Good afternoon, and welcome to the CPSI Second 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 Mr. Chris Fowler, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Dru, and thank you to everyone for joining us this afternoon. These are not the results that I’d hope to be sharing with you all today. There are bright spots in the quarter and we are still confident about our strategy and optimistic about our future, but while this has always been a story about transformation and change. The change is taking a little longer than we forecasted. The lesson learned is results from change take time, and we simply were too optimistic about how quickly the payoff would start to show in our results. As I’ve taken the time to reflect on the year so far and on our planning for 2023, our message should have been that this was our year from investment and change and establishing a foothold for our future. Instead, I felt [indiscernible] of wanting to show positive results [indiscernible] change this year significant. We’ve reorganized our sales team. We’ve transitioned to the public cloud. We’ve moved to a global workforce and focused on becoming a people first organization focused on talent. These initiatives have been successful and have put us in a position of strength for our next phase, but they have come at a cost including both an add to the bottom line and a longer lead time to show results. This has been a valuable lesson for me and for our team regarding optimism versus realism. We have been guilty far too long of being overly optimistic when it comes to our results, and that ends now. I’m going to share an overview of what happened in the second quarter and touch briefly on guidance and then let Matt delve into the nuances of both topics. Our revenue in the second quarter came in at $84.6 million. While the EHR…

Thanks, Chris, and thanks to everyone joining the call. I’ll now review the second quarter results. Net patient revenue, which represents our total NPR of just our end-to-end RCM customers was $3.2 billion, an increase of 9% year-over-year. Total bookings in the quarter were $21.9 million. RCM bookings of $13.6 million, comprised 62% of total bookings and were the second highest in our history behind only the second quarter of last year. Cross-selling RCM to our EHR customers, which is a key factor in our success, represented 74% of total RCM bookings in the quarter. Total revenue of $84.6 million increased just 2% compared to last year. For the quarter, RCM represented 56% of total revenue, EHR was 41% and patient engagement rounded out the remaining 2%. Gross margins in the quarter of 47.8%, decreased compared to 49.2% due in part to the labor pressure that Chris noted. We believe globalizing efforts will begin to relieve the labor pressure as we scale. Operating expenses as a percentage of revenue was 50.1% in the quarter compared to 43.6%. We saw an uptick as a percentage of revenue in product development due to our cloud migration and other modernization efforts and general and administrative costs related to increased severance in other non-recurring charges. These all resulted in adjusted EBITDA of $11.2 million compared to $13.2 million a year ago. Adjusted EBITDA margin of 13.3% was down 260 basis points due to the expense pressure that Chris highlighted earlier in the call. Wrapping up the financials, operating cash flow for the second quarter was $700,000. Turning to guidance, Chris gave you a rundown of some areas where we expect to see outsized expenses in the back half of the year, but provide a little more context on each factor we’ve taken into consideration.…

Thanks, Matt. To close, let me just say that while we’re taking a step back in 2023. I know our organization is stronger and better prepared to capitalize on the opportunities in front of us. Like I said in the beginning, this has always been a story of transformation and change, and it still is. I thank you for your interest in CPSI. I sincerely look forward to sharing an update on our progress in the coming quarters. That concludes our prepared remarks. Rob, let’s open up the call to questions.

Thank you. [Operator Instructions] Thank you. And our first question is from the line of Jeff Garro with Stephens. Please proceed with your questions.

Yes, good afternoon and thanks for taking the questions. Maybe we’ll start out on the demand side of things, and you talked about the pipeline continuing to grow. But was hoping you could comment on how pipeline conversion has been and what you could do to accelerate that in the future, realize that it might be a bit of a balance that you’re not always in competitive procurements, but that lends itself to maybe less urgency on behalf of your customers and prospects. So we appreciate your comments there.

