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Healthcare - Medical - Healthcare Information Services - NASDAQ - US
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EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2014 - Q1
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Operator

Good day, and welcome to the Streamline Health First Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Randy Salisbury. .

Randolph Salisbury

Thank you for joining us to review the financial results of Streamline Health Solutions for the first quarter of fiscal year 2014, which ended April 30 of this year. As the conference call operator indicated, my name is Randy Salisbury.

As Senior Vice President and Chief Marketing Officer here at Streamline Health, I manage all communications, including Investor Relations. .

Joining me on the call today are Bob Watson, our President and Chief Executive Officer; and Nick Meeks, our Senior Vice President and Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session.

If anyone participating on today's call does not have a full text copy of the release, you can retrieve it from the company's website at streamlinehealth.net or at numerous financial websites..

Before we begin with prepared remarks, we submit for the record the following statement.

Statements made by the management team of Streamline Health Solutions during the course of this conference call that are not historical facts are considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those reflected in the forward-looking statements included herein.

Please refer to the company's press releases and filings made with the U.S. Securities and Exchange Commission, including our most recent Form 10-K reports for more information about these risks, uncertainties and assumptions and other factors.

Participants on this call are cautioned not to place undue reliance on these forward-looking statements that reflect management's analysis only as of the date hereof. The company undertakes no obligation to publicly revise these forward-looking statements..

On this call, the company will discuss non-GAAP financial measures, such as adjusted EBITDA. Please refer to our website at streamlinehealth.net and our earnings release for reconciliation of such non-GAAP measures to the most comparable GAAP measures.

Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. These non-GAAP measures do not include certain items of income and expense that affect operations, and other companies may calculate these non-GAAP measures differently..

With that said, let me turn the call over to Bob Watson, President and Chief Executive Officer.

Bob?.

Robert Watson

Thank you, Randy, and good afternoon to all of you participating on today's call. As I stated last month on our Q4 2013 and fiscal year-end 2013 conference call, I apologize for the delay in reporting our first quarter results. The delay, as I'm sure you all know, is directly related to delayed filings for the end of the prior fiscal year.

That said, we fully expect to be back on schedule and to present our Q2 earnings in a timely manner in September and for each quarter thereafter..

Before discussing the specifics of our first quarter performance, I want to revisit for one final time our year-end audit challenge and then be done with that conversation. I want to be crystal clear about what we believe transpired this past spring. It was not an auditor problem. It was a Streamline Health problem. .

Let me explain. When this management team was first brought in to Streamline Health in early 2011, our initial focus was threefold

first, to better understand our clients and the value our company brought to them so that we would be able to build the business that would allow us to sell additional solutions to these clients; second, to rationalize the company spend metrics in order to generate positive cash flow; and third, to build a long-term strategic plan against which we would execute.

Those steps were accomplished in the first 18 months of our tenure here..

In late 2012, the decision was made to relocate corporate headquarters from Cincinnati to Atlanta, including the finance and administrative functions. It became clear during the second half of 2013 that many of the accounting processes and procedures we inherited were antiquated. Many of these processes had not been updated for nearly 15 years.

These weaknesses were articulated in Item 9A, Internal Controls over Financial Reporting, in our most recent 10-K. .

During the same period, our shareholders approved the change in our auditors from a middle-tier firm to a big 4 firm. The company's rationale for recommending this change to our shareholders was that we knew that we would become a much larger and more complex company.

Inasmuch as we, ourselves, provide best-of-breed solutions, we wanted our key providers to be best of breed as well. .

We consider the results of the arduous audit process that incurred earlier this year and the recommended improvements we will make to be simply another step, albeit a painful one, in the continuing transformation of our company into a world-class health care information technology company that management foresees.

That said, going forward, we will not talk about the specifics of the audit anymore. We now have policies in place with our auditors to get back on track with regard to publishing earnings on a timely schedule going forward..

