Ladies and gentlemen, thank you for standing by. Welcome to the CPSI Fourth Quarter and Year-End 2018 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Friday, February 15, 2019. I would now like to turn the conference over to Boyd Douglas, President and Chief Executive Officer, CPSI. Please go ahead.

Thank you, Chris, and good morning everyone, thanks for joining us. During this call, we may make statements regarding the 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 today will be Matt Chambless, our Chief Financial Officer. At the conclusion of our prepared comments, the two of us, David Dye and Chris Fowler will be available to take any questions you may have. As we announced in our Q4 results this morning, we are pleased with the solid finish we had in 2018. This year, TruBridge eclipsed $100 million in revenue and delivered a third consecutive quarter of growth for total bookings, which included $3 million in bookings for our new SaaS offering, nTrust. Last year, we began positioning nTrust with our current clients as an alternative to their existing license and maintenance model. We are excited about the level of interest from our base, and we will continue to leverage…

Thanks, Boyd, and good afternoon everyone. As we mentioned in the earnings release, the fourth quarter's 12 new Thrive implementations marked our highest point, since 2010, and drove solid results on both the top and bottom lines. Quarterly revenues of $72.3 million are up 4% sequentially, and were the second highest in the history of CPSI, trailing only the fourth quarter of 2017's Meaningful Use-driven results. Non-GAAP EPS effectively matched last quarter's all-time high, and outpaced the fourth quarter of 2017 by 24%. Adjusted EBITDA grew 28% sequentially and reached the highest point since our acquisition of Healthland. We're proud to close out 2018 with such a strong quarter with post-acquisition highs in operating, pre-tax, net, and adjusted EBITDA margins with second-best results for non-GAAP net margin. Operating cash flows for the quarter increased for the third consecutive period to $9.1 million, up nearly 30% sequentially, and over 70% from the fourth quarter of 2017. The combined strengths of our sizable recurring revenue base and cash conversion on existing financing receivables propelled us to our best cash flow period since the first quarter of 2017, all while faced with a $3.5 million further expansion and financing receivables, driven by the record new Thrive implementations. All told, operating cash flows doubled from $7.8 million during the first half of 2018 to $16.1 million during the second half of the year. These strong operating cash flows, particularly in the second-half of the year, allowed for a year-over-year increase in balance sheet cash of $5.2 million, while net payments against long-term debt totaled $11.7 million, including a $5 million advance payment against our revolving credit facility during the fourth quarter. Reduced debt levels, combined with continued EBIDTA execution resulted in our leverage ratio as calculated under the terms of our credit agreement, decreasing…

Thank you. [Operator Instructions] Our first question is from the line of Jeff Garro with William Blair & Company. Please go ahead.

Yes, good morning all, and thanks for taking the question. I'll start with the backlog, maybe you could give us the split between the recurring and non-recurring portion, and then just maybe some commentary on how we can think about the right coverage level for the next 12 months' revenue, really anything different to call out from typical historical performance versus that metric? Thanks.

Yes, Jeff, this is Matt. So, the backlog split, as of 12/31 was roughly $228 million for recurring, and $29 million on the non-recurring side. There's a little bit of a pullback on non-recurring backlog, which was somewhat to be expected given the work through that meaningfully used three backlogs during 2018. Other than that, kind of the status of where we are backlog-wise versus kind of revenue outlook for 2019, is kind of where we expect things to be.

Got it. Maybe another one on the revenue front, you gave the expectation for Q1 installs, which seems quite healthy. I was hoping you could give us some type of expectation for full-year installs versus this past year and the year before. You guys have kind of called out, long-term, that '17 and '18 seemed to represent probably the right expectation for net new installs going forward, but wanted to check in there.

Yes, hey, Jeff. Good morning. This is David. The expectation is 28 to 30 net new installs in 2019.

Great, perfect. So, then maybe one more for me, more on the operating expense side of things. Operating expenses, I think, down 3% for 2018, but down 19% if we look at Q4. So, hoping you could help us understand what in Q4 represents the right run rate going forward, or maybe other areas where we should look at the ful -year as being more representative of future spending?

Yes, this is Matt. I'd say that Q4 is a pretty good glimpse of where we're starting 2019. That's -- the fourth quarter represents a good kind of run rate, I guess, leaving the year. There weren't any kind of goofy one-time items that were coming through. Now, that being said, we do have $10 million or so worth of cost savings initiatives that we do intend to execute on during 2019, so we do expect the cost profile for the company to come out significantly less than where we are right now, but that's the answer. The Q4 is kind of a good base for exiting the year.

