Greetings, and welcome to the CPSI Third Quarter 2021 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dru Anderson. Thank you, Ms. Anderson, you may begin.

Good afternoon, and welcome to the CPSI third quarter 2021 earnings conference call. During this 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 risks, 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. At this time, I will turn the call over to Mr. Boyd Douglas, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Dru. Good afternoon, everyone, and thank you for joining us today. After my comments, I will hand the call over to Matt Chambless, our Chief Financial Officer, who will provide additional color regarding our third quarter results. At the conclusion of our prepared comments, the two of us, along with David Dye, our Chief Growth Officer; and Chris Fowler, our Chief Operating Officer, will be available to take your questions. The pandemic continues to disrupt many aspects of our lives, both personally and professionally. As such, last month, we hosted a virtual event for our clients after making the difficult decision to postpone our annual in-person conference until March of 2022 in St. Louis. The need to postpone was disappointing. However, it afforded us the opportunity to give the topic of mental health within the health care workforce, the attention that it deserves. Mental health plays a part throughout the care continuum. And as our very insightful guest speaker, Dr. Izzy Justice said, it's not health care if the patient is being healed at the expense of the health care worker. And with the help of Tracey Schroeder, our Chief Marketing Officer; and Amaris McComas, our Chief People Officer, we also explored the phenomenon around the great resignation, driven by the burnout employees have experienced due to the COVID pandemic. This conversation highlighted the importance of celebrating diversity and supporting the significance of inclusion and equity in the workplace to ensure people feel that they can bring their whole selves to work. Understanding these important factors that impact employee engagement and talent recruitment is something we are taking seriously at CPSI, and we felt that it was important to share this with our clients during our virtual event. And lastly, as part of the business update, our clients…

Thanks, Boyd, and good afternoon, everyone. On today's call, I'll provide a high-level overview of the quarter, including some additional detail on bookings performance and a brief walk through our third quarter financial results. Far and away, the most notable development of the quarter was the significant growth in bookings as we saw the sales environment becoming increasingly favorable with the resurgence in new hospital EHR contract signings and the emergence of Get Real Health as a viable player in the patient engagement arena. On the financials, the third quarter was dominated by two top line themes that worked to offset each other in our GAAP results but to each point to exciting success areas for both our EHR and services businesses. First and foremost, TruBridge showed year-over-year growth of 24% with organic growth driven by improved patient volumes and recent new business wins and inorganic growth driven by our acquisition of TruCode in May of 2021. As Boyd mentioned, TruCode continues to perform according to plan with a quarterly revenue contribution of $3 million absent purchase accounting adjustments and $1.8 million of incremental EBITDA. Year-to-date contributions since the acquisition date are $4.6 million in revenues and $2.3 million of EBITDA. On a pro forma basis, including pre-acquisition amounts, TruCode has generated revenues of $10.2 million and EBITDA of $4.6 million. The second dominant top line theme has been the success of our dramatic shift to a more SaaS-friendly license mix. A shift that has been intentional and in keeping with our strategic priority of enhancing long-term shareholder value by expanding our base of recurring revenues. While clearly aligned with long-term value creation, these license mix dynamics put significant pressure on the period's nonrecurring revenues offsetting the gains on the TruBridge line and limiting overall revenue and adjusted EBITDA growth…

Our first question comes from the line of Donald Hooker with KeyBanc. Please proceed with your question.

Yes. Good afternoon. I wanted to hear a little bit more about the Get Real Health bookings. I was particularly interested in you guys press released a deal win in Europe and then in the Netherlands, which is obviously very new for CPSI. Can you expand a little bit and maybe break down those Get Real Health bookings that were so high in the quarter?

Donald, David here. Actually, the Netherlands press release was an expansion on a relationship that we already had there. It has extensive opportunity for us down the road from a bookings standpoint. It was rather minimal in terms of the Get Real Health bookings in the quarter. Two that Matt just mentioned in his prepared remarks are split about 50-50 in terms of bookings value, both incredibly significant, both deals that were competitive and we’re certainly proud that we wanted now it’s time to go execute. The international was actually in the Asia Pacific to telecom provider in the Asia Pacific. We hope that this will be press released in the relatively near future, that’s about as much information as we can give you right now. It’s a nationalized health care systems very similar to the relationship that we have with TELUS in Canada, in particular in the provinces of Alberta and Saskatchewan, where the telecom has the exclusive right to utilize our products there as a patient portal for the citizens of a particular country. And then the second significant win is, as he mentioned, is the domestic health system here in the United States, where we’re going to Get Real Health is going to provide the digital front door. The typical patient portal functionality in addition, the appointment scheduling, bill pay, pharmacy refills, et cetera.