Turning our attention now to the first quarter of 2014. Revenues were approximately $7 million, an increase of 7% over the same quarter last year. It is worth noting that recurring revenue grew materially and was up 15% over the first quarter of last year. Revenue was negatively impacted by 2 factors

first, a decline in professional services revenue, which was down more than $300,000 from the same quarter a year ago; second, there was lower-than-originally-anticipated revenue recognition from the Unibased acquisition, which was completed at the beginning of the first quarter.

Revenue recognition was less than estimated due to a higher deferred revenue valuation allowance. These original estimates of the Unibased revenue contribution for the quarter did not assume a 50% haircut due to the valuation allowance.

This revenue drag will persist through the balance of the year as we work through the deferred revenue acquired from Unibased..

The softness in our professional services revenue is directly related to 2 items, our emphasis on getting backlog software-as-a-service clients live during the quarter and the continued softness in the professional services revenue segment due to client resource constraints, although, as I said in our call a few weeks ago, we do see some material improvement in resource allocation at our client sites.

Further, I should remind everyone that our professional service fees in a SaaS-based sale are recognized over the life of the contract, which, on average, is about 4 years in length, rather than on a milestone or time and materials methodology, as they are with perpetual license or term license sales..

As some of you know, we had a change in our sales leadership at the start of this fiscal year. And as often happens when you have a change in that role, you experience some lag times or delays in closing deals. This was apparent in our bookings number for the quarter, which was lower than normal.

However, we believe that by filling the position from within, we will recapture sales momentum as the sales leader and his team close deals that were in our year-end sales pipeline while building that pipeline as well.

While this quarter was challenging, we remain confident that our sales organization's performance on a yearly basis will exceed the results from last year. .

That said, we also feel strongly that key metrics, such as contract renewals, are harbingers for the momentum we have at the company. Specifically, in the first quarter, we had $9 million in renewals.

This is a firm and solid statement and confirmation of our beliefs that our Looking Glass platform delivers significant and meaningful return on investment and that clients continue to choose to work with us over other providers in this very competitive marketplace.

I said before that we enjoy a world-class client base, well known and highly regarded health care enterprises that can work with any health care information technology vendor they choose, and they choose to work with us..

One of our sales thesis is that we can leverage our client relationships in a given market to grow our client footprint. Our significant new client sale in this quarter came as a direct result of another client in the same city providing a referral to our team.

This client win, which we have not yet announced publicly, but will shortly, is a good example of our geographic penetration strategy. .

This model is fairly straightforward. We establish a foothold in the market, and we leverage client references for introductions to other leading health care enterprises in the same market. For example, when we started here at Streamline Health, we had one client in Philadelphia. Today, we have 4.

We had 6 clients in the greater New York City area, and today, we have 12. We have had similar results on the West Coast of Florida and in the state of Texas. Further, our sales backlog was $62.9 million at the end of the first quarter, up 19% over the first quarter of last year and up 11% from the end of fiscal 2013..

I will now turn the call over to Nick Meeks, our CFO, to review the specifics of our first quarter financial performance, including commentary on the metric we introduced in our fourth quarter call, unimplemented quarterly committed recurring revenue.

Nick?.

Nicholas Meeks

Thank you, Bob. I would like to review some of the more significant aspects of the financial results for the first quarter ended April 30, 2014.

As reported earlier today, revenues for the quarter increased approximately 7% over the prior comparable period to $7 million, of which approximately 89% were recurring, comprised of software-as-a-service, maintenance and term licenses..

As we reported during the previous call, unimplemented quarterly committed recurring revenue was $0.75 million at the end of the prior fiscal year.

Over the subsequent quarter, this metric was reduced to $650,000, the variance being comprised of approximately $150,000 of revenue now recognizable from implemented clients and approximately $50,000 of new client sales.

We believe this metric, unimplemented quarterly committed recurring revenue, provides an added visibility into our overall performance as it represents revenue under contract that is not currently recognizable.