Great. I'll jump back in the queue with that. Thanks guys.

Our next question comes from the line of Mohan Naidu with Oppenheimer. Please go ahead.

Thanks for taking my questions and congratulations on reaching the $100 million mark on TruBridge. Just a couple of questions on nTrust. On the nTrust bookings, do you guys split them between system sales and TruBridge or is it all going to one bucket?

Yes, so for bookings reporting, there is an allocation of the revenue between the subscription revenues, so the amounts that we called out related to bookings for the software side that are subscription-based, those would include any subscription side of the nTrust deal with the other side being allocated to the business office services that we provide for TruBridge, so there is an allocation that's performed.

Okay. Boyd, maybe a question around the replacement market, you said -- you gave us some comments around there. What is driving the hospitals now to still look at replacements without any regulatory, I guess, pressures on them on the changes?

I would say the major driver is and has been for a while now physicians and their satisfaction with the system. Again, there's still a lot of people that may -- are a lot of hospitals that made not good long-term decisions with Meaningful Use. And so, coming out of Meaningful Use, they realized that whatever solution they're on is not a good long-term solution, physicians aren't happy, other caregivers aren't happy, and that's why they're looking, mainly. I think others -- I think cost can be a factor. Maybe there was -- it's costing more than what the vendor initially implied and/or overall overhead to run a system, so things like that, but mainly dissatisfaction on the users.

Okay, thanks, Boyd. Maybe last one, Matt, to your earlier comments to Jeff. The $10 million cost synergies going into '19. Should we think about that as looking at 2018 expenses and taking out $10 million out of that into '19 in the face of a flat or uppish revenue growth, or how should we think about that $10 million savings going into '19?

Yes, so the $10 million represents savings that we're going to execute on throughout the year, and the overwhelming majority of those will be actually realized during the year.

Okay, thank you very much.

Our next question comes from the line of David Larsen with Leerink Partners. Please go ahead.

Hi, Matt. It seems like the cost reduction efforts [technical difficulty] you would have $10 million of savings as you exit 2018, so that would manifest in 2019. [Technical difficulty] to me like you're not done yet, and you're still going to go after your more [technical difficulty] in 2019. Is that correct? And can you give any sort of color around what you would like to see personally in terms of like long-term either EBITDA or gross margin expansion? Thanks.

Yes, so David, your line was breaking up a little bit on me, perhaps I was the only one that was getting that interference. But I think I heard your question well. The $10 million is still a pretty solid number for where we think that we're going to land year-over-year cost reduction-wise, 2018 to 2019. We've identified the steps that we have to take, and in many cases, we already kind of decisioned those and are now just kind of waiting for the benefits to start flowing through. And when it comes to long-term, where we'd like to see, particularly EBITDA margins land, I think we've stated previously that 20% we think is a healthy EBITDA margin profile for our business, and that's our target to reach that level and sustain it naturally. Obviously, we reached that level this past quarter on the heels of some heavy nonrecurring revenues, but the idea is to strip some costs out of the system, so that we're not overly reliant on nonrecurring revenues to get us to that target.

Okay, thanks very much. Congrats on a good quarter.

Thanks, Dave.

Our next question comes from the line of Donald Hooker with KeyBanc. Please go ahead.

Great. Good morning. A question on sort of the MU3 bookings and revenue, I just want to make sure I understand. How much of your client base overall has taken advantage of that opportunity or has taken advantage of that. So, is there any leakage? I mean, you gave guidance for 1Q '19 of, I think, $1.4 million revenue there, but is there any chance you could get some revenue from that in the following quarters?

Yes, hey, Donald, this is David. About 65% of our clients have taken advantage of it. The remaining, there's approximately 20% to 25% of our customer base wouldn't attest for MU3 because of their status as a facility, maybe they're a specialty facility, behavioral, et cetera, the remaining, in the numbers that we're thinking going forward being pretty conservative. There are some hospitals that have decided to take the penalty at this point. Of course, that could change. So, yes, there is opportunity beyond just this quarter, but it's a relatively unknown at this point.

Got you. And in the software and -- in the system sales and support line, I guess I'll see it in the K, but what is the recurring revenue in that, of the $47.2 million?

Yes, so looks like $33 million of recurring revenue from system sales and support for the period.

Okay, got you. And maybe just -- maybe a last one, just thinking about the Healthland acquisition from a few years back, can you just update us in terms of, I assume a lot of the migrations are done. Are there any remaining sort of legacy users of, I guess, Classic or whatever left are there any -- are sort of most of the migrations done?