Great. And then maybe one follow-up for me. On another data point you threw out that was interesting to me was the retention rate, which continues to be sort of 95% plus. It sounds like, I think I jotted that down correctly. I know in the past, you had – maybe last year or the year before, you seem to be sort of alluding to an improving competitive environment, maybe getting some price as well. Just wanted to maybe get an update there on the competitive environment. It sounds like it’s pretty favorable for you guys.

Yes. So, on the competitive environment, well, I mean, obviously, we felt really good about winning the 11 deals in the quarter from a pricing standpoint. To your question, we do have more pricing power than we did and we were competing with athena, both in our existing customer base and in net new deals with athenahealth. And obviously, we don’t have that competition out there, at least from an inpatient acute care standpoint anymore. So – and obviously, now Healthland is a part of us, some others that aren’t there anymore or some other competitors that we traditionally competed with over the years. But we – obviously, we still have the major competition from MEDITECH concern or in some cases, former competitors. So favorable, I think, is an accurate term, but we certainly still have formidable competition out there. From a pricing standpoint, it is noticeably slightly better than it has been in previous years. And that’s shown in our execution and our average deal size so far this year. As to retention, I think, Matt, may touch on that.

Yes. So Don, you had touched on the success that was 2020. We finished 2020 back kind of at our historical retention levels of around 95%. And right now, on an annualized basis, 2021 is actually projecting to be a good bit higher we’re conservative we’re really estimating that – some of that in 2021 is going to pull in a little bit in the fourth quarter, but we still think that we’re going to in the year, a good bit north of 95% retention for 2021, which historically speaking, is going to be a pretty good year for us retention wise.

Great. Thank you.

Thank you. Our next question comes from the line of Joy Zhang with SVB Leerink. Please proceed with your question.

Good afternoon and thank you for taking my question. You mentioned in your prepared remarks, the great resignation movement in the labor market. I was hoping you can provide more color on how much the rural hospitals are experiencing the labor pressures compared with their more urban peers? Is it more – is it a bigger headwind given how shallow the talent pool is? And as a follow-up, do you see this labor dynamic as a net positive tailwind for TruBridge given greater need for outsourcing?

Hi, Joy, this is Chris. It’s a good question as you think about it as it relates to the rural versus urban. I would say just proportional based on the number of employees that they have when they lose one at the rural market, it obviously is a bigger percentage of their workforce. So I do think that there is a larger impact. Obviously, what we’re seeing specifically on the nursing side, there’s a lot of pressure there and there’s some outside forces where the dollars that they’re having to pay to staffing agencies is really creating a big headwind for them operationally and providing service and delivering that care in their communities. So something that we continue to watch and see if there’s an opportunity for us to solve there. As it relates to opportunities on the TruBridge side, yes, what we are seeing is that there are – we’ve tried to be flexible there as it relates to how we can provide interim deals or interim opportunities from a staffing solution standpoint, which a lot of times also turns into larger, long-term deals for us. I think in the last six months, we’ve signed somewhere in the neighborhood of 15 to 20 deals where we have provided some sort of interim staffing solution to our hospitals. So it’s something that we – obviously, we’re facing some of the same similar challenges that the customers – that the hospitals are facing as far as from a labor standpoint. So there are other levers that we’re continuing to pull there to make sure that we can accommodate those needs from our customers.

And Joy, I’ll just add on to that, in particular because I’ve had some very recent conversations about this. The labor market and the nursing for our post-acute facilities, skilled nursing facilities and things like that is really, really tough. And as Chris talked about, the staffing agencies, the supply, the nursing, the rates, they’re charging are really high and really tough to absorb. So absolutely, the acute care is struggling with it, but post-acute, I would say if you put them on a scale, pushes struggling even more than the acute – on the nursing side for sure.

That’d be very helpful. And as a follow-up question on bookings, it’s great to hear the positive commentary on the legacy Airstar business in addition to TruBridge. So I was hoping you can give more color on how much of the rebound was driven by deals that were pushed out from the first half of the year? And would it be fair to say that demand in the rural hospital market is largely normalized? Or is COVID still a meaningful headwind?

Yes. Joy, David, I had a little trouble hearing you, but I think your question was why the success in the third quarter? Certainly, part of it was pent-up from the lack of success in the first half of the year. Any time you get 11 deals in the quarter, and they were all SaaS and the average deal size was in line with what it has been recently, which is around $1 million, which is certainly good as well. Really, the good news is, is that from a pipeline standpoint, the three-month pipeline, as you measured at the end of each quarter actually went up going into the fourth quarter over the third. Now whether that means we actually execute on that exactly in that time frame or not remains to be seen. But – so the three-month pipeline went up a little bit. The six-month pipeline, the total number went down a little bit. So basically, given that we had a $29 million bookings quarter and the fact that those remain roughly the same between the three and six months, we are particularly pleased with.