From a future visibility perspective, we finished the quarter with approximately $62.9 million in revenue backlog, representing a 19% increase from the same period 1 year ago..

In our earnings release, we have included a table reconciling our net loss to the non-GAAP financial measure of adjusted EBITDA.

We define adjusted EBITDA as net earnings or loss, plus interest and tax expense, depreciation and amortization expense of tangible and intangible assets, stock-based compensation expense and nonrecurring expenses, such as severance costs.

Given the relatively large amount of noncash charges and certain nonrecurring expenses, we feel that adjusted EBITDA is a more meaningful measure in understanding our underlying cash-based earnings..

Adjusted EBITDA for the second quarter was a negative $515,000. The primary variable was lower-than-anticipated revenue, driven largely by professional services and the deferred revenue allowance for Unibased.

We began the process of capturing cost synergies from the Unibased acquisition late in the first quarter and have advanced that effort through the balance of the second quarter. We believe the financial impact of these steps will be reflected in adjusted EBITDA numbers for the second half of this fiscal year..

Moving now to balance sheet and our cash position. The ending cash balance for the quarter was $7 million. The largest use of cash in the quarter was the $6.5 million purchase of Unibased System Architecture on the first business day of the fiscal year.

In addition, the first quarter tends to result in our highest accounts receivable balance due largely to annual invoicing. The building accounts receivable balance was exacerbated through Q1 and into Q2 as the finance team focused the majority of its efforts on finalizing the annual audit.

Having now completed both the annual audit and the first quarter 10-Q, we will increase our focus on receivables management moving forward..

That concludes my remarks. I will now turn the call back over to Bob. .

Robert Watson

Thank you, Nick. We will continue to thoughtfully make investments in our future through both development and infrastructure. During Q4 of last year and into Q1 of this year, we invested heavily in our clinical analytics solution acquired from Montefiore Medical Center in the fall of 2013.

As we stated last fall, we didn't expect our first sale of this solution until Q3 of 2014. I'm happy to report today that we recently received an order for a proof-of-concept license for this solution from a government-owned health care system.

We see great promise with the solution, and we'll continue to update you on our progress as we build sales momentum..

Likewise, we will focus on the long-term strength, stability and visibility of our revenue stream by driving, whenever possible, our sales contracts to the software-as-a-service model. As previously mentioned, this transition has a direct impact on our top line revenue, which impacts our adjusted EBITDA as well.

This is an ongoing process as we focus on converting as much of our existing perpetual license-based sales pipeline as possible over to a software-as-a-service-based model. .

We continue to build this company for a long run via a plan of measured, sustainable growth to become the world-class health care information technology company I know we can be. As always, I want to thank our entire team of associates for their hard work, dedication to and support of management's strategic plan.

Finally, I firmly believe that our vision to deliver critically important solutions to our clients from our Looking Glass platform is timely and accurate..

I will now turn the call over to the operator for our question-and-answer session.

Operator?.

Operator

[Operator Instructions] And we'll go first to the site of Matt Hewitt with Craig Hewitt. .

Dillon Hoover

This is actually Dillon on for Matt. Say -- so I'm going to start off with a couple of more macro-oriented questions. First off, last time we spoke about a month ago, you had noted that the health care IT spending kind of environment appetite for spending was improving.

Is that still the same? Has it gotten any better or worse, kind of the same status quo since then?.

Robert Watson

Yes, I wouldn't call it status quo. I mean, it's also been a month. We do still see fairly robust activity inside the sales pipeline, which we think is a good indicator of that metric for us. .

Dillon Hoover

Okay. And then a question on a specific opportunity in general. We've been getting a lot of news, headlines around the VA patient scheduling replacement.

Given your acquisition of Unibased, it's kind of opportune, are you guys involved with that process? Is there an RFP that's been submitted or in the works? Can you comment at all on that?.

