mike Ott on for Mohan. Just a follow-up on Canada for a minute here. Could you help us quantify maybe the number of small hospitals in English-speaking Canada and how that might compare to the U.S. market here?

There are about 450 hospitals that we feel like are in our sweet spot in our target market in Canada.

All right. Thanks. And then to follow-up on TruBridge a bit. Do you have a number for roughly how penetrated you are in your CPSI customer base either in terms of number of clients or number of solutions that they're taking?

Probably the number I can give you, this is the best is 90% of Evident customers utilize TruBridge for at least one service, but that could be anything for statement outsourcing where we're putting all the statements to full business office. So it's by particular service, it's a little bit harder to comment, and I don't have those numbers right in front of me, but 90% of the evident base is utilizing TruBridge for at least one service.

Okay. That's helpful. Thanks. And then just lastly, on the likeminded initiative you mentioned with customer service, is that something that you can quantify, as having any kind of impact on your new 2015 guidance here or not really a needle mover in terms of...

It's not a needle mover, it's just really a change in the way we're delivering support.

Okay. Thanks very much.

Thank you very much. And Mr. Douglas we have no further questions on the line. I'll turn it back to you.

We appreciate everyone's time this afternoon. Thanks for joining us on the call. Thank you for your interest in CPSI. I hope everyone has a great weekend. Thank you.