Thank you very much.

Thanks, Joy.

Thank you. Our next question comes from the line of Jeff Garro with Piper Sandler. Please proceed with your question. Your line is now live.

Good afternoon. Thanks for taking the question. Maybe a couple on the bookings front. The first one, just to clarify those pipeline comments. Was that for specifically EHR deals or the comment around three-month pipeline going up. Does that refer to the broader pipeline?

The broader pipeline, Jeff, but the EHR pipeline was consistent with those comments also.

Excellent. Great to hear. And more broadly, Q3 was a really nice result with bookings, but I also want to make sure they have the right context on it with – versus the year-to-date results and actually, there were headwinds last year as we look at the comparison. I guess, maybe more specifically interested in the subscription line, where just trying to parse out where that is year-to-date and how we should frame our expectations as we go into Q4, whether we’re at kind of a new run rate or whether we should reel in those expectations, maybe looking more at the first nine months of last year.

Yes. So Jeff, getting to that question about subscription rates and where they land. I don’t have the year-to-date numbers in front of me, but from a quarterly standpoint, which is given the growth curve that we’re on, there is probably a little bit more indicative of what we’re going to do heading into the fourth quarter and heading into 2022. Right now, we’re looking at just shy of a 50% increase in our SaaS EHR subscription revenues compared to the third quarter of last year. So definitely substantial and incremental growth there. And when we take a look at the bookings composition year-to-date, we mentioned in the prepared remarks that 100% of the net new hospital EHR deals that we have signed during 2021 have been SaaS. And that’s actually a little bit ahead of what we had expected coming into the year. We expected somewhere closer to a 70-30 split, and we’re happy with this 100% mix for SaaS licenses because we obviously believe that that’s in the best interest of creating value long term. So as far as the sales mix is concerned, you can’t get much higher than 100%. But on the revenue line, we definitely expect to continue to grow that because as incremental customers are added, the chances are increasingly more favorable towards them coming on as SaaS customers.

Excellent. All very helpful. And maybe try to translate some of that commentary around exceeding expectations on the SaaS transition to your margin expansion goals. I’m curious how we should think about the timing of your platform investments as well as the revenue mix shifting to subscription. Some interesting cross currents there. And just how that impacts the cadence of margin expansion? I know it’s not going to be linear, but I think the margin levels this quarter may be a little bit bigger of a step back from Q2 than some of us might have expected.

Yes. I mean you’re kind of hitting the nail on the head as far as the logistics of what happens with our margin expansion initiatives, at least in the short-term, we do kind of have these competing projects going on that have different impacts on margins. Obviously, the shift towards more SaaS mix in the new sales environment. It’s a drag on margins. There’s no way around that in the near term. And that was something that we were expecting even with the 70-30 split that we have planned coming into the year. But obviously, with net new installs installing at a higher rate of SaaS and what we’re expecting is pulling margins down somewhat more than what we had expected. But you’re right, there’s a give and take in the very short term. The two initiatives, the margin expansion initiatives through increased offshore reliance and investment in automation technologies. In the short term, the two dynamics do tend to offset each other. But again, the payoff being in the longer term as we continue to stack up more and more recurring revenue for our top line that we should see margin expansion increase in the future.

And just to try to pin it down a little bit further. Is it fair to think about year-over-year margin expansion every three months being an appropriate expectation? Or will there be even more nonlinearity than that?

Yes. I mean I would still say that, I mean, I’d expect it to still be a bit nonlinear. There’s still the chance going forward that we may have a couple of quarters here, a day in a 90-day period, anything can happen. But there may be some quarters where we do have the resurgence of the perpetual license deals that kind of held the day back in the pre-2019, 2020 time frame. So – but we do expect, at least for, say, the next 12 months that margin – expanding the margin on the acute care side is going to see some headwinds from this transition to SaaS.

Understood. That’s all for me. Thanks again, guys.

We have no further questions at this time. I’d like to turn the floor over to Mr. Douglas for closing comments.

Great. Thanks, Devin. Just to quickly summarize, certainly, we’re very pleased with our third quarter performance and the positive impact that our three-year growth plan is having on our effectiveness, efficiency and value delivered to our shareholders, clients and employees. We remain keenly focused on core growth, margin optimization and achieving tangible upside growth through digital innovation. I hope everyone has a great evening tonight, and we appreciate your interest in CPSI, and we look forward to giving you another update after the fourth quarter. Thank you.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.