Robert Watson

Yes, I can. There is, forthcoming, an RFP from the Veterans Administration. It's expected sometime in the next 30 to 60 days. We will participate in that process. As you know, we have a live VA site using our scheduling asset today. .

Dillon Hoover

Okay.

And would you care to quantify that opportunity? Or is it not at that stage yet?.

Robert Watson

I'd rather not, at this point. I mean, it's 171 hospitals -- 150 or 171 hospitals, something like that. I mean, it's a very large opportunity. It's very complex. It's fraught with political nonsense that happens in D.C.

When you pick up the newspaper, read USA TODAY online or The Wall Street Journal, virtually every day, there's some debate regarding the poor care our veterans have received in those hospitals. So it's a very politicized process. .

Dillon Hoover

Okay, okay. And then kind of just drilling down on Streamline in particular. Last call, you disclosed that there was 3 go-lives in Q1 and 2 in Q2.

Do you guys had any more since that into Q2 or too early?.

Robert Watson

We've had one more since the month ago. .

Dillon Hoover

One in Q2, okay. And then... .

Robert Watson

Just to clarify, Dillon -- let me clarify something there. When these go-lives happen, there's a lag of 30 to 60 days before there's revenue recognition on our side. So just so you understand the lag time. .

Dillon Hoover

Okay. And then lastly for me, maintenance and support. I know that's kind of a lumpy business, pretty strong. It's actually strongest I've seen over the past couple of years.

Was there any big onetime things in nature there? Or any orders got pulled through from Q2 or pushed out, I guess, for Q4?.

Robert Watson

In the maintenance revenue line?.

Dillon Hoover

Yes. .

Robert Watson

Maintenance -- no, that's -- there -- nothing unusual in that line. It reflects the addition of the Unibased asset in the quarter, and that's the only thing that's reflected in that number. .

Operator

And we'll go next to the site of Frank Sparacino with First Analysis. .

Frank Sparacino

Guys, maybe first on the bookings.

Can you just talk about, when you look at the SaaS line, the $1.2 million, what comprised that? What products?.

Robert Watson

It was analytics, Frank. .

Frank Sparacino

On the cash flow side of things, given the start of the year, what would you anticipate for the full year in terms of cash flow from operations?.

Nicholas Meeks

Frank, this is Nick. I would expect that it's certainly positive and more positive than it was the last year. Given the distraction with the audit, we had a rough start in managing the -- our own revenue cycle. But I have every expectation that it will return to positive cash generation during the year and be more positive than it was last year. .

Frank Sparacino

And then lastly, just on the acquisition front.

Any update on CentraMed?.

Robert Watson

No change from when we spoke on the call a month or so ago. The certain closing conditions have not been met. When and if those conditions are met, the transaction will close. If they are not met, we're obligated under security rules to release a press release noting that those closing conditions were not met. .

Operator

And we'll go next to the site of Bruce Jackson with Lake Street Capital. .

Bruce Jackson

So one follow-up question on CentraMed.

Do you think it could still close this quarter? Or would it be maybe moved into the next quarter?.

Robert Watson

We're -- unlikely this quarter. We're a couple of weeks away from the end of the quarter and unlikely in this quarter. .

Bruce Jackson

Okay. And then with Unibased, you said that you had to take a little bit of a haircut.

What was the actual revenue contribution of Unibased in fiscal Q1?.

Robert Watson

So let me talk about the haircut for a minute while Nick gets the actual contribution from Unibased. I mean, the impact of the 50% haircut on the deferred revenue was approximately a reduction in revenue for the quarter of about $340,000, and that'll -- from our original plans internally. So it's a fairly material cut. .

Nicholas Meeks

It was $385,000 was their total contribution to revenue in the quarter. .

Bruce Jackson

Okay, great. And then, one last question on Collabra revenue. I think it was -- you're expecting it to be back-end loaded for this year.

Is that still the case?.

Robert Watson

No. We expected license revenue to be back-end loaded this year, not specific. I don't think we gave any guidance as to specific solutions. But we do continue to see the license opportunities percolate through the sales pipeline, and they will be, given the fact that we're where we are in the year, back-end loaded. .