Donald, there's about 15 Healthland Classic sites that are left that are potential for migrations.

Got you. Why would they stay on -- I mean, is there a reason why they stay on Classic, they're just comfortable with it?

Yes, they're comfortable with it, it works. There is some expense in transitioning. As comfortable as we try to make that for them, obviously there's expense, and conversion, et cetera. So, that would be the primary reasons that there the 15 are left.

Okay, thank you. Thank you so much.

Thanks, Donald.

Our next question comes from the line of Jonathan Bentley with SVB Leerink. Please go ahead.

Hi. I just had one question, a follow-up, after Dave's question earlier. I think last quarter you had talked about having 13 implementations scheduled for fourth quarter, and I think I heard that you guys had actually 12 occur. Is that correct that one got pushed, and why did that get pushed, if it is the case?

Yes, this is Matt, Jonathan. The pushes that we've been seeing all throughout the year, and the fourth quarter push is really no difference here, has been with startup facilities, with our implementation and go-live heavily relying upon a number of different kind of balls lining up in place, including or getting provider numbers and things like that. So, that's effectively all of our -- every time we've had a slip from one quarter to the next that's kind of been the answer, and that's what happened in Q4 as well.

Okay. So do you expect that those pushes will then be implemented in the future or are these any deals that are actually getting hung up?

No, so these aren't hung up deals. These are just deals that are -- I mean we certainly -- they're on our implementation calendar right now for 2019, which particular hospital I can't remember exactly whether it's in Q1 or early Q2 now. But as far as any slippage off of our radar completely, that's not something that we typically see.

Okay, great. Thank you very much.

Our next question comes from the line of Sean Wieland with Piper Jaffray. Please go ahead.

Hi, thanks. Curious if you have any initial reaction to ONC's proposed regs on embracing of FHIR standards in information blocking that came out earlier this week. How you think impacts how you're going to market, and as well as more broadly for the industry, what you think the effects of that will be?

Yes, Sean, from a development perspective certainly it's a lift for us, as has been the cast in the past. Typically, new regulations and things like that from ONC or whoever are typically good for us, because it drives some of the smaller players here out of the market or where they can't comply. And our customers see that and look to us because they've got the confidence in us that we will meet those relations. It certainly will affect our roadmap for our future things that we were planning on doing. But that's part of what we do, and kind of normal course of business to have these types of things happen. So we view it as a positive. I think it's good for the industry. It'll be interesting to see how that aligns with what we're doing with Commonwealth and how all that comes into play. But we certainly welcome the change and look forward to the final rule.

Okay. Thanks for that. And just a quick one, what percentage of the TruBridge bookings was from within your base versus outside your base?

Sean, this is Chris, just a bit of a slag on that, I would say probably 85%, 90% people.

Is within your base?

Yes.

Yes. Okay. Thank you very much.

Thanks, Sean.

Our next question comes from the line of Jamie Stockton with Wells Fargo. Please go ahead.

Hi, good morning, thanks for taking my questions. I guess, maybe real quick on TruBridge, the gross margin kind of trended down over the course of the year. I suspect you guys may have been doing some hiring late in the year for business you think that's going to land early this year. Could you just talk about how we should think about the gross margin there? It's kind of bounced from the low 40s to the mid 40s depending on what quarter you look at. If you could start there that would be great.

Yes, hey, Jamie, this is Chris. So the margins for TruBridge, overall, we anticipate staying in that 42% to 46% overall. A lot of that depends, though, on where the growth comes from. On the TruBridge RCM side, obviously, we have much higher margins. You know, we're in the 70%, whereas in the accounts receivable service which is our -- 35% of the business, those margins are about 30%. That's where we're probably seeing the trend a little bit down on that and a little bit of that is just based on our hiring philosophy changing to where we're going to a little bit more of a remote staff, more senior employees that are little more efficient in the operation that they run. So we feel confident we hold that number in about 30% for the ARMs and so again a little bit dependent on what the mix looks like in the services, but feel confident for 2019 overall margins in that 45% range.

Okay. Thank you. And maybe just a quick one on the balance sheet, I think Matt said you guys are basically at about 2.5 turns net debt to trailing EBITDA and I think last quarter your said that was kind of your target and it was possible that once you hit that level that you might either get a little more aggressive investing in the technology platform or maybe start to do some more tuck-in acquisitions. Can you just give us an update on your thoughts about the balance sheet now and potential M&A kind of as we go through 2019?