Yes. Hey, thanks a lot, Jeff. I’ll start and then Matt may have some additional color on the back end of that. I think it’s a great point to call out that we’ve seen this all elongation in the pipeline, and I think a big portion of that is the fact that, again, remember that we’re selling something to your point, where it’s not necessarily competitive we’re creating the demand as well. So we’re going to these opportunities, which aren’t even opportunities in the beginning, and so we’re having to first sell them on the idea of outsourcing and then sell them on the idea of TruBridge. And so I think that there’s always going to be a natural additional link to that compared to our historical process on the EHR side. But as we continue to refine that value proposition and show the benefit of this being one of the things that the hospital can take out of their operation, I think we’ll see that shortened. I also think there’s going to be a natural acceleration on the buying side of this, because the pressures are only intensifying from a labor standpoint specifically. And so as those labor challenges continue to be emphasized at the facilities, I think that’s going to have a natural acceleration to the timeline.

Yes. And Jeff, I think the question around pipeline conversion is really getting to what’s happening in win rates and in the competitive market. And the competitive landscape here hasn’t really changed all that much from when we entered the year. And that story kind of holds true on the win rates as well. For a little bit of context, we win roughly 90% or more of the opportunities where we get a chance to – what we call demoing TruBridge’s RCM services. So situations where the prospect is really taking the service seriously. And that’s been our historical rate. It’s been pretty consistent and that consistency is maintained throughout the first couple of quarters of this year. So what we’re seeing on the pipeline and booking side of things is really just an elongation of that decision timeframe, but the outcomes themselves haven’t really changed all that much.

Got it. All very helpful. And then maybe to switch over to the margin side of things, and certainly, it’s a little bit related that you’re seeing a relatively healthy demand environment, but facing labor pressures. So I think the natural question is, how would you describe your ability to capture more price from your customers while also trying to accelerate some of that conversion we just talked about? And then the second question there is on the labor pressures and looking to globalization as an offset. Is there any weariness of moving too fast on globalization efforts given the pressures that you’re seeing?

So I’ll take the second question first and then may ask for some clarification on the first question. We’ve said from the very beginning that we were going to be very intentional about our conversion to the global market. We’ve always been prideful in the service that our team has put forward. It’s highly referenceable. Our retention rate is very strong there. And so we wanted to be mindful that while we were undertaking this initiative that we were thoughtful of the impact on the service to our existing customer base. So with that said, we were looking at on pace for our 400 employees by the end of this year and looking at potentially 800 employees by the end of 2024. That was the original plan at the beginning of the year. As we continue to feel the same pressure that’s creating the opportunity for us with the new business, and we’re looking at how can we potentially accelerate that opportunity, while not deteriorating the service that we’re creating. And so we will continue to be very thoughtful about making sure that the service is high level, while seeing what levers we have to be able to put our foot on the gas, for lack of a better term, about seeing this conversion happen sooner rather than later. And on the first question, come back to – if you don’t mind helping me out again, you said it an opportunity to take more price from the customer.

Yes. Maybe a bit of a concern that labor pressures are causing demand for your services, but they’re also pressuring your profitability. So if you could speak to your ability to deliver these offerings more efficiently – these services more efficiently than your customers can and not just kind of take on their labor pressures.

Yes, absolutely. And so I think that speaks right into the heart of the globalization and then also automation. I would say, those are the two main levers we have the opportunity to pull from a providing this at a more efficient rate than our customers can. One dynamic that we’ve really another learning of the year is we were anticipating the ability to start with a higher offshore model from the beginning with our customers. And what we’re seeing is that as we take their employees on. That ramp is taking a little bit longer than we maybe had thought it would. So for an example of that, if we take on a customer that’s got 20 employees in their business office, we will take those employees on our own – as our employees and either continue to keep them on the account, find opportunities to up train them and place them throughout the organization. And that just creates another dynamic for us to continue to keep that right-size of the percentage of onshore to offshore of cut of employees. But again, I think that’s a big part to our future success is again remember in these small, mid-size towns that they’re a crucial part of the employment process in the community, big part of the economic development. And so we’ve got to continue to be mindful of that to some extent. And so as have learned more of what that looks like, I think we’ve refined the approach of what the ramp to get to that maximum utilization is. And while it may take a little longer than we thought, I think over the long-term, as we sign three and five-year contracts, we’re going to be better, better down the road.

Got it. That helps. I’ll jump back into queue.

Thank you. [Operator Instructions] The next question is from the line of George Hill, Deutsche Bank. Please proceed with your question.

Hey, good evening, guys, and thanks for taking the questions. I’ll say, Chris and Matt, you guys talk faster than I can take notes. So some of this might be a little bit repetitive. On the impact of the sale, that was a license sale that you guys thought was going to be a license sale that went SaaS, was that EMR or TruBridge, and I missed if you talked about what the revenue impact was I guess for both the quarter and the expectation for the year.

Yes. So as far as the license mix impact, you are calling out an important nuance here and that these were not EHR contracts. EHR contracts have been 100% SaaS. That’s all we’ve signed and probably the last three years. Instead these were large TruBridge contracts, specifically the True Code product, large True Code deals that frankly were a lot bigger than our average deal size that we see in total. Average deal size, average contract value for True Code arrangements is fairly small in the grand scheme of things. So these were kind of outliers. But that’s the context between these couple of sites that we were talking about. And sorry, what was the back half of that question, George?

Well, you clarified my first question on the product, which is I knew what it was. I guess what was the – what’s the financial impact for the year? So how do we think about, what is the – because you guys kept the revenue guidance the same, but you also indicated a slowing revenue recognition from the nature of this contract. So how do we think about the headwinds and the puts and takes on the top line? And then I have a couple more questions.

Yes. So the puts and takes on the top line, while we did see this headwind stir up with regards to these couple of True Code contracts. We have had some tailwinds on the top line. They’re going to help offset some of the overall top line impact from the year. And I think Chris mentioned it earlier, one of the positive surprises I say – I would say for this year has been that the EHR retention of that customer base, while we expected it to be strong coming into the year. It’s outpaced even our expectations, and this is probably the second or third straight year where that business unit’s been stronger and more stable than what we had even expected. So that’s kind of what’s offsetting that and resulting in a top line guidance that’s kind of unchanged right now.

Okay. That’s helpful. And then if I think about the SG&A in the quarter came in about $7 million higher than what I had modeled, and that kind of that’s pretty close to the EBITDA guide down for the year. I guess, so should we look at Q2 as kind of the high watermark from a discretionary expense perspective as we go through the balance of the year? You guys kind of indicated the cost cutting initiatives that that should kind of like lead for that number to go through with the employee retirement programs and stuff like that?

Yes. So if you’re looking at SG&A, there are a couple of items that are making that really pop in the second quarter. First of all, we do have some seasonal costs in there with our National Client Conference that takes place in May of every year. And as much as we’d love to be able to smooth that cost out throughout the year, the costs have to be booked when they’re actually incurred and that all happens in the second quarter. And I think that was for somewhere between $1.2 and $1.3 million in SG&A. And frankly, the rest of the SG&A cost increase in the second quarter was really all EBITDA neutral stuff from non-recurring charges partly related to the severance event that Chris mentioned on the voluntarily retirement program.

Okay. And then my last one will be given what you guys discussed as it relates to inflation, and this kind of piggybacks on Jeff’s last line of questions a little bit is, how does this change how you guys were thinking about the longer-term guidance of the reaccelerating the revenue growth profile and the earnings profile, given that it looks like we’re going to be operating from a higher cost basis as we go through 2024 – 2023, probably into 2024 and 2025?

Yes. I’ll start there and then Matt can fill in any blanks that, that I leave. What I would say is that, we have taken a really hard look at the second half of this year and really, really sharpened the pencil to make sure that we are fine tuned on where we’re going to come in. We continue to do work on what we have understood or what we have seen happen through the first half of this year, and what we know will happen in the back half and what impact that’ll have on next year. So I don’t think that we’re ready to give any guidance into 2024, but that’s something that we’ll be doing in the next call or two, but know that we understand that that’s something that we’ve got to get out there. I will say, as we look at it, big picture, and I’m not going to put a date on this, we still feel like the levers that we have in front of us as it relates to the offshore initiative and what we had talked about the first of this year, the offshore initiative, our opportunities with automation that we still see a path to get to those 20%-plus EBITDA margin grows. And we still see that opportunity to see the revenue growth continue, but let’s stay tuned on sharpening what 2024 looks like for the next call.

Okay. Well, stay tuned. Thanks guys.

Thank you. At this time, we’ve reached the end of our question-and-answer session. I’ll turn the call over to Chris Fowler for closing remarks.

Thanks, Rob, and thanks for everybody for your continued interest in CPSI. Have a wonderful evening.