Operator

And we'll go next to the site of Jack Wallace with Sidoti. .

Jack Wallace

Just thinking about the recent rebranding of the Looking Glass platform, the full set of software as a whole. How much -- I guess, early, your success that you've had going ahead and up-selling to existing customers with the full suite of product.

And I guess, when could -- when would we see, I guess, down the road, customers taking the full package?.

Robert Watson

So let's -- it's actually a good question, so let's, I mean, walk you through a couple of examples. So over the last 3.5 years, we had some clients that have continued to make additional purchases of additional solutions as we brought them on. We have one client today that actually has pieces of all 4 of the key solution areas in their health system.

Part of our plan has been in terms of rationalizing our acquisition strategy, and our platform strategy has been our ability to cross-sell those solutions across the client base. And there's been a significant amount of that over the last couple of years.

We're approaching a level of close to 20% of our clients today have solutions for more than one solution stack. And so as we move through that, that sales process over the next couple of years, we expect to see more uplift inside the client base.

I've said before that I continue to think that our sales organization ought to deliver something in the vicinity of 70% of net new sales should come from our current accounts as opposed to net new accounts. We performed at about a 60%-40% level last year, 50%-50% the prior year.

So the metrics are starting to get in line where I'd like them to be to be. Now the concept of someone actually buying the entire platform as initial -- an initial purchase, I mean, frankly, that's unlikely. Many of our net new clients are going to take off of a relatively smaller chunk of our solution set on day one as they get to know us.

But the same strategy then plays out. Once they're a current client, we work them into the sales process for the other solutions over time. And so that's our model, Jack. So I don't think there should be any expectation that there's a buyer that's going to take 100% of the platform on an initial purchase. It's just statistically unlikely. .

Jack Wallace

That's some good color, Bob. And then maybe you can give me a better idea for the expected success for converting the pipeline for the rest of the year, and you mentioned it'd be back-end loaded. And I'm wondering what pieces of the solution circle, if you will, are expected to be converting. .

Robert Watson

So if we look at the sales pipeline conversion from opportunity to sale over the course of the year -- we were just talking to Jack, we were -- or Bruce, excuse me, we were talking to Bruce. We were talking about -- excuse me, I got a little bit of sinus infection.

So we're talking Bruce, we made a point that the solutions get moved through the pipeline in orderly fashion that were back-end loaded on some license sales, so we forecast early in the year.

On a prior call, we noted that somewhere -- 10% to 15% of our revenue this year would be license sales revenue, and we expect that revenue to hit as we move through quarters 3 and 4. As we look at the sales pipeline conversion numbers, it'll move the mix of the business this year.

The raw pipeline today stands at about 40% in the financial management sector, 25% in the HIM coding sector, 20% in scheduling and the balance in patient care. And as you know, the patient care solution is the solution -- primarily the solution we acquired from Montefiore last fall.

When we made that acquisition and the call around that acquisition, we noted that we didn't expect to have a sale until Q3 of this year. We just discussed today in the prepared remarks that we had a proof-of-concepts purchase order on that solution in the second quarter. So we think the progress is pretty good. .

Jack Wallace

Okay.

And then lastly, are there any changes to the guidance of, call it, $34 million -- I think, it was $37 million for the rest of the year -- or excuse me, for the entire year?.

Robert Watson

No change to the guidance. .

Operator

And we'll go next to the side of James Terwilliger with Newport Coast Securities. .

James Terwilliger

Very quickly. I'm new to the story, but I wondered, Bob -- this is probably old news for a lot of people in this call, and I apologize, but I wonder if you could provide some kind of visibility into some of the expense lines.

The 2 expense lines I would like you to discuss at high level would be the increase in selling -- SG&A expenses and then also the increase in R&D.