Yes, Jamie, you're right, exactly a year ago that we identified the target of 2.5 and as you know we're right there. I think we made commentary throughout the year that we continue to look at potential tuck-in acquisitions, especially those that we think could help accelerate our TruBridge growth and we continue to do that.

Okay, thank you.

Thanks, Jamie.

[Operator Instructions] our next question comes from the line of Stephanie Demko with Citi. Please go ahead.

Hey, guys, thank you for taking my questions. Just a quick one coming out of hands, can you talk to some of the areas of client demand [indiscernible] surprised you in some of the foot traffic in the booths?

I don't know that there were any huge surprises from it. The HIMS [ph] I would call it the typical HIMS. Frankly, we don't get a lot of traffic from either existing customers or potential customers. And typically in our market, they just can't afford to come to something like that and we certainly encourage them if they're going to spend travel dollars to come to our user conference that's in May to get a lot more benefit out of it. So you know it's the usual -- you do get a flavor of international at HIMS, but whether any of that will really ever pan out you don't know, but you usually get some foot traffic related to that. And we did get some of that again this year.

And good morning, Stephanie, I'll add to that too. I mean, I think -- and it's a focus of ours. I think there's increased chatter you know, at HIMS every year, there's something that sort of goes to the next level and I think that this year is patient engagement, and the future of that. And we certainly saw that, and it's something that we're thinking heavily about.

I heard that. And so, I guess beyond the [indiscernible] clients that they don't have to go to HIMS, is there any thought on the patient engagement side? If that is a potential area of M&A now that you have freed up some cash in the balance sheet or would that be more of an internal investment project?

You know what, we look at it both ways. Certainly, we've already got some functionality there that we are in the process of continually enhancing, and as in anything with regard to how it could help us grow our services business going forward from an M&A perspective or from a development perspective, that's something that we're heavily invested in.

And I talked about it in the prepared comments. Obviously, the press release we just announced with Apple is a step in that direction.

I hear you, I hear you. Well, thank you so much for taking my questions.

Thanks, Stephanie.

Our next question comes from the line of Gene Mannheimer with Dougherty & Company. Please go ahead.

Thank you. Good morning. Congrats on a good finish to the year. With respect to TruBridge, guys, I think in the past, Boyd, you've discussed your targets of mid-teens growth for that business. We saw that 9% growth in the back half of the year. So just want to try to reconcile you know what gives you the confidence that we can get there this year to that mid teens number. I do note of really positive bookings number in the fourth quarter. So is that kind of what gives you that comfort level?

Yes, hey, Gene, this is Chris.

Hey.

That's exactly right, I mean, what we're seeing, I think, Boyd's comment spoke to it from an nTrust standpoint. Obviously, that's one of the largest drivers for that number. Year-over-year, we were at 13% growth from '17 to '18. So with the optimism around interest, what's already booked and to be implemented this year and also what the pipeline looks like, feel pretty good about that mid teen growth again.

Okay, excellent. Thank you for that. And with respect to nTrsut, really exciting model there, I'm just curious, to date, how many clients have opted for that and if you have any expectation for what conversion might look like going forward, would you think 10% of the base or 20% of the base, would opt for this model? Thank you.

So first question, you know, the numbers count so far, and it's hard to put a pin on it, I would love to say we see it getting upwards of 50% of the base that would go to this model. You know, I think and David and Boyd both said it in calls in the past, you know, we anticipate one day where people won't be running their own business offices, that virtually all hospitals will outsource the business office. So we feel like we're positioned to get the vast majority of that for the CPSI base so -- and I think 2019 will be a telling year for what we think will give us an opportunity to have a little more insight into what that looks like going forward. But again the pipeline is strong both from an internal customer base conversion to that model as well as the net new deals.

Well, that's terrific. So my last question would be then -- on that is can you talk about maybe the revenue lift for a customer to go from a licensed model today to an nTrust model, what does that look like in terms of wallet share, so to speak?

So you know, there's one variable in there that is contingent on the software that they've purchased to date, obviously converting them from the perpetual license into that SaaS model, but from a pure TruBridge standpoint, the number is on average $400,000 of additional revenue that we would see. So, just -- if you want to take a bake number all the way for a customer, a current customer going from the license model to nTrust, probably half-a-million dollars a year.

Great. Thank you.

Thanks, Gene.

And there are no further questions on the phone lines at this time. Mr. Douglas, I'll turn the presentation back to you.

Yes, I want to thank everyone for being on the call this morning. Obviously we are excited with the way we ended the year, and are looking forward to a great 2019. So, thank you for being on the call, and I hope everyone has a great weekend.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.