Are there any onetime items maybe from the audit that are in these expense lines? And how should I trend those lines going forward as I start to do some modeling?.

Nicholas Meeks

So there are onetime items -- this is Nick Meeks. There are some onetime items in the SG&A section, and the easiest way to see them is via the adjusted EBITDA reconciliation. We'll give you the breakdown. When you think about R&D, there are 2 big factors there.

Since the comparable period of 2013, we made both the CLG acquisition and the Unibased acquisition. We've also limited cash -- capitalized software to the legacy business, the legacy Streamline business. And as such, as our R&D department is spread over a much broader solution portfolio, we're capitalizing less.

So I'm going to say, in round numbers, we capitalized $260,000 less, in this quarter than we did in the same quarter in 2013. .

James Terwilliger

Okay, excellent. And just one more question real quick. On the sales and marketing side, Bob, how is that trending? You've done some acquisitions.

Have you been able to cross-train some of the acquired sales force with your different products? Are you looking to hire sales people? I mean, just at a high-level, talk to me a little bit about maybe the momentum of the sales and marketing department with the number of initiatives that you have going on within the company. .

Robert Watson

Sure. So a couple of things. As we noted, again, in the prepared remarks, we had a change in leadership to the start of the year. We did promote from within, which we -- into the sales leader role, which we think is very important.

We've added somewhat significantly to the sales team over the ensuing sort of 5 or 6 or 7 months -- 6 months of this fiscal year. All of our sales assets are cross-trained in the selling process. We don't necessarily have a specialist in any one area.

We think that model plays out well when you think about the fact that they have a significant number of current accounts, as well as new business responsibilities, but a significant number of current accounts that they're responsible for cross-selling.

And as I noted in one of my earlier comments, we've -- about 20% of our client base has multiple solutions from us today. So there's still plenty of positive runway in front of us there for the sales organization. And again, as I said earlier, I believe that we need to get our cross-selling percentage of sales bookings into the 70% range this year. .

Operator

[Operator Instructions] And we'll take a follow-up question from Frank Sparacino with First Analysis. .

Frank Sparacino

Just want to confirm in the earlier comments around the bookings expectation for the year. I think you stated you believe we would see growth relative to last year. .

Robert Watson

Correct. .

Frank Sparacino

And on that front, Bob, can you just talk about, on the HIM coding side of the business, what the discussions have been like recently as it relates to CAC or CDI and just what's going on in the marketplace?.

Robert Watson

Yes. It's interesting. The delay notification -- and I think I've probably said this on the call a month or so ago, but the delay notification for vendors like ourselves is -- has been a net positive.

The -- our pipeline continues to grow in total dollar value, that number of opportunities that are related to either -- to some segment of the HIM coding CDI portfolio are relatively significant. They tend to be -- because of the nature, they tend to be very large opportunities.

So they move a little slower through the pipeline, but they are very, very, very meaningful when they're closed. So it's -- the activity levels continue to be high. If you go back to Q4, in Q4, we had the first sale of accessANYware and computer-assisted coding and CDI in the same sale and the sale to Cymetrix.

That model, I think, going forward for us, is sort of interesting, to be able to leverage the value of the unstructured data that's in -- that's captured through the solution formerly known as accessANYware is really important to many of the clients we're speaking to or sales prospects we're speaking to in the marketplace. .

Operator

[Operator Instructions] And at this time, I'm showing no further questions in the queue. .

Randolph Salisbury

All right. Well, if you will give it back to me, I will conclude today's call. Again, we thank you very much for your interest and support of Streamline Health. If you have any additional questions or need more information, please feel free to contact me directly at randy.salisbury@streamlinehealth.net. .

And as Bob mentioned, so did Nick, we look forward to speaking with you again in early September when we will report our second quarter 2014 earnings. Good day. .

Operator

And thank you for joining us today, ladies and gentlemen. We certainly appreciate everyone's participation today. Today's program has concluded. You may disconnect at any time. Once again, thank you for joining